Keith Collister, Financial Gleaner Writer
The Bank of Jamaica has kept the foreign exchange market in check. - FILE
JAMAICA'S DEBT to GDP ratio has fallen significantly since its peak of 150 per cent in 2003, which in simpler terms means our total debt was 50 per cent higher than the country's entire national output at that time. This very high debt generated concerns about our debt repayment ability in 2003, which among other factors helped trigger a mini exchange rate crisis in May of that year.
The welcome fall in the ratio has, however, to date been driven mainly by a combination of falling domestic interest rates and an almost entirely 'inflation driven' double-digit growth in nominal GDP over the period. This means that while there has been growth in the current Jamaica dollar output of the country due to inflation, thereby increasing the size of the GDP denominator and reducing the ratio, very little of this growth is in real GDP e.g. after inflation. Another key factor in our declining debt to GDP ratio has been Jamaica's very high 'willingness to pay', which according to leading U.S. investment bank Bear Stearns is greater than any other country they cover. This willingness to pay is measured by our primary surplus, which is the fiscal surplus that the Government would run if it didn't have to pay interest. This 'surplus' can also be looked at as the money that is not available to pay for social services due to the necessity of repaying our debt.
In a recent report on Jamaica, Bear Stearns argued "Jamaica's public debt burden is widely recognised as being much higher than optimal. With a debt/GDP ratio currently hovering around 130 per cent, and interest payments consuming 42 per cent of government revenues, the debt has become a huge burden on taxpayers and a drag on the economy. The Government's strategy for managing and reducing the debt burden is multi-pronged. It involves running very high (in excess of 10 per cent of GDP) primary fiscal surpluses, creating conditions for above-trend economic growth, and using various instruments to stabilise the foreign exchange market and domestic interest rates."
They go on to say, "The strategy's results have been mixed, due to a combination of lower-than-expected economic growth and lower-than-expected (though still very high) primary surpluses. Stability in the foreign exchange market, a gradual reduction in domestic interest rates, and still-high primary surpluses have prevented debt from entering an explosive path."
THE 10 PER CENT SOLUTION
In their report, Bear Stearns looks at three potential debt sustainability scenarios. The first one is their base case scenario which they call the '10 per cent solution'. In this scenario, the Government runs a primary surplus of 10 per cent of nominal GDP over the forecast period, while nominal GDP growth hovers around 10 per cent (split between three per cent real growth and seven per cent inflation), with the average nominal interest rate on public debt at around 10 per cent. Under this scenario, the debt to GDP ratio declines to less than 100 per cent and we get to around 50 per cent of GDP (which they would consider solid double B credit rating) by 2012-2013. It should be noted that it is more than a decade since we achieved this 3% growth rate, although as previously discussed we have seen a nominal growth of GDP over the past few years slightly exceeding this due to higher than expected inflation.
In a negative scenario, "Political will falters due to crumbling infrastructure and declining investment in essential public services such as education. This leads to primary surpluses trending to seven per cent over the medium term (still high by comparative standard), which in turn leads to higher interest rates (rising to 15 per cent) and lower growth. Under this scenario, the debt/GDP ratio does not explode, but it remains above 100 per cent for the entire forecast period." Bear Stearns, like myself, doubt this is sustainable long term.
In an optimistic scenario, the primary surplus is maintained at above 10% of GDP, which real GDP growth accelerates to five per cent (which with a seven per cent inflation rate implies nominal growth averages 12 per cent over the forecast period."As a result, domestic interest rates and country risk premiums fall, lowering the average interest rate on the public debt to eight per cent." The path of the debt to GDP ratio is similar to the base case initially, but the debt falls significantly faster in later years.
PARTNERSHIP FOR PROGRESS INITIATIVE
For Jamaica at least, this scenario modelling by Bear Stearns is not merely the academic exercise it may seem at first glance, as a very similar modelling exercise informed the work of the private sector led Partnership for Progress in the latter part of 2003, led by the work of Dr. Damien King in conjunction with PSOJ Economic Policy Committee Chairman Colin Steele. Due to our then very high interest rates and debt levels, a significantly more negative version of Bear Stearns current "downside scenario" was a realistic possibility at that time, and the timely explanation of this possibility was an important factor in persuading key groups of the need for co-operative action.
The private sector (particularly some of our leading financial institutions), in co-operation with the major trade unions and key technocrats, became highly motivated to help avert such a negative scenario. However, despite some success in their limited short term objective of averting a "downside scenario", the underlying major private sector objective of shifting Jamaica to the "Upside Scenario" of a much higher real growth path of five per cent or higher was not accomplished.
The private sector, again in conjunction with a number of major union leaders and key technocrats, continues to believe that Ireland provides an excellent case study of how to transform an over indebted, relatively small Island economy with large scale migration of its population due to the scarcity of jobs.
While clearly not every aspect of Ireland's transformation will be relevant to Jamaica, private sector leaders thought the situation of Ireland in 1987 was sufficiently similar to Jamaica's situation in 2003 to justify a study trip to Ireland in October 2003, arranged through leading cellular telecommunications company Digicel. This trip ultimately lead to the "Partnership for Progress" initiative, which did not however achieve its principal goal of starting the process of achieving a wider transformation of the economy, in particular shifting Jamaica's growth rate to a level of at least five per cent per annum.
