The IMF: Comparing Jamaica and the Dominican Republic
Published: Sunday | October 18, 2009
Robert Buddan, Contributor
The International Monetary Fund (IMF) has agreed to lend the Dominican Republic (DR) US$1.7 billion under an agreement of 28 months. Jamaica is seeking US$1.2 billion for an agreement covering 24 months. These two neighbouring countries are asking for very similar support.
The DR has submitted a letter of intent after starting preliminary talks at the end of August and substantive negotiations in the first week of September. The IMF's Board now has to approve the agreement.
Jamaica started preliminary talks around April/May. We still have no IMF agreement six months after. The DR had one in one month. In their letter of intent, the DR has pledged to reduce the debt to gross domestic product (GDP) ratio to 0.8 per cent for 2009; to balance the Budget by 2010 and to achieve a surplus of two per cent by 2012. We don't know what our letter of intent will say. We do know that Jamaica has revised its debt to GDP ratio from a high 5.5 per cent to a higher 8.7 per cent, which is going in the wrong direction.
The IMF has much confidence in the DR's economy and believes that growth is around the corner. The DR, it believes, will be able to service its loan from that growth. An IMF study says that the DR will be one of the best economic performers over the next five years. It says that, starting next year (2010), the economy of the DR will begin to grow at an average of 5.2 per cent over the next five years to 2014. This will make it the third-best performer in Latin America after Panama and Peru.
Jamaica's minister of finance told Parliament two weeks ago that the Jamaican economy is doing worse than he had projected. It is declining by more than four per cent. Barclay's Capital just said the decline will be closer to five per cent or more. The minister of finance said recovery will only begin late in fiscal 2010-2011. Even if this is to believed, the kind of growth needed to pay back the IMF is nowhere in sight.
Already, the economy of the DR is showing signs of improvement. Inflation from January to September 2009 has been 4.3 per cent. Jamaica's inflation is running at 6.1 per cent. Over the last two years inflation in the DR has been an accumulated 15 per cent. In Jamaica, it has been more than twice, at 32 per cent. This has left the Jamaican consumer twice as badly off to spur recovery through spending.
Tax revenues in the DR have improved by 2.5 per cent at September 2009 over September 2008. Revenues for this third quarter were 1.4 per cent higher than for the third quarter last year. The country is collecting more of the taxes due as well, saying that in the third quarter it collected 96 per cent of taxes due. In Jamaica, revenues are not keeping up with expenditure at all. About 91 per cent of the taxes expected were actually collected. Jamaica has a low tax-compliance rate to begin with and most income taxes are paid by PAYE employees alone.
The United Arab Emirates is building a natural gas plant in the DR. The gas plant will allow the DR to have cheaper and more efficient energy. It will provide up to 600 megawatts of electricity. The strategy is to invest more in coal and natural gas and lessen dependence on fossil fuel because of the volatility of oil prices. The natural gas plant will produce energy nearly three times cheaper. We still don't have a natural gas agreement with Trinidad or anyone else.
The DR also says that it has 55 new products ready to be brought to the market. Agreements have already been signed for local distribution. The products range from banana products to flour wafers, squash, dry fruits, raisins, peppers and more. They also include products developed in the biotechnology and industrial innovation institute, such as shampoo, humidifier cream and hygienic products. The cancer-fighting properties of a certain plant are under longer-term study. Jamaica's great agricultural possibilities, on the other hand, remain largely undeveloped.
The DR has asked Barclay's Plc and Citigroup to handle its latest bond placement. Conditions have improved to make DR bonds more attractive and part of its letter of intent to the IMF includes raising as much as US$600 million on the overseas debt market. In the last seven months Jamaica's bonds have become higher risk bonds because of downgrades by credit agencies.
The tourism industry of the DR is still down compared to where it was this time last year but it sees signs of recovery. Its most important market, the United States, saw a 14 per cent growth in the last four months. So far, 2.8 million tourists have visited the country this year. Wayne Cummings of Jamaica's Hotel and Tourism Association (JHTA) has said that visitor spending is at an all-time low in Jamaica and occupancy levels are averaging only 40 per cent. Some resorts report occupancy of 10 to 30 per cent. This tourism season, he fears, will be worse than last year.
The real difference between the two countries is that Jamaica doesn't have a plan for production. We need a plan to grow the economy by five to seven per cent, just to be able to afford to pay back the IMF. There is too much talk about public sector cutbacks and too little about private-sector expansion. This is where the difference between the two countries lies.
The Jamaican authorities and private sector need to pull the economy out of the doldrums. They cannot simply wait for the world economy to recover and for us to be lifted with the wave. That would be a shallow recovery, not a transformational one. Golding said we would hear more in six months at the next budget presentation. President Leonel Fernandez of the DR is not so laid back, unprepared or confused. We don't have six months. We should have been planning for production, including emergency production, two budgets ago.
Portia Simpson Miller, leader of the Opposition, said her party left many plans ready for, or were already in train - tourism master plan, cultural development plan, Harmony Cove development plan, energy plan, agricultural plan, education plan, Falmouth cruise ship pier plan, Roaring River property development plan, sports development plan, a plan for the Montego Bay Convention Centre, to name the economic plans. We should be ahead of the DR because of these plans and with Jamaica's potential.
Mrs Simpson Miller's other point though was the Government's inability to manage the economy. Probably that is the real difference between where the DR is and where we in Jamaica are. They have a plan for the IMF they can manage. We don't.
It is one thing to go to the IMF if you have a plan in place to increase production and growth so that the private sector can absorb the persons laid off in the public sector, and compensate for tax revenues lost from public sector lay-offs, and of course to be able to quickly present a credible medium-term economic plan to pay back the IMF. Without a plan the IMF's standby agreement will have nothing to stand by.
Robert Buddan lectures in the Department of Government, UWI, Mona. Email: Robert.Buddan@uwimona.edu.jm or firstname.lastname@example.org.