Jamaica's re-engagement with the IMF
Darron Thomas, Contributor
On February 4, the latest instalment of Jamaica's relationship with the International Monetary Fund (IMF) was made official. A year and a half after the crash of Lehman Brothers, signalling the world financial and economic crisis, the support under the IMF programme was a welcomed move, and the attendant other multi-lateral support should be useful as Jamaica pursues economic and social prosperity, at least in the short term.
What we should be more concerned about, however, are the long-term growth prospects for the Jamaican economy, especially in light of the austerity measures which have been imposed as part of the conditionalities under the IMF agreement. While we have no doubt that the austerity measures were necessary to stabilise the economy and ensure that we no longer spend more than we earn, the timing of the imposition of these measures is cause for concern.
As already outlined in the IMF letter of intent, Jamaica has been forced, in the face of the world economic and financial sector crisis, to pursue policies which, in principle, further dampen economic activity. The austerity measures should exacerbate the contraction of the economy as the public sector is restructured and rationalised. Of course, the proposed injection of approximately US$2.4 billion over the next 27 months should act as a stimulant to the Jamaican economy. Overall, the expectation is that draw-downs on the IMF funds should, in the next two years, result in positive growth levels, provided there are no significant shocks to the local and/or global economic system.
Chequered record with IMF
Under what can be considered Jamaica's chequered record with the IMF, due to frequent failures to meet specified targets under IMF arrangements, the period 1986 to 1990 may be considered the only period when the IMF steadily pumped monies into the economy, as they did not terminate any existing arrangement. During this period, the Jamaican economy registered growth rates of 5.2, 4.6, 0.6 and 5.5 per cent in each of the respective years from 1987 through 1990. In the earlier half of the decade of the 1980s, growth oscillated in and out of negative territory as successive IMF agreements were discontinued for target breaches.
Since the end of Jamaica's relationship with the IMF in the mid-1990s, it is well documented that growth has been anaemic, suggesting that the actual programmes, implementation thereof, and/or other policies that successive Jamaican governments have pursued over time have not been fruitful in generating sustained economic growth. That is, since 1996, GDP growth has been above 1.5 per cent in only two years.
Eliminating the fiscal deficit by the end of 2014 and taking on no new arrears seem to be tight targets under the arrangement, but some experts still contend that the targets under the programme are generally soft. What there seems to be agreement about among experts is that, given Jamaica's history regarding the effectiveness of collecting taxes, meeting the targets should not be premised on revenues gene-rated from proposed new taxes, but instead on increased efficiencies in the public sector and general improved expenditure management and cuts in public spending.
While a lot is being done and has been proposed on the expenditure side, the simple argument is that the revenue targets are too optimistic, and failure to achieve said could jettison the programme. Matter of fact, such failures could run the debt to unsustainably high levels, especially given where the debt-to-GDP ratio currently stands. It must be noted that in no way are we indicating that not acting is the way to go, as we can all agree that failure to act could very well be the worst possible outcome.
High debt-to-GDP ratio
Jamaica has started the current IMF programme with the debt-to-GDP ratio at 140 per cent. While it is projected that debts will be reduced to approximately 115 per cent of GDP by 2014, there are significant (and well understood) risks involved with the strategy. For example, it is highlighted in the IMF's Article IV consultation that a 30-per cent depreciation in the USD/Jamaican dollar exchange rate could escalate the debt-to-GDP ratio to 180 per cent. Clearly, such an occurrence could once again put Jamaica up against its greatest enemy, as an IMF conditionality, the Net International Reserves (NIR) target (missing the NIR target is responsible for the majority of the discontinued IMF programmes in the 1980s).
The Jamaica Debt Exchange Programme (JDX), in addition to reducing interest rates and therefore the cost of debt, has also pushed back maturities of Jamaica government debt. In particular, 65 to 70 per cent of the debt which was due to mature up to 2012 has had their maturities postponed into 2013 and beyond. Against this background, should the IMF agreement be suspended or cancelled for any reason, and the funds from said arrangement dry up, servicing both the IMF debt and the postponed maturities could pose significant challenges for the government of the day and the people of Jamaica.
The majority of IMF and other multilateral monies earmarked for BOP support, in addition to the Article IV consultation indicating that there is no need for significant exchange rate realignment, augurs well for stability of the Jamaican currency. However, any deterioration in international competitiveness and/or failure to become more competitive, as well as a recovery with jobs (and therefore confidence) in the developed world, could lead to pressure for the Jamaican currency to decline, thus putting pressure on NIRs. That is, a robust recovery in the developed world could see investors making a rapid return to financial assets of those countries, thus creating increased demand for those currencies vis-á-vis the Jamaican currency.
Clearly, the recent rating upgrades augur well for the demand for Jamaican financial assets. However, the JDX and the associated interest rate adjustment has created some uncertainty, which may keep investors uneasy until the full benefits of these lower interest rates begin to impact financial and economic markets in a real way.
In the final analysis, what is needed is a set of strategies to promote international competitiveness, high-growth industries with robust international demand that is expected to continue into the medium- to long-term future. Programmes to improve the skill level of the majo-rity of the population so that we can be more productive with more highly paid individuals who feel they have a stake in the well-being of the society.
There is also urgent need to curb the crime monster, as the risk posed by the occurrence of violent crimes will continue to outweigh the benefits investors could potentially derive from the lower interest rate environment which should be realised going forward.
Dr Darron Thomas is a lecturer in the Department of Economics, UWI, Mona. Feedback may be sent to firstname.lastname@example.org.