THE NEWLY elected prime minister had promised, during the campaign, to renegotiate the current agreement with the International Monetary Fund (IMF) as one of her first tasks in office. The current agreement, a 27-month standby loan, was entered into in early 2010 after a long and tedious negotiation. The agreement is currently stalled, however, and in any case, was due to expire in May. So renegotiation is actually not necessary. Rather, the new prime minister must determine, largely from scratch, what is the nature of Jamaica's future relationship with the IMF. But that relationship will have to take cognisance of two key facts: one about the borrower, and one about the lender.
The borrower is blocked in on all sides. The current programme has been stalled for a year as the Government has failed to satisfy four consecutive quarterly tests. At the heart of the impasse are unprogrammed salary increases to public-sector workers, which have stymied the programme's plan to cut the public-sector wage bill. Tax and pension reforms, also part of the original programme, have not been implemented.
The case for approaching the IMF in 2009 was because it was the only reasonable option left short of default. Jamaica had experienced a reduction in foreign-exchange inflows as a result of the global economic crisis which affected remittances and earnings from bauxite and tourism. Further, foreign direct investment (FDI) inflows had started to taper off as international investors became increasingly nervous about the prospects for the world economy. Finally, the Jamaican government's access to international capital to refinance its debt portfolio was cut off as a result of the credit freeze that was at the centre of the global crisis.
At the same time, the current account balance was coming under pressure, the fiscal balance had reached a crisis in light of the prolonged rise in benchmark interest rates and its effect on the cost of servicing the domestic debt portfolio. Additional borrowing from the domestic capital market, even if creditors were willing, would only have made the problem worse since the high cost of servicing the domestic debt was the problem.
only way out
In these circumstances, the options facing the Government were few, namely (a) major cuts in the delivery of public services, which would have been political suicide, or (b) significant increases in tax rates, which were likely to have failed to raise the expected revenue.
The only way out of this dilemma was multilateral external borrowing, which actually offered two clear advantages: 1) multilateral loans are less expensive in comparison to those offered in the commercial capital market, domestic and international; 2) such loans usually have a longer tenor (time to maturity).
There is an additional, usually unstated benefit of an IMF relationship: technical and institutional support for the Government. The Golding administration used the fund's support to push through both the JDX and the sale of Air Jamaica towards stemming the rising national debt. It also benefited from the IMF's expertise in honing its medium-term programme.
At the heart of the PNP's promise to "renegotiate" the IMF agreement is a residual antipathy towards the fund that is a legacy of the highly politicised and contentious relationship with the agency from three decades ago. One pre-election poll suggested that as many as 42 per cent of Jamaicans are against any further relationship with the IMF. However, as suggested above, the current fiscal situation makes it difficult for any Jamaican government not to have some kind of relationship with the fund.
Yet, the lender today is not the one from the 1970s. It has long since increased transparency by allowing access to more timely and useful information to its member countries. It has also broadened its accountability framework by entering into dialogue not only with governments but civil society as well through, for example, the unions, academia, and NGOs.
In transforming its lending framework, the fund now differentiates more between different types of borrowing countries and different needs. It has taken account of the need of some members for mechanisms directed at alleviating poverty with a Poverty Reduction and Growth Facility. It introduced a Flexible Credit Line Facility to provide large and upfront loans to countries with strong economic fundamentals. Standby arrangements, such as the one entered in with Jamaica, now offer greater flexibility. The cost and maturity structure have been simplified in order to make borrowing more affordable to members. Finally, the fund's conditionalities framework has changed in order to support the borrowing country's own macroeconomic objectives.
So the newly elected prime minister's recasting of Jamaica's relationship with the IMF comes down to a rethinking of the country's own medium-term programme. And that rethinking will be bound by fiscal and external constraints and conditioned by the IMF's current approach to lending programmes. There isn't much room to manoeuvre.
Caribbean Policy Research Institute (CaPRI) is a not-for-profit public policy think tank. CaPRI works to promote evidence-based dialogue on issues critical to social and economic development in Jamaica and the Caribbean. www.capricaribbean.org or email@example.com.