The president of the Private Sector Organisation of Jamaica believes that a new agreement with the Interna-tional Monetary Fund (IMF) is necessary. He laid out the implications on Tuesday, September 25, 2012 in a speech at a luncheon meeting of the Rotary Club of St Andrew. Below is an excerpt from his speech.
Let us examine a scenario in the event there is no IMF deal.
This scenario, that I will outline in the event of no IMF deal, is not only plausible but extremely likely.
The following are likely to occur.
The most immediate impact would be:
(a) dramatic fall in business and consumer confidence;
(b) significant deterioration in international and local financial sentiments; and
(c) continued delay in the disbursement of funds or even worse, a significant loss of financing from other international development partners (World Bank, IDB) given that additional disbursements are linked implicitly or explicitly to the finalisation of an IMF agreement. Lack of these multilateral funds would compromise the reform agenda and infrastructure programme of the Government.
The deterioration in market sentiments against Jamaica would undoubtedly be supported by the assessments of rating agencies, that is, eventual downgrades.
The fall in market confidence and in sovereign ratings, combined with the loss of multilateral financing would lead to a further reduction in the net international reserves and trigger a speculative attack against the Jamaican dollar, leading to a rapid and significant deprecia-tion of the Jamaican dollar accompanied by higher inflation.
Domestic nominal interest rates would obviously rise in response to the higher inflation and currency depreciation.
Domestic and external bondholders would still consider holding GOJ paper, but risk premiums would rise substantially.
Higher real rates of interest then depress domestic production activity, reducing the growth of investment and increasing the likelihood of job losses.
The depressed domestic economic environment, together with the forex market instability then weakens the financial sector: loan growth dries up, but non-performing loans — within existing loan portfolios — rise, and financial institutions that are mismatched in terms of currency will incur significant losses.
The higher interest rates and exchange rates will also obviously lead to a rise in the GOJ's debt servicing costs, inducing larger budget deficits — bearing in mind that the higher inflation is also likely to inflate GOJ expenditures proportionately more than revenues, as the latter will be dampened by lower economic activity.
To address the worsening fiscal indicators (fiscal deficit, debt service cost and debt stock), the GOJ would have to implement corrective measure such as a reduction in expenditure and/or an increase in revenue, that is, more austerity and more taxes.
All of the preceding conditions mentioned above will lead to a further reduction in domestic demand, higher unemployment levels and higher poverty rates; that is, a downward spiral of negative consequences for our country.
It should be obvious that this cycle cannot feed on itself for an extended period.
And who will feel the most pain? The vulnerable in our society: the poor, the aged, the underprivileged.
I must stress in the strongest possible way that, thankfully, these outcomes have not happened yet as we remain confident and supportive of the efforts and commitment of the minister of finance and his technical team.
Thus, in my humble opinion, the pain of no IMF agreement is vastly more than the pain of an IMF agreement.
THE IMF ROLE
Finally, I turn to the role of the IMF in this process which is vital to our nation's future. As in any deal there are two sides. In this one there is Team Jamaica and there is the IMF.
In the collective view of the wider private sector, both sides have to display responsibility to act in a way that does not compromise the future stability of Jamaica.
There is the possibility that the chemotherapy of the medium-term programme which is to be administered to cure the cancer of debt, can be so strongly applied that it ends up killing the patient. This is the delicate balance that I am sure the IMF in its wisdom is grappling with constantly.
There is a point at which the requirements and, in particular, the timeframes for implementation could be so onerous, so severe, that it may very well be impossible for Jamaica to comply, especially in the context of the global economic recession and our weakened state of social and economic stability.
The consequences of such a scenario would be untenable and unimaginable, and as such the private sector of Jamaica would like to make it clear to the IMF that just as much as we as part of Team Jamaica will uphold our part of the bargain and do our best to ensure that the rest of our team does too, we expect the IMF to also act in an enlightened and responsible way and contextualise their final positions in the environment of global stagnation, a very weak Jamaica, and a Jamaica whose entire society is finally united against the past evils of fiscal irresponsibility and low growth, and for the future of fiscal consolidation, fiscal responsibility, and economic structural adjustment.