Edward Seaga, Contributor
Somewhere in the mix of discussions concerning the prevailing economic turbulence and the proposed International Monetary Fund (IMF) agreement, the most fundamental problem has been overlooked. The balance of payment accounts set out the chronic deficit which occurs year after year, as expenditure of foreign exchange exceeds receipts. This creates a gap in the accounts, which has to be closed by external borrowings (foreign exchange), increasing the national debt.
The national debt is perhaps the most alarming problem affecting the Jamaican economy. It now stands at J$1.68 trillion, which is a frightening 140 per cent of GDP. This is in the same category as the cliffhanging Greek economy which is only being kept alive by massive emergency loans. Greece is not alone in this category of operating an economy at the brink of default. Spain is in much the same condition, having to be sustained by desperate financial assistance from the European Union.
Over the years, Jamaica has reached a stage in its borrowing programme where Government must borrow to repay debt, which is the ultimate act of poor financial management. Debt should be repaid from earnings, or grants.
It is clear that the IMF considers the national debt to be a crucial problem which must be given priority rating in its agreement with the Government of Jamaica. This is being tackled by increasing earnings and/or reducing debt or expenditure of foreign exchange and other outflows so that the gap created by insufficient revenue is closed. Both strategies mean less borrowing and, eventually, reduction in debt.
Despite the urgency, forecasts for the period of the proposed IMF agreement show the foreign-exchange gap to be widening (as shown in Figure 1 below) even with the strong policy decisions expected to be implemented in the IMF agreement. This is a perilous situation that can be best corrected by increasing exports. But what exports? Therein lies the problem.
Few success stories
Jamaica produces small volumes of exportable manufactured goods, and with excessive interest and energy costs, future prospects are discouraging. Tourism has made its mark regionally and worldwide as one of the few Jamaican economic success stories. But the future is less promising because few prime locations remain to be developed as new resorts. Mining for bauxite and conversion to alumina falls in the same category of substantial past development, but little room has been made for future expansion to meaningfully increase exports.
Remittances have become the number one foreign exchange earner in gross and net terms. All the receipts are spent in Jamaica, in contrast with tourism, which retains only 35 per cent of receipts, and mining, which retains 40-45 per cent of sales proceeds in the island.
Agriculture has promise for export expansion. The days of massive exports of sugar and bananas have passed, but a number of other crops are emerging as new but modest growth areas.
This summary does not include across-the-board increases of existing exports which, if possible, could be a rising tide to float all boats. This is precisely what devaluation/depreciation of the currency in the IMF strategy is intended to accomplish. The argument is that depreciating the value of the currency makes Jamaican exports cheaper, increasing prospects for greater demand. That reasoning is infallible for the economies of most countries which export in various currencies.
But for Jamaica and other CARICOM countries (excluding Trinidad), this is not the case, because all these small Caribbean nations have the same type of economies in which the export earnings are predominantly from America and Canada, paid for in US and Canadian dollars. In such a case, depreciation of the currency does not affect the cost of hotel rooms, since hotel costs are already in US dollars. Likewise, the mining giants of bauxite and alumina denominate their sale prices mostly in US dollars.
Accordingly, during a devaluation, there is no additional currency benefit because the US dollar value does not change. The same is true for remittances of foreign exchange, the major export earner. In fact, the opposite is true, in sharp contrast to the IMF projections, since Figure 1 shows that as the exchange rate increases, so do imports, while exports remain relatively flat.
For example in 1991, with an exchange rate of US$1 to J$12, the current account deficit was US$255 million (Point A in Figure 1). As the exchange rate depreciated, the difference between exports and imports increased, thereby increasing the current account deficit. In 2010, at an exchange rate of US$1 to J$87, the current account deficit increased to US$934 million (Point B in Figure 2). This is understandable because depreciation of the Jamaican dollar results in the price increase of imports.
Indeed, another result not sufficiently recognised is that these export earners require less of their dollar earnings to pay their costs for staff and utilities in Jamaica, or to maintain the amount of Jamaican dollars remitted to relatives and for other purposes in Jamaica. Hence, foreign-exchange inflows are decreased by devaluation in these cases, not increased, contrary to IMF thinking.
The strategy of improving export earnings for these economies through devaluation, therefore, does not work because the exports are predominantly in US dollars. Hence, there is no change in value and no benefit.
The six islands in the OECS (Antigua, St Kitts, Dominica, St Lucia, St Vincent and the Grenadines, and Grenada) have pegged their exchange rate, the East Caribbean dollar to the US dollar at a rate of EC$2.70 to US$1. Similarly, Barbados has pegged its dollar to the US dollar at a rate of BDS$2 to US$1. Strategically, these values have not changed over the years, hence, the OECS and Barbados have retained the full benefit of the growth in their economies without suffering devaluation costs.
That is why, in contrast to their past positions some 25 years ago, which showed them in weaker positions than Jamaica at that time, their economies and standards of living are now much stronger and higher than Jamaica's. They resisted all pressures to depreciate the value of their currencies, retaining the benefits to the economy. They pegged the exchange rate and maintained the full value of all their growth.
Jamaica has not followed suit. It has allowed the IMF to sidetrack it into a wasteful, one-size-fits-all strategy because its devaluation dogma applies to other countries. As a consequence, we are struggling in a lifeboat while others in CARICOM are much more comfortable and secure.
To return to the original argument, the Jamaican economy is in a precarious position, benefiting, to a limited extent, only from established exports with no major new exports being introduced. When this happened in the 1980s, we introduced garment exports, using Far Eastern producers to create a new subsector which significantly boosted exports earnings. The garment industry became larger than tourism and alumina, for a while, until the producing companies changed the location of their operations to other countries in the 1990s. Employment in this subsector produced 40,000 jobs.
As far as I know, there is no concentrated effort today to set up a task force to determine appropriate new export earners as I did in JAMPRO in the mid-1980s. It is not good enough to wait on some new prospects to happen. A dynamic approach must be used to survey and target the export landscape.Export earnings
The failure to generate new export earnings will impact on economic growth, which the IMF now forecasts will be a continuation of the anaemic pattern of the past 20 years. The IMF specifies growth of 1.0 per cent in 2013 and 1.5 per cent in 2014.
So, too, will be the result of the strategy to reduce the external debt which, because of the lack of growth in foreign-exchange earnings, requires increases in borrowing to cover the gap. (Figure 2 shows the trend-line projection showing debt increasing, not decreasing).
On the other hand, there is the potential for increasing investment significantly if the rate is pegged and the exchange-rate risk removed to provide mortgage funds for low-income housing and low-interest rate investments in agriculture, education and general development. This is a solution for dollar inflows.
The same problem will never be solved by the same failed solutions. There are 20 years of precedence of failed growth of exports, anaemic increases of GDP, and an intractable debt, all of which have ranked the Jamaican economy internationally bottom of 142 countries. Maybe the consolation is that the situation can't get worse than being in last place.
Former Prime Minister
Edward Seaga is now chancellor of UTech and distinguished fellow at the
UWI. Email feedback to email@example.com and