Today, we begin a new series, The Briefing, with Dr André Haughton. It will explain and discuss various issues, including challenges facing the economy.
What's the position, what went wrong?
With current debt burden at about 130 per cent of gross domestic product (GDP); unemployment at its highest level in 20 years, a sliding Jamaican dollar, a depleting Net International Reserve (NIR) and huge balance of payment problems; Jamaica's economic problems did not occur overnight. Jamaica saw its first major economic crisis in the 1970s as a result of rising world oil prices. Then came the second in the 1990s with the financial crisis, after economic liberalisation without sufficient control mechanism in place. The pseudo remedy to this second crisis was the establishment of FINSAC, for which the country had to borrow to support it. Subsequently, Jamaica's debt-servicing payments increased by more than 70 per cent between 1999 and 2003. It continues to grow.
What is the result of these problems?
The increase in debt servicing requirements has put a significant strain on the country's annual budget. Currently, approximately 55 per cent of government spending goes to service the debt. After paying public-sector wages, less than 22 per cent remains for capital expenditure and government programmes. Continuous lack of proper infrastructural development reduces the country's ability to adopt new technology, reduces its ability to increase productivity, resulting in a very inefficient economy with little or no growth in output since the 1970s.
How could it be solved?
The Jamaica Debt Exchange (JDX) programme provided a significant window from which economic sustainability could be restored. However, the long-run success of the JDX required some amount of debt write-offs instead of just debt payment extensions, which wasn't negotiated. Consequently, the JDX failed to minimise debt-servicing requirements and did not increase fiscal room. Now it appears the country's progression rests on a new deal with the IMF.
How will the IMF agreement benefit Jamaica?
In the short term, the IMF agreement is needed to: (1.) Provide balance of payment support. This deal will increase the flow of foreign currency necessary to cushion the NIR and restore Jamaica's balance of payments. It will provide the income needed to support Jamaica's high import bill, for example, between January and June this year, Jamaica bought $854 million worth of consumption goods, excluding motor vehicles. (2.) The IMF agreement is needed to increase international lenders' confidence in the economy, to provide additional funding for budgetary support.
Why is an IMF agreement not yet signed?
The IMF is aware that the current structure of the economy is not sustainable. The IMF has recommended tax reform, pension reform and a more structured and sustainable public-sector payment system. The Government is yet to address these satisfactorily. Additionally, the private sector has not been helping. The average commercial banks' lending rates in the country remain extremely high at an average of 17.4 per cent, even though the BOJ's treasury bill rate is currently 6.57 per cent.
High interest rate increases the cost of capital which slows down investment activity and productivity in the country.
Is the IMF agreement really a benefit?
In the long run, the standby agreement will result in an increase in borrowing and support the country's importation of consumption goods. This will lead to an increase in our debt service requirements, which will further deplete the Government's revenues, putting the country in a winding circular trap. Borrowing to increase imports is not sustainable, if it is not supported by strong exports. The outflow of foreign currency will continue to increase with no corresponding increase in inflow of foreign currency, resulting in further balance of payment problems.
How will Jamaica survive?
Overall, an increase in production is required. Currently, the NIR is depleting because the country has a greater outflow of foreign currency than inflow. The Government needs to redirect some funds used in social safety net programmes to more long run-oriented solutions. For example, the creation of social enterprises which, if developed properly, can sustain themselves and the economy over time.
This year alone, the Government increased spending on social safety net projects to US$14.5 million; a fraction of this could be used to facilitate the establishment of social enterprises to produce niche goods and services for exports. By increasing export-oriented production of goods and services, the current account deficit can be steadily diminished. This problem could also be addressed if the country imports less of the goods that it can produce. This can only be achieved if Jamaica increases capital investment to increase productivity and boost efficiency.
Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email firstname.lastname@example.org