Tue | Dec 1, 2015

Missing link in IMF talks

Published:Sunday | January 20, 2013 | 12:00 AM

Edward Seaga, Contributor

A popular view held is that as soon as an International Monetary Fund (IMF) agreement is signed, and there is no doubt now that it will be, the funds due from the multilateral institutions will begin to flow. At that point, the problems of the economy will be over, it is assumed, although much pain is expected to follow. This impression of completion is far from the truth.

The present discussions with the IMF involving the domestic Budget are only one important component of the total picture. It is one leg of a stool, wobbling, slipping and collapsing, if left to stand alone. The second leg of the stool must be installed for the stability needed to generate growth.

This second leg of the stool is the external Budget, which deals with foreign-exchange flows. The current discussion with the IMF is on the fiscal, or domestic, Budget, which is concerned with financing in Jamaican dollars. Solutions to both Budgets, domestic and external, are required to produce the complete picture.

The external Budget deals in foreign exchange earned and spent. The difference between income and expenditure is reported in the balance-of-payments account which sets out the surplus or deficit in foreign exchange and what gap exists.

Some countries, like China, have a massive surplus in foreign exchange, amounting to more than a trillion dollars; others have deficits resulting from spending more than is earned. Jamaica is among the deficit countries. It has experienced shortfalls in the last several years, especially in its balance of trade between imports and exports: See table.

These deficits have to be paid, or the accumulated arrears could create future problems in future payments and residual borrowings which could be disastrous to the functioning of the economy.

The total deficit balance set out above covering the last dozen years is very relevant to the huge indebtedness of the Jamaican economy of $1.7 trillion, which is currently more than 140 per cent of GDP and, according to the 2012-2013 Global Competitiveness Report, is almost the highest in the world. To indicate the danger of such deep indebtedness more fully, a recent news item in one of the top newspapers in the United States, The Chicago Tribune, points out the damage as follows:

"Jamaica has more debt in relation to the size of its economy than any other country and warned against the island becoming what it labelled 'The Greece of the Western Hemisphere'.

"It has tried to restructure its loans to stretch them out over more years, at lower interest rates, with no success. Such a move would be risky for its already nervous lenders," the paper said.

"To set itself straight, Jamaica needs a restructuring, and a bailout with significant debt relief. No way can a small economy that has limped along with growth at less than half the global average for two decades pay back the fortune that it owes," the paper said.

"Defaulting on its debt would ruin Jamaica's prospects for many years to come: It would undermine the island's critically important trade relations with the US. It would discourage badly needed foreign investment in its tourism, agriculture and mining sectors. The only thing worse than doing what Jamaica must do to live within its means would be not doing it," it continued.

debt default not possible

There is an overstatement in the above quotation which refers to the possibility of defaulting in the payment of debt. The Constitution of Jamaica does not allow for any default in debt payments. All such payments have to come off the top of the revenue, which means that debt servicing has to be paid first before any other payments are made from the Budget.

Essentially, this means the debt problem is the crisis point of the economy, and the balance of payments must be kept under control to show surplus earnings, or modest deficits at the most.

How is this to be accomplished? Imports and exports make up the most dynamic elements in the balance of payments account. Imports are dominated by the cost of oil for energy, currently some US$944 million per annum, while total export earnings were US$1,662 million. In fact, a comparison between exports and the cost of oil shows that it requires 56.8% of export earnings to pay for oil imports.

Faced with a gap of US$4.261 billion to cover the deficit in the balance of payment account for 2011 would require an increase of 256% in export earnings or a 72% cut in imports. Both of these are highly unlikely, even impossible, unless there is a mega transformation of the Jamaican trade economy. Notwithstanding the enormity of such an effort, a meaningful impact can be made.

In the case of imports, the country has to stop its shameful display of inability and come to a conclusion by taking a decision about whether liquefied natural gas (LNG), a petroleum product, or coal should be the choice. The split position which appears to be emerging is between LNG and coal as the major source of energy for the nation. LNG is also low cost at this time, but is very likely to increase substantially as peak oil approaches in the next few years. Peak oil is the point at which the global supply of oil begins to decline until no more oil remains at some point near the middle of the century.

go with coal

As the decline of global oil occurs and the price of LNG moves up dramatically, the current problem of unaffordable fuel prices will reoccur. The price of coal, on the other hand, is not likely to be as volatile, given the need of the major supplier, the United States, to maintain prices at an industrially competitive level. It seems foolhardy in these circumstances to take a gamble on LNG, especially if future price movements will revert the economy to the same condition of exceptionally high prices.

Exports have no such prospects of any dynamic increase as things stand now. Increases will be incremental, with slow movement failing to close the balance of payments gap. The ultimate position then would be that the balance of payments gap would continue to substantially increase the national debt.

It will need creative thinking and dynamic action, both of which are sadly lacking now and over most of the past 20 years to close the balance of payments gap, to figuratively provide the stool with a second leg for stability. This is the missing link.

But where is this giant leap forward in developing the huge new export earners? New prime land for hotel development has been almost fully used up in the recent Spanish hotels' expansion. Bauxite/alumina resumption is still tentative and likely to be settled with deeply reduced benefits. The recently announced proposed project to recover rare-earth minerals from bauxite/alumina 'red mud' would be a big step forward to boost earnings, if proven viable.

Agriculture, while showing some improvement in domestic cultivation, continues to stagnate in exports unless the Chinese cultivation of sugar cane, with new capital and technology, shows marked success, warranting expansion. Current growth in sugar exports, while being dynamic in the local setting, is too small to be startling. Among the dominant export earners, this leaves remittances to continue its role as the star performer, with steady but modest incremental growth.

Of these main export activities, transfers from remittance dollars are almost fully converted to foreign exchange. The conversion ratio for tourism and bauxite is 35%, and 45% retention of foreign exchange, respectively.

Everything points to the fact that the really urgent need of the Jamaican economy, if it is to dig itself out of a deep hole, is to develop massive new export-earning projects with high retention and labour content which will not rely only on the present dried-out sources of foreign-exchange earnings.

a master plan

Such a project can be developed. It is multifaceted. It features transportation by land, rail, sea and air; assembly of manufactured goods; retailing and wholesaling of container supplied goods; Internet technology; hotel accommodation; free port shops and cultural activity based on Jamaican heritage and contemporary culture.

It requires an expansion of the Kingston Container Terminal and Freeport to accommodate mega ships currently being developed for which the Panama Canal is now being widened. Reclamation of 197 acres of land around the Fort Augusta peninsula which, with 54 acres of existing land, would provide a strategic development area of 250 acres next to the container port.

The development would provide more berths, creating additional pier accommodation, including access to the Port Royal archaeological park; it would also include assembly manufacturing; Internet technology; hotel accommodation; a free port area for shopping and a cultural park for cultural presentations. This would be the centrepiece as conceived and proposed by me in May 1996 as the Fort Augusta Freeport Development plan.

Add to this a large reservoir near Spanish Town, larger than the Mona Dam, which I have proposed, storing the overflow of the Rio Cobre to be used to irrigate the 12,000 acres of the St Catherine Plain, representing the remaining agricultural developable land in the parish. This would irrigate and cultivate organic vegetables for export by cargo plane leaving the proposed Vernamfield cargo airport being promoted by Mike Henry.

This master plan would incorporate the developed Norman Manley Airport, and the Tinson Pen Aerodrome for small jets to accommodate passengers from North, South and Central America. It would introduce tourism on a credible basis to Kingston to patronise the development of Port Royal, the best marine archaeological site in the Western Hemisphere, using the berth at the southern end of the reclaimed Fort Augusta development to ferry passengers across the mouth of the harbour to Port Royal.

Many thousands of jobs would be created for the southern side of the island, with the possibility for considerable foreign-exchange earnings. This mega project, subject to studies of the possibility to develop substantial export earnings, could substantially close the balance of payments gap. It would complement the stability of the domestic economy as set out in the IMF agreement with a further agreement to induce stability in the external economy as the link to restoring illusive growth after 20 years. In the 1980s, such a plan was created by the Government of Jamaica and the World Bank.

Edward Seaga is a former prime minister. He is now chancellor of UTech and a distinguished fellow at the UWI. Email feedback to columns@gleanerjm.com and odf@uwimona.edu.jm.

Year Imports Exports Balance of Trade
2000 3,004.30 1,562.80 -1,441.50
2001 3,072.60 1,454.40 -1,618.20
2002 3,179.60 1,309.10 -1,870.50
2003 3,328.24 1,385.60 -1,942.64
2004 3,545.10 1,601.60 -1,943.50
2005 4,245.60 1,664.30 -2,581.30
2006 5,076.99 2,133.62 -2,943.37
2007 6,203.89 2,362.59 -3,841.30
2008 7,546.76 2,743.90 -4,802.90
2009 4,475.60 1,387.70 -3,087.90
2010 4,629.40 1,370.00 -3,259.40
2011 5,923.50 1,662.50 -4,261.00