Delroy Warmington, Guest Columnist
Contrary to the popular notion that the International Monetary Fund (IMF) agreement will be the panacea to Jamaica's economic malaise, I dare say this is a myth.
Yes, it hangs over the country like the sword of Damocles. It will help Jamaica regain access to the capital markets, but this will only be a Band-Aid solution. Obviously, a chasm has opened up between the IMF and Jamaica. No doubt the Government has been profligate. Wasteful spending is prevalent throughout.
There is nothing in the anticipated agreement that addresses the real problem of the Jamaican economy, which is growth. And, austerity will only diminish domestic demand, even though this could be only temporary.
Even the IMF's own projections have the economy growing less than 2% per annum through 2017. Given the current policies of the Government, this seems overly optimistic. We have a debt and deficit problem, but the most pressing issue is to get the economy growing at its true potential, which, realistically, is above 5% per annum. The economy is operating below its capacity, so there is no need to fear inflation as a threat. What Jamaica needs is to get its nominal GDP growth rate above the rate it pays on its external debt.
Any effort to tighten fiscal policy is bound to reduce GDP growth. As Olivier Blanchard, the IMF chief economist, said, cutting the deficit too aggressively will have a negative impact on growth and will increase the debt-to-GDP ratio. He also said that "decreasing debt is a marathon, not a sprint".
The Jamaican Government should be leery of any proposal which tries to vigorously cut the debt and deficit without an equal plan to enhance GDP growth. What Jamaica needs is the relaxation of austerity in the face of a weakening economy.
If the recent IMF agreements with Portugal, Greece, Ireland, Romania, Jordan, Cyprus and Suriname are to be a guide, Jamaica should expect some painful requirements. This will include:
A reduction of 10-15% in the public-sector workforce.
An informal devaluation of the Jamaica dollar to J$100: US$1.
Salary cut for public-sector workers in the 5-10% range.
Reduction in tuition subsidies.
Significant increase in excise, GCT and property taxes.
Pronounced reduction in benefits and pension. Also, the elimination of cost-of-living increases for the public-sector workers.
Targeted debt-to-GDP ratio of 110% by 2017 and a restriction that Jamaica cannot resume borrowing until this ratio is below 130%.
Targeted fiscal surplus of 7.4% by 2016.
The banking industry will be asked to strengthen its capital buffer.
Austerity does not always work. Ask Chancellor of the Exchequer George Osborne. As the United Kingdom demonstrated, cutting government spending causes the economy to decline, mainly because of a fall in the overall output. As a matter of fact, the deficit has almost doubled since Mr Osborne implemented his austerity programme. He grossly underestimated the negative impact on unemployment, consumption and investment. The British GDP is now less than when the Cameron government took over in 2010.
Jamaica should look no further than the Philippines, which has judiciously addressed its economic challenges, reducing its fiscal deficit to 2% by implementing audacious reforms, resulting in 55 consecutive quarters of growth averaging 5.4%. The Philippines declared war on the tax evaders, which substantially increased revenue. Consumption is now 70% of the GDP. This indicates that the vast majority are benefiting from the new polices.
DEFERRED INTEREST PAYMENT
We are likely to see another attempt to buy back debt at a steep discount. This would be accompanied by a maturity extension and deferred payment. Also, there might be a lowering of interest payment and some degree of debt write-down. Remember that deferred interest payment can significantly reduce the debt. There could also be a plan to tender debt for government assets.
Any IMF agreement which does not address revenue and tax collection in Jamaica would not be a workable solution. Governments of either major Jamaican political party have been known to cuddle tax evaders. It is, conservatively, estimated that the underground economy is in the range of 25%-30% of GDP.
As the Philippines did, Jamaica needs to develop a programme to NAME AND SHAME these evaders. The tax system needs to foster a sense of inclusion. Tax as a percentage of GDP at only 25.6% is way too low for Jamaica. It needs to be in the 35% range. In Canada, it is 32%, UK 34.2%, Germany 37.3%, Luxemburg 37.6%, Sweden 46.7% and Denmark 48.1%.
We can expect a recalibrating of net international reserves and foreign debt, possibly the goal of having reserves of at least 50% of foreign debt.
Don't be surprised to see the IMF insist that Jamaica get some equilibrium in its current account and balance of payments. This could involve a programme for import substitution and a substantial emphasis on export. Manufacturing will have to play a bigger part in the economy, possibly in the range of 15%-20% of GDP.
Regardless of what the IMF proposes, the focus should be on growing the economy. A robust economy can solve any debt or deficit problem. Yes, there are risks to put the saliency on growth, but the Government must realise that to win without risk is to triumph without glory.
Delroy Warmington is a global fund manager based in the New York. Email feedback to firstname.lastname@example.org and email@example.com.