By Wilberne Persaud
A Ministry of Finance official, responding to a query on National Debt Exchange (NDX) progress on Wednesday, indicated: "We are looking good. We are not in a position to provide the numbers as yet. The minister will make an announcement when the offer is closed."
There's no reason not to expect total NDX uptake.
Indeed, it's an offer we can't refuse. Take it or leave it - albeit much worse off. The Bank of Jamaica website's FAQ responds to the question: "Why should I accept this transaction?" as follows: "No transaction will mean no international support, and everyone is much worse off."
This condition was known at least two years prior to the new Government taking office, so the question immediately arises: Why so long, 13 months, to come to this resolution? Did our representatives feel there might be an alternative, easier way? Did we have to counter IMF proposals in extensive consultations while engaging with local stakeholders? Did we have to prepare the population for bitter medicine?
These few questions may be multiplied; indeed, almost every kind of concern would be represented in the set of reasons for the decision being so long in coming.
Actually, this result was widely expected. Domestic holders of Jamaica government debt knew they would face another shave. Servicing debt currently on the books while simultaneously maintaining essential services the population needs is impossible without funding.
With revenues insufficient and further borrowing ill-advised, expensive or impossible, absent an IMF agreement, NDX or as some have termed it, JDX2, was the only viable option.
Not being privy to IMF/GOJ negotiations, let's try an exercise. Look for a specific exchange arrangement. Identify its provisions then 'reverse engineer' the thinking, to arrive at the set of assumptions behind it.
This is interesting. For the IMF model, implicit or explicit, assumes the market shall take care of the fallout that must ensue from layoffs, cuts in expected pay-outs over time to pensioners, impairment of the condition of some financial services firms and so on.
The facts have continuously debunked this market-fix assumption. But just as Republicans in the US remain wedded to tax cuts as job-creating in face of evidence to the contrary, the IMF tended not to change its stance.
New locally issued bonds will be exchanged for currently held ones. They will come in the various forms FR - fixed rate; VR - variable rate; CPI-indexed tied to the consumer price index, hence inflation protection; and USD-denominated. Additionally, a new bond called a 'FRAN' with an accreting amortisation structure is included.
New one-year bonds in JMD and USD will be available to smaller holders owning VR, FR and USD Notes maturing in 2013 and 2014 who may opt for New Retail Notes.
Here is the provision we might parse or deconstruct: "Holders who choose the FRAN (Fixed Rate Accreting Note) will receive $80 principal for $100 exchanged, and the interest rate will be fixed at 10% on the then principal of the note. The principal of the notes will accrete or grow to $100 over the life of the note, and at maturity will pay out $100. Starting in August 2015, the principal accretes at 0.50% per six months until 2021; 1.00% per six months until 2027; 1.50% accretion per six months until maturity. This instrument was designed for use by certain state-owned companies, and is not expected to generally appeal to investors given the complex structure."
This FRAN is nothing if not designed to achieve a specific debt-to-GDP ratio. So the initial principal reduction helps achieve this.
It is a bit disingenuous to suggestit shall not be attractive to investors because of its complexity. It is not attractive because it reduces principal for years.
It is meant specifically for government entities - 'massa horse massa grass' - and reduces the current debt-GDP ratio to whatever has been agreed with the IMF.
The debt-GDP ratio, even though a metric providing useful information, is no magical number. As the nurse does on your visit to the doctor's office however, there are other equally or perhaps more important indicators to measure, to track. It is these metrics we need to change during the debt-service breathing space NDX provides.
Perhaps the most significant of these is the anaemic return on investment Jamaica demonstrated over the last decade and more.
We need to explore the factors underlying this outcome and fix them. Also, efforts must be made in international fora to seek debt forgiveness and/or schemes similar to the debt for nature or environment swaps of an earlier period.
Jamaica's requirements for economic development don't evaporate because of the debt-service burden, rather it becomes more acute.
If you raise this with an IMF team the answer shall be: "This is not within our remit". But this remit is one which the OECD countries - US and Europe - have worked out in their interest.
A kind of new imperialism prevails so that there are several inequitable relationships from which the industrialised countries benefit, to the detriment of countries such as Jamaica.
Why, for instance, should Jamaica have to cease protection of dairy farmers, or implement other 'free market' arrangements in order to qualify for specific kinds of assistance when the big economies refuse to?
Actually, alongside short-run arrangements in its quest for financial and exchange-rate stability, a modified IMF approach should include mechanisms and funding available to consider and provide remedies for problems of 'under-development' that clearly impact current economic performance.
To do this would certainly require verification and other procedures that could come into direct conflict with the notion of sovereignty in countries such as Jamaica.
Yet, if Jamaica achieved a moratorium on debt payments or even debt forgiveness while developmental programmes could be implemented, problematic issues can arise.
There is no guarantee, were Jamaica to benefit from such assistance, that resources thereby set free shall find their way to specified targets.
Wilberne Persaud, an economist, currently works on technology change and capital solutions for Caribbean SMEs. Email firstname.lastname@example.org