Wed | Dec 11, 2019

Until debt do us part

Published:Sunday | March 10, 2013 | 12:00 AM

Dr Christopher Tufton, Contributor

Jamaica is a highly indebted country, and until we can repay and retire a significant portion of monies we owe, it is highly unlikely that we will realise the growth and development we hope to achieve.

Various studies confirm that - for a number of reasons, countries that are highly indebted usually have difficulty achieving economic growth. For us, therefore, the challenge is to reduce and control our debt while we work to achieve economic growth. But will we ever get there?

We are currently being stifled by a public debt of $1.75 trillion, a debt-to-GDP ratio of 140 per cent. In simple terms, this means that in this given year, the Jamaican government and Jamaican people owe creditors significantly more than we earn and so must borrow to pay creditors and support normal living expenses.

Servicing this debt represents a major burden as we have to forgo expenditure on critical areas of economy such as roads and water supplies, as well as other infrastructure. Often, in incurring that debt, the Government competes for private capital that could otherwise be directed to more efficient private-sector investment activities.

Our debt-servicing interest charges are approximately $130 billion, and we are searching to fill a Budget deficit of $65 billion. This has become as chronic as the country's 40 years of no or negligible growth. Jamaica has been carrying a debt averaging more than 120 per cent of GDP and a Budget deficit averaging above five per cent over the last decade.

We are married to debt, and until we can divorce ourselves from that unholy union, we will continue to limp along, hoping for a rescue plan.

DEBT CAN BE GOOD

As long as we do not have too much of it - experts say between 60 and 80 per cent of GDP - debt can be good for the economy, as long as it's being used for productive, enabling endeavours. The challenge with us is that we have a long tradition of borrowing and have little to show for it, except the bill.

Jamaica's economic malaise has been exacerbated by the 1990s financial meltdown. It is amazing that having had such a horrific experience, leading to so many businesses collapsing, and a legacy of debt left on the backs of generations to come, the Government is still arguing over a few million dollars to complete the FINSAC enquiry.

This enquiry is important because of the lessons to be learnt. Instead, there appear to be attempts to sweep the experience under the carpet, for it to go away and be forgotten, because it appears no one wants to take responsibility. But the FINSAC experience will not go away any time soon. The debt is still here haunting us, one austerity programme after another, one debt exchange after another, and one IMF agreement after another.

Failure to confront and address the root causes of our debt will only lead to more debt and a populace cynical about any attempts by governments to correct the debt challenge.

The other major sources of debt are natural disasters, which are increasingly predictable, but because of our current debt and inadequate leadership, we seem never to plan for or expect. Isn't it amazing that we subscribe to, and attend, international fora where issues such as the impact of global warming on small island states like Jamaica are discussed? Even drought- and storm-mitigation programmes are responded to reactively, not proactively.

Every year, we have drought conditions and flood-related damage to key infrastructure and disruption to food production, disrupting normal life, particularly for the most vulnerable. Jamaica is experiencing one of its worst droughts in a decade, and citizens are taking to the streets demanding relief.

It may be a good move for the Government to elevate the environment to ministerial status. But, more importantly, will be actions taken to deal with environmental sustainability, including disaster management. Rainwater harvesting, coastal protection, and agricultural best practices are just a few of these sustainable initiatives that are necessary. Failure so to do will only lead to more devastation when disasters strike and greater levels of debt long after they pass.

THE IMF AND DEBT

The International Monetary fund (IMF) agreement we are hoping to ink soon is all about managing our debt. For a long time, we have lived through borrowing and spending more than we earn. Even though we have spoken about the dangers of such behaviour, for one reason or another, we have become overdependent on other people's generosity and willingness to lend.

Looking back, I am convinced that we have become complacent in fixing our problems since independence because it was so easy to incur debt.

Our current state is captured aptly in Jamaica's Vision 2030 National Development Plan in the foreword signed by then director general of the Planning Institute of Jamaica, Dr Wesley Hughes. He says, in that nearly 400-page document, that Jamaica's social and economic challenges since independence are largely as a result of "neglect of long-term issues, which has led to poor GDP growth, high levels of debt, unacceptable levels of unemployment and poverty, crime, violence, low skills, weak infrastructure, and uncompetitive industries that produce low values commodities".

Jamaica has had many such statements and plans and hardly ever the stick-to-itiveness to overcome these challenges We seem not to have had the political will to follow through on these plans, but instead choose the easy way out: borrowing to maintain our addictive habits of living above our means.

SOVEREIGNTY AND DEBT

Today we are in real terms dependent, and our sovereignty is compromised. Our creditors are now calling the shots. We have sacrificed our sovereignty and once again must be dictated to by the multilaterals or suffer the consequences of having rapid shocks from cutbacks and shutdowns. Most are now agreed that the no-IMF option is not an option at this time.

But how realistic and achievable is this IMF option? Can we get to a debt-to-GDP level of 99 per cent of GDP by 2020?

The Caribbean Policy Research Institute (CaPRI), an economic policy think tank based at the University of the West Indies (UWI), ran a series of economic models, based on a number of assumptions, to test the arithmetic possibility of the Government achieving a reduction of the debt as prescribed within an IMF framework. Dr Damien King, head of the Department of Economics at the UWI, led this piece of work and concluded that Jamaica could indeed achieve this debt reduction of approximately 100 per cent of GDP by 2020 if Jamaica stuck to the
outlined targets.

The CaPRI study confirms that if the
Government continues on its trajectory, without external shocks, debt
to GDP, and the deficit, would be around 130 per cent and 7.1 per cent,
respectively, in 2020. This would mean no meaningful change in the
country's current status and a continuation of the adverse impact of a
huge debt burden.

If the general targets announced by
the Government are achieved and there are no unplanned adverse
occurrences, debt to GDP and the deficit would fall to approximately 100
per cent of GDP and 2.2 per cent, respectively.

The
CaPRI study confirms what many may have suspected: that it will take
more than these IMF-stipulated measures to pull Jamaica out of this debt
trap and place us on a path of economic
prosperity.

Further, as much as we hope it not to be
the case, Jamaica will likely have drought and food-related damage over
the next seven years. We need a plan and a budget to mitigate against
these uncertainties.

By far the most significant
contributor to the debt-reduction strategy is economic growth. The
Government needs to be much clearer and more specific on the
growth-facilitating activities to cushion the impact of the austerity
programme.

Dr Christopher Tufton is opposition
senator and spokesman on foreign affairs, foreign trade and investment
and co-executive director of think tank CaPRI. Email feedback to
columns@gleanerjm.com and cctufton@yahoo.com.