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Debt cancellation for Jamaica a more sustainable plan, says think tank

Published:Friday | July 5, 2013 | 12:00 AM

The Washington-based think tank, Center for Economic and Policy Research (CEPR), says multilateral lenders could provide greater assistance to Jamaica by cancelling existing debt rather than providing billion of dollars in new loans.

At the same time, CEPR has warned that the conditions attached to Jamaica's latest programme with the International Monetary Fund (IMF) may again prove unsustainable.

The agreement struck between Jamaica and the IMF acknowledge that additional measures may be required to meet debt-reduction targets.

As such, Jamaica has already initiated talks with the Paris Club to request a cancellation of some external debt.

In a new issue CEPR brief, 'The Multilateral Debt Trap in Jamaica', CEPR found that, compared with a net cash flow of US$346.1 million or 0.4 per cent of gross domestic product (GDP) from the loans, debt cancellation by the IMF, World Bank and the Inter-American Development Bank (IDB) would free up US$1.6 billion over the period 2013 to 2017, providing important resources to Jamaica, given that it is being forced to cut spending under its agreement with the Fund.

The multilaterals are projected to disburse US$1.95 billion and Jamaica is due to repay US$1.6 billion over the 48-month life of the IMF programme.

"If the IMF and other multilateral lenders truly want to help Jamaica, they would do better by cancelling existing debt," said the paper's author, CEPR Research Associate Jake Johnston.

"Right now, Jamaica has the highest debt interest burden in the world, yet it is being forced into a programme of budget cuts and other austerity under its agreement with the IMF," Johnston said.

According to the think tank, even after new loans from the IMF, World Bank and IDB, Jamaica will have a net outflow of US$100 million to those institutions in 2013 due to debt-service payments.

It said Jamaica is actually paying more to the multilaterals than it is getting back this year, even after the approval of the IMF agreement.

Making reference to the Jamaica Debt Exchange undertaken by the Jamaican government in 2010 and the National Debt Exchange in February and March, this year, CEPR noted that they neither effected external debt nor reduced the principal of the domestic debt.

Jamaica's IMF-backed economic programme aims to achieve a debt-to-GDP ratio of 126.5 per cent by 2017.

"If this is truly the goal, it could be achieved virtually overnight" through debt cancellation, said CEPR.

The think tank estimated that "with multilateral debt cancellation, Jamaica's debt ratio would shrink from 146.9 per cent of GDP to 123.4 per cent."

"If Jamaica wants to escape its current cycle of debt, budget cuts, more debt, and more cuts, then Jamaica and its lenders are going to need to try something different," said Johnston in a CEPR statement.

Jubilee Debt Campaign, a coalition of national organisations and local groups around the United Kingdom, reported on its website that Jamaica owes the Paris Club group just US$268 million or about three per cent of the government's total external debt of US$9.8 billion.

It owes the IMF, World Bank and IDB considerably more.

According to IMF data, the share of debt to multilaterals increased from US$1.12 billion or 17.9 per cent of total external debt in 2008, to US$3.26 billion or 39.5 per cent in December 2012.

Loans from multilaterals accounted for 70 per cent of the total increase in Jamaica's external debt from 2006 to 2012, CEPR added.