Bad deal for Jamaicans
In the FY2014-15 budget Debate, the finance minister, in explaining why the International Monetary Fund (IMF) programme is necessary, said: "This question can be answered in one word: DEBT. Jamaica over the years has built up an unsustainable public debt stock which for the past 40 years has acted as a millstone around the neck of every Jamaican."
The Opposition now asks the question: How does this US$1.5 billion high-cost replacement debt deal serve to solve that problem?
Let's examine the components of the US$1.5 billion PetroCaribe replacement debt.
The Government of Jamaica has replaced approximately US$3 billion of debt bearing an interest rate of 1 per cent annually with a US$1.5 billion of high cost debt at an interest rate of 6.75 per cent on one note that matures in 2028 and 7.875 per cent on another note that matures in 2045.
This means that the Jamaican people will now be paying approximately US$108.6 million or J$12.7 billion annually to service this new debt.
When one considers that the PetroCaribe Fund was adequately servicing the US$30 million or J$3.5 billion annual interest payments on the existing PetroCaribe debt from its own resources with no need to call on the taxpayers for any payments whatsoever, one will begin to see how bad a deal is this replacement loan on the backs of Jamaicans.
Additionally, over the course of the 25 years, Jamaican taxpayers will be required to pay a total of US$2.7 billion (nominal dollars) in interest payments on the replacement debt versus the US$750 million (nominal dollars) in interest payments that the PetroCaribe Fund would have paid.
When examined in net present value terms, taking into consideration the interest payments over the 25 years plus the payment of US$1.5 billion instead of US$3 billion, the deal has a negative net present value of US$645 million. This deal should not have been done at such a high interest rate.
Of significance, one noted international broker, when asked by Nationwide Radio about the Government of Jamaica replacing a very low interest rate debt with high interest rate, said that was a "... question that we all want to know."
International news agency Reuters, in its news report on July 23, 2015 titled 'UPDATE 2 - Jamaica tests waters with cheaply priced bond sale', quoted an international investor as saying: "It is hard to imagine that this is net present value-positive."
International Capital Markets
So why are the international capital markets so in love with this deal? Because they are laughing all the way to the bank with the high interest rate that the Government of Jamaica is paying them. International investors are having a hard time finding interest rates (yields) as high as what the Jamaican Government is paying and so international investors love this deal. A country where the IMF ensures that debt payments are made issues bonds at high interest rates. How much better can it get?
With an additional approximately US$109 million or J$12.7 billion added to the country's interest payment annually, what does this mean for the budget as a whole and specifically the primary surplus?
Only recently, Dr Van Selm, IMF's resident representative, was at pains to explain why a 7.5 per cent primary surplus was the right figure for Jamaica. Dr Van Selm said, "It's the only way to get Jamaica out of its cycle of debt. That's because Jamaica spends between seven and eight per cent of GDP each year on interest payments. So, a seven-and-a-half percent primary surplus serves to balance the sums."
The annual interest payment on the US$1.5 billion PetroCaribe replacement debt is equivalent to approximately one per cent of GDP, making the amount that Jamaica will now spend on interest payments in the range of eight to nine per cent of GDP. The Opposition is asking: How does this additional interest payment of approximately one per cent of GDP serve to balance the sums?
The big headline from the government is the downward movement that we should see in the debt-GDP ratio.
According to the IMF's own calculation of Jamaica's public debt in its report dated June 2015, the PetroCaribe portion was US$0.8 billion. (See pie chart). The Opposition asks: How does replacing US$0.8 billion with US$1.5 billion reduce the value of the country's public debt and help to put debt firmly on a downward trajectory?
Why replace a friendly, low-cost debt in which Jamaica has the flexibility to pay some of its interest payments with locally produced goods and services such as clinkers with a rigid and unfriendly international capital markets debt deal?
Why make the high-cost debt an obligation of the taxpayers of Jamaica rather than retaining the low-cost debt at PetroCaribe Fund, where it was being adequately serviced?
If the PetroCaribe Fund is to now help to service this new replacement debt, is the minister of finance not diverting development funds available for small and medium enterprises, renewable energy projects, etc, towards debt payment? How does that help the economic growth picture for Jamaica?
How is paying an additional one per cent of GDP in interest payment consistent with the Ministry of Finance's insistence that there is no room in the budget?
How will United States President Barack Obama, to whom democratic lawmakers wrote to ask him to intercede on Jamaica's behalf for the IMF to loosen up the primary surplus requirements, view Jamaica replacing a low-cost long-term loan with high-cost debt?
Will Obama view a negative net present value deal as a good deal for the Jamaican people?
The US$1.5 billion raised to pay back the approximately US$3 billion PetroCaribe debt is a bad deal for the Jamaican taxpayers for the following reasons:
1) The high interest payments of US$109 million or J$12.7 billion annually on the new debt for at least the next 25 years far exceed the US$1.5 billion in savings.
2) The PetroCaribe debt that existed was being adequately serviced already at an interest rate of approximately one per cent or US$30 million annually by the resources at the PetroCaribe Development Fund. It did not require $1 from taxpayers.
3) It unbalances the primary surplus equation.
If, as Dr Van Selm of the IMF said, the primary surplus at 7.5 per cent of GDP adequately "balances the sum given that Jamaica's interest expense is 7-8 per cent of GDP", then when you add some J$12.7 billion or one per cent of GDP of new interest payment, wouldn't that unbalance the sum? Doesn't that make the primary surplus less than the interest expense and unbalances the sums?
4) Government has replaced a very friendly low-cost loan with a very high-cost unfriendly loan.
5) There is no reduction in the public debt or the debt-GDP ratio that the Government calculates. Debt-GDP of 131.6 per cent reported at end of FY2014-15 would remain at 131.6 per cent of GDP because it does not include the PetroCaribe debt as per page nine of the Fiscal Policy Paper dated February 19, 2015.
6) There is no reduction in the public debt or the debt-GDP that the IMF calculates.The Ministry of Finance said that debt-GDP as reported under the Extended Fund Facility (EFF) was 139.7 per cent at the end of FY2014-15. It also said that and the EFF calculation included PetroCaribe debt in the order 8.1 per cent of GDP. Now, if the new replacement debt of US$1.5 billion represents approximately 11 per cent of GDP, how does one get a reduction in the debt-GDP using the EFF calculation?
The Jamaican people are being asked to shoulder additional interest payments despite the fact that the costs outweigh the savings. Additionally, these interest payments begin now when the Jamaican people are already badly squeezed and in need of relief, not more interest payments.
- Fayval Williams is deputy spokesperson on finance for the Jamaica Labour Party. Email feedback to firstname.lastname@example.org