Editorial | Preemptive IMF deal good

Nigel Clarke, the finance minister, has acted prudently in tying up a potential US$1.76 billion in cheaper money from the International Monetary Fund (IMF), rather than risking the global financial markets tightening further and Jamaica having to pay higher premiums on borrowings.

With this preemptive move, Dr Clarke accomplished something else that is important, which is good for Jamaica. He apparently ditched whatever the impulses that were at the outset of the COVID-19 pandemic that caused him to initially hedge about Jamaica needing to go to the Fund for support, before accepting a US$520-million balance of payments loans from the IMF’s Rapid Finance Instrument. Happily, at that time, Dr Clarke acted before the fiscal fallout from the pandemic became insurmountable.

In fact, Jamaica has weathered the crisis not unbruised, but in better shape than most of its regional peers. Having lost 10 per cent of its GDP in 2020, as the island’s tourism sector collapsed, the value of national output, in real terms, is projected to return to its pre-pandemic level in 2023.

Moreover, the Government’s debt, projected to end the current fiscal year at 87.3 per cent of GDP, will, by that measure, be 7.5 percentage points lower than the outturn for the 2019-20 period. Similarly, unemployment was at a historic low of 6.6 per cent in July.

DELIVER ON PROMISE

While the data hasn’t yet translated into a better quality of life for large swathes of Jamaicans, the broad trajectory has to be maintained for there to be a chance that they deliver on their promise. However, as Dr Clarke observed this week, there are plenty that could put things awry in the near to medium term. Not least of these is the Government’s need to pay off more than US$1 billion of its debt over the next two fiscal years.

The Russia-Ukraine war has fuelled global inflation and pushed Europe towards an energy crisis and a predicted recession in 2023. There are fears, too, of a possible recession in the United States next year.

“International financial conditions are tightening as central banks around the world raise interest rates to battle inflation,” Dr Clarke lamented in a review of the environment in which he would possibly have to go to the private markets to finance a rollover of the debt. It may not have to, if indeed things do go further south and the island’s foreign reserves fall under stress.

Last week, the Government and the IMF reached a staff-level agreement on a facility under which Jamaica would, if required, have access to US$967 million from the Fund’s Precautionary and Liquidity Line (PLL).

Launched earlier this year, the PLL is designed for countries that have undertaken reforms, are deemed to have sound economic fundamentals to which they are committed, but are likely to confront global circumstances, such as those highlighted by Dr Clarke, that negatively impact their balance of payments – exogenous shocks, as the economists call them.

A PLL facility may, depending on its terms, be open for between six months and two years. Based on the timelines for the debt amortisations, Jamaica appears to have opted for the longer term, willing to pay a service fee on funds committed, but not utilised.

INTEREST RATE

The potential loan’s broader interest rate, however, was not disclosed, but under the IMF complex formula for the scheme, it could be as low as 2.5 per cent before surcharges. In any event, it would be significantly lower than what private markets would demand.

In addition to the precautionary facility, Jamaica and the IMF agreed to a US$763-million loan under the Fund’s Resilience and Sustainability Facility (RSF), from which low- and middle- income countries can borrow to help address the development challenges posed by the pandemic and climate change, such as investing in infrastructure and clean energy.

This loan will be at 3.8 per cent, repayable over 20 years, with a 10-year moratorium on the principal. According to Dr Clarke, that would save the Government US$35 million a year over the life of the debt, compared to what it now pays on its borrowings. At the start of the current fiscal year, the weighted average cost of the central debt was around six per cent, but recent market conditions might have pushed that higher.

That Jamaica is making use of these facilities is sensible. However, the presence of the RSF reminds of the need for a deeper overhaul of the global financial architecture, which limits the access of middle-income countries like Jamaica to regular, concessionary development financing, including from the World Bank.

The IMF was not designed to undertake the kind of development-type lending, which, when stripped to its core, is what the RSF facilitates, even if indirectly. Jamaica, though, must take what is available.