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All hurdles cleared to final IMF deal, formalities remain

Published:Friday | January 15, 2010 | 12:00 AM

R. Anne Shirley, Business Writer

By now, it should be very clear to everyone that the presentation of the Jamaican Government's letter of intent to the executive board of the International Monetary Fund (IMF) on January 27 is just a formality, as the GOJ has passed the last major precondition set by the fund for the granting of a US$1.3 billion stand-by facility over 27 months.

In his national broadcast Wednesday night, Prime Minister, Bruce Golding announced the broad parameters of the debt rescheduling exercise - called the Jamaica Debt Exchange Programme (JDX) - that it will be undertaking with all of the domestic holders of Government of Jamaica bonds.

This is a critical plank of the Jamaica Medium Term Economic Framework, along with the recently imposed new tax measures, which needed to be put in place at the beginning of our engagement with the IMF.

As PM Golding pointed out, Jamaica has reached the point where we can no longer continue to borrow more money in order to service our debt obligations.

Net present value

This had become unsustainable. And this is where the IMF has forced us to recognise that unsustainability means that if something drastic is not done to curtail this continued build-up in debt, then debt relative to GDP (gross domestic product), as well as debt servicing relative to GDP, would continue to increase indefinitely.

In such a circumstance, the reality is that the economic net present value of Jamaica's sovereign debt is less than the face value of the debt and, moreover, would likely continue to fall until a restructuring takes place and growth resumes in the economy.

Under the JDX, the government expects to save over $40 billion in interest expense over the next financial year that will provide needed fiscal space for the government to execute needed reforms in wage adjustments, tax and finance administration, improvements in efficiency and collection, provision of additional social safety nets to, for example, the PATH and school-feeding programmes and increases in payments to NIS pensioners.

There had been extensive discussions between members of the local financial sector and technocrats at the Ministry of Finance and the Bank of Jamaica (BOJ) for several months, last year, on the development of a liquidity management programme that was rejected, but the critical difference between that initiative and the JDX is that the former exercise would have involved the rescheduling of existing debt with longer maturities and lower upfront interest payments, while maintaining net present value of the bonds.

The JDX programme, however, involves a reduction in the net present value of all existing contracts with all domestic bondholders of GOJ paper.

This exercise is limited to domestic debt obligations, which according to Prime Minister Golding, is worth around $722 billion of the government's $1.3 trillion public debt burden.

As at the end of October 2009, financial institutions held around $454 billion of this total, with merchant banks, trust companies and securities dealers accounting for $247 billion, insurance companies holding $108 billion, superannuation and pension funds holding $89 billion and commercial banks, a further $87 billion, while building societies held $12.5 billion.

Of the $722 billion national debt, public bodies hold an estimated 25 per cent - approximately $180 billion.

Taking up Govt's offer

Checks by the Financial Gleaner indicate that all of the major financial institutions will be taking up the Government's offer under the JDX programme, and as such, there should be over 90 per cent compliance at the end of the offer period on January 26, which, incidentally, is the day before the IMF board will be considering Jamaica's letter of intent.

An important pillar in the debt exchange programme is the establishment of a US$400 million Financial Sector Support Fund by the Bank of Jamaica, using funds from the IMF and multilaterals, that will provide assistance to financial institutions that might be negatively impacted by their participation in the debt exchange programme.

In other words, some of the financial institutions, particularly some of the locally-owned institutions will, quite likely, take a hit on their bottom line in the reduction in earnings that they were anticipating on GOJ paper that they are currently holding, while they will have to honour the existing terms of their outstanding stock of fixed deposits and other deposit instruments.

The BOJ fund will help them to survive this impact.

Another important facility is the US$300 million Liquidity Programme for Growth Sustainability, accessed by Jamaica last year from the Inter-American Development Bank and is now operated by the Development Bank of Jamaica as a revolving credit facility that allows financial institutions to replace lost or reduced working capital credit lines to both exporters and importers as well as to producers for the local market.

Other major planks will include inflation and exchange rate stability.

These are all key steps in the development of the Jamaica medium-term macroeconomic framework, the details of which are anticipated in the upcoming Parliamentary debate on or around January 19.

Jamaica's IMF journey has begun once again.

The reality is that the economic net present value of Jamaica's sovereign debt is less than the face value of the debt and, moreover, would likely continue to fall until a restructuring takes place and growth resumes in the economy.