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EDITORIAL - No to economic mirages, or Keynes in drag

Published:Monday | May 28, 2012 | 12:00 AM

Peter Phillips, the finance minister, is right about the folly of chasing mirages - his apt characterisation of the idea of a voluble handful of commentators that the Government dump loads of cash into the economy to stimulate growth. For in their failure to robustly analyse their proposal in the context of Jamaica's debt crisis and our limited ability to borrow, their conclusion is a bit like dressing Keynes in drag.

Stripped of fancy appellations, their proposal is for the Government to engage in higher levels of deficit spending. That is, it will have to borrow more, thus increasing the size of the country's debt.

But there are two major issues facing Jamaica if it were to pursue such a counter-cyclical policy, not least being the size and unsustainability of the debt it currently carries. The Government owes J$1.7 trillion, or approximately 130 per cent of gross domestic product (GDP), the value of all goods and services produced in the country. Jamaica's debt-to-GDP ratio is not as bad as, but in hailing distance of, Greece's and worse than most of the Eurozone countries whose deficit problems precipitated the latest round of the global financial crisis.

Debt takes priority

In this fiscal year, servicing the debt, paying interest and principal, will consume 54 per cent of government expenditure. This is an inescapable obligation unless our lenders voluntarily agree to write-offs or rescheduling or payments - as domestic bondholders did more than two years ago - or if Jamaica unilaterally defaults. The latter option would be deeply problematic.

The debt, as this newspaper and others have noted repeatedly, is the single largest drag on Jamaica's economic growth which, over the past three decades, has averaged less than one per cent a year. Debt servicing diverts resources away from potentially productive investment. The most obvious requirement, therefore, is to bring the debt under control, as part of a strategy for sustained growth.

But even assuming that accelerated deficit spending was an efficacious and desirable policy option, those who promote the idea seemed to have overlooked one critical point: Jamaica would first have to find willing lenders, or, more to the point, people willing to lend at affordable rates.

Jamaica is no United States. The Jamaican dollar is no reserve currency that other nations or global investors want to hold, making them willing to lend to us cheaply. Nor is Jamaica a partner in a rich club with the capacity to afford its financial bailouts, as Greece has had, albeit at a cost, from the European Union (EU).

Further, as the finance minister made clear last week, both the World Bank and the Inter-American Development Bank won't release new loans to Jamaica until it has an agreement with the International Monetary Fund (IMF). Similarly, bilateral partners, like the EU, have held up fiscal support, pending an IMF agreement.

Said Dr Phillips: "And the inescapable precondition of the IMF's seal of approval is that Jamaica must embark on a programme that will steadily reduce our debt ... ." The notion of a stimulus package, while "seductive", as Dr Phillips put it, is, in reality, "a mirage".

Jamaica's best option in the short term is to create, and aggressively pursue, options for private-sector-led investment and growth and tight management of the country's fiscal affairs. The good news is that Prime Minister Portia Simpson Miller seems to be onboard.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.