EDITORIAL - Don't bleed the reserves
In the late 1970s, with Trinidad and Tobago on the way to squandering its windfall from the first oil shock, Michael Manley, the Jamaican prime minister, reportedly told a meeting of the national executive of his People's National Party (PNP) that the money was "running through" the Trinidadians "like a dose of salts".
The crudity of the metaphor and the self-satisfaction, if not open glee, with which it was delivered - partly a response to Eric Williams' supercilious attitude to Jamaica's request for a loan - aside, Mr Manley had a point.
Its coffers bulging with petro dollars, Trinidad and Tobago had gone on a consumption binge which, by the early 1980s, had sent it back into an economic crisis, including nearly eight years of negative growth. Its recovery was built on a decade of prudent fiscal management, spread over two administrations, each of which was allowed only a single term, and the good fortune of another oil shock.
While there may not be a direct parallel between Trinidad and Tobago's experience of the 1970s and Jamaica's current circumstances, there is relevance in the late Mr Manley's diarrhoeic observation as our finance minister, Peter Phillips, goes about his economic policymaking and its execution. Our specific reference is to the debate over the efficacy of currency devaluation and the US$800 million in debt that Dr Phillips last week raised on the global money markets.
In the two and a half years since Dr Phillips has had the job, the Jamaican dollar has devalued by approximately 30 per cent, more than half of that coming in the 15 months since the Simpson Miller administration signed an economic support agreement with the International Monetary Fund (IMF). The IMF argued that the Jamaican currency was significantly overvalued, and during her visit to the island a week ago, the Fund's boss, Christine Lagarde, suggested that the depreciation still had a bit to go, though "not much", in the country's thrust for global competitiveness.
Significantly, it was the first time that Jamaica was going to the money markets for four years and the 7.625 per cent at which it borrowed was the lowest since it started accessing the global markets in the 1990s. This happened because after a year of tough reforms, the economy may be on the mend and the risk of default, after the two 'voluntary' debt exchanges with domestic bonds, had receded for foreign lenders.
The Government has cut spending, raised taxes, run a primary surplus of 7.5 per cent of GDP and, in the process, lowered its debt by around 10 percentage points to 137 per cent of GDP. But few things on the policy agenda have concentrated minds as much, or are as potentially politically flammable, as devaluation. Indeed, there are suggestions that some of the proceeds from the loan be used to shore up the Jamaican dollar.
We, however, urge Dr Phillips and the central bank governor, Brian Wynter, to be exceedingly wary of such proposals. The Government has a €150-million bond that falls due in October, and US$300 million next June. Prudence demands that these, and the possibility of paying out of other expensive debt, have first call on the loan, rather than, as Ms Lagarde put it, Jamaica "bleeding its reserves to support a currency that is clearly over-valued". The result of any such deliberate strategy is to subsidise imports and domestic consumption and to send Jamaican jobs abroad.
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