How the IMF can help Jamaica unleash growth


Wednesday, November 15, 2017

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After literally decades of failing to complete IMF programmes — which ended with Jamaica telling the IMF goodbye or ta-ta in the mid- 1990's just as we were entering a catastrophic domestic financial crisis which eventually cost 40 per cent of GDP — Jamaica is now the IMF's star pupil.

Along with Ireland, Jamaica has essentially become the poster child for the view that austerity works, itself a longer conversation.

Ireland exited its own IMF agreement — a response to its own catastrophic, domestic financial crisis triggered but not created by the global financial crisis — relatively quickly, and now appears to be approaching its fourth year of growing at roughly five per cent (a neat reversal of Jamaica's 'five in four' growth target).

For the first half of this year however, unlike Ireland, Jamaica's growth has continued at the anaemic levels seen for the past decade, although some believe the official figures understate the reality.

It is therefore more than timely that the IMF is having a high-level Caribbean forum tomorrow under the title 'Unleashing growth and strengthening resilience', and is launching a book with the same title.

The dizzying array of topics covered in the chapters include unleashing “strong, sustainable and inclusive” growth, tourism and its challenges (including Cuba and the issue of tax incentives), natural disasters, economic citizenship programmes, debt restructuring, financial development (inclusion, interconnectedness, problem loans and the loss of correspondent banking relationships), energy diversification, emigration and remittances, and the costs of violence.

In her own foreword to the book, Madam Lagarde emphasises the Caribbean trap of low growth and high debt, noting the challenges including frequent natural disasters, a large public debt overhang, high energy costs, violent crime, constrained access to credit, the high cost of doing business, and the brain drain, “to name just a few”.


Jamaica is a specialist in this issue of low growth and high debt, and in particular the specific challenges mentioned by Christine Lagarde, who might have been talking about our particular economic history. Nevertheless, it might be helpful to provide a domestic, as opposed to an international, perspective on our key challenges.

Such a perspective already exists officially, in the form of the eight recommendations of the Economic Growth Council (EGC), chaired by Michael Lee-Chin.

Just to remind everyone, these are : maintain macroeconomic stability and pursue debt-reduction strategies; improve citizen security; improve access to finance; pursue bureaucratic reform to improve the business environment; stimulate greater asset utilisation; build human capital; harness the power of the Jamaican Diaspora; and catalyse the implementation of strategic projects.

One of the missing pieces from the domestic list of priorities of the EGC is tax reform, which was perhaps wisely left out due to its sheer complexity (the size of the task would overwhelm any committee with eight other major objectives) and which in any case, from the beginning of this year, has now got its own committee.

Tax reform is one of the issues where IMF help (and pressure) can be invaluable, but where it also needs to really avoid absolutist “religious” dogma, and accept “that one size does not fit all” — something the IMF now claims to do.

It is worth looking back to why the last comprehensive tax reform implemented on January 1st, 1986 under Professor Roy Bahl as lead consultant (until recently at least he was a member of the IMF's own technical advisory “expert” panel) was so successful, nearly doubling revenues in the four following years and thereby allowing “growth” to essentially close the budget gap.

Funded by US AID with real money, the two-year project had an all-star cast of public finance economists, some of whom went on to become world experts in their field.

As importantly, the visionary US AID director of the time basically put Jamaican Canute Miller, then chairman of the Board of Revenue, in charge, telling him it was “your project”, and “they work for you”, thereby creating genuine ownership with the technocrats at the Ministry of Finance.

The role of the private sector was also important, as the committee was chaired by then immediate past president of the PSOJ and JCC, Roy Collister and included, amongst others, Joseph Matalon (who went on to chair another such committee in 2004) and Betty Anne Jones (of KPMG). It also had the advantage of the private sector, having already paid to second Price Waterhouse partner Richard Downer to the Office of the Prime Minister full-time to help with a renewed thrust to achieve economic reform after the 1984 election — thereby achieving a very high level of communication with the then Prime Minister and Finance Minister Edward Seaga.

Essentially, it was a very successful example of public-private partnership where, unusually, the multilaterals (in this case a “unilateral”) allowed genuine ownership by the technocrats, the private sector provided critical information as to how things really worked and how they could be improved, and the committee had access to genuine, world-class expertise in the form of Professor Bahl and his team.

Finally, it included a committed prime minister with the political will to get things done and who, having reviewed the numbers, implemented most of the recommendations.

Even here there was unfinished business as, for political reasons, Seaga did not accept the recommendation to implement GCT (this was implemented after the return of the PNP Government a few years later), which would have allowed a then globally competitive corporate tax rate of 25 per cent rather than the 33 per cent chosen.

As my father always used to say, “The need for tax incentives simply means the corporate tax rate is too high.” Instead, as the committee felt it could not lower the corporate tax rate to the globally competitive level needed to attract foreign investment to Jamaica, the committee took the rational decision to leave incentives alone, thereby enabling the subsequent expansion in the 807 'textile' and tourism industries, which also helped close the foreign exchange gap.

The latter expansion was helped by the sensible decision of the Government to finally divest itself of the numerous hotel properties it had acquired during the 1970s, enabling the creation of a domestic tourism industry.

Without yet having the benefit of having got a copy of their book, and wholeheartedly agreeing with the issues identified by Madam Lagarde (particularly for Jamaica), I cautiously note that it may be worth the IMF looking at some areas where there may be a few gaps, or the need for different priorities, or where certain current IMF/government policies could be adjusted.


The starting point is access to finance.

Following the financial collapse of the 1990's, the Jamaican Government implemented some of the most stringent financial regulation in the world, using Canada as a model, but making it significantly tighter even than the “best practice” model they were using.

This 'overreaction' was not in itself unusual as a response to a financial crisis globally (Jamaica's effective regulation had been pitiful pre-crisis), but what is unusual is that we still have not adjusted our financial regulations after nearly two decades, and are operating with an essentially immediate, post-crisis financial framework.

This was coupled with the creation of an effective banking monopoly (more precisely an effective duopoly) by virtue of the consolidation of the sector, who have become virtual tax collectors for the Government — through the asset tax and a higher rate of corporate tax. What was an effective moratorium on new banking licences has only recently been lifted through the long-overdue granting of licences to Jamaica National and more recently JMMB.

Unsurprisingly, it turns out competition was the best antidote to this duopoly. Access to finance for creditworthy customers has improved dramatically since, all helped by a balanced budget eliminating the crowding out effect — exactly what many members of the private sector had, for decades, told successive governments would happen.

Past PSOJ president and current Sagicor President and CEO Chris Zacca notes that the policy matrix for the current IMF programme states that the Government is committed to “streamline and rationalise financial sector taxes, including financial turnover taxes (stamp duty and transfer tax) and the asset tax, while also assessing the appropriateness of the higher corporate income tax rate of the regulated industry” by Fiscal Year 2018.

He adds “access to lower-cost capital is the fuel that is needed to drive inclusive economic growth, and I would really like to see the IMF facilitate the urgent creation of a high-level, public-private working team to accomplish these tax reform goals that have been agreed by the Government”.

Zacca is indeed right.

Financial sector taxes are indeed much too high, and are essentially being passed on to the consumer, creating a wedge between the growth-promoting “inclusive” cost of finance and what currently exists, which is an albeit welcome financial deepening for those who can already borrow.

As my dad also used to say, “banks only lend money to those who don't need it” — still an unwelcome reality for hundreds of thousands of small enterprises.

More precisely, a recent Ministry of Finance brief justifying an IDB collateral guarantee project estimated that there are about 200,000 formal small and medium enterprises (SMEs) in Jamaica, and between 200,000 to 400,000 microenterprises, with Jamaican MSME's estimated to employ 82 per cent of the country's labour force, according to the Financial Sector Assessment Programme 2015 SME Finance Technical note of the World Bank.

There is a need to urgently address the regulatory capital weights imposed on the banking sector, which effectively lock out small- and medium-sized business from access to finance, and force the general population into the hands of usurious microlenders.

From a broader capital markets perspective, one could add that it is also ridiculous that by regulation, US dollar-denominated Jamaican Government debt has a much higher “required capital weighting” across various segments of our domestic financial sector than Jamaican Government debt — a measure solely designed to fund the Government and not for the benefit of business.

Even if there are legitimate concerns about the “dollarisation” of the Jamaican economy, it simply goes against economic reality in our small economy.

It also goes against one key area of potential, emerging economic advantage of Jamaica — namely our deepening capital markets, which should be encouraged so that we can become a true regional capital market for real businesses across the region.

There are many other examples, including the restriction on pension fund investing in the area of private equity/venture capital, or corporate bonds.

In short, we need “a financial market that funds productive investments”, to use the exact phrase of Dr Paul Holden's more-than-a-decade-old IDB study, which is still worth reading.

Thankfully, some of these issues are now finally being addressed, but so slowly.

The issue of poor access to finance for MSMEs due to banking collateral or risk-weighting requirements is hugely compounded by the informality of hundreds of thousands of businesses, essentially a vicious circle, suggesting that a tax amnesty should be an IMF, and government, priority to bring these businesses into both the tax and banking systems.


It needs to be coupled with an aggressive reduction in transfer tax to get registered the hundreds of thousands of parcels of land (all potential collateral), which would, as a bonus, start to pay annual property tax.

Essentially, doing these three things simultaneously would be a 'triple' play for many small businesses, simultaneously reducing informality and driving 'inclusive' growth.

Another area of focus for the IMF should be encouraging export-led growth, or put slightly differently, encouraging “industrial self-discovery”, as a Harvard team lead by Musson Group's Nicholas Scott argued long ago in a presentation just before the global financial crisis.

In a still-relevant study, the team also identified a “macro instability tax” as Jamaica's other major problem, which at long last seems to be receding.

As the IMF saw fit, rightly, to seek Professor Harris's endorsement for their book, they might want to look again at his excellent book on how Jamaica can achieve export-led growth Jamaica's Export Economy : Towards a Strategy of Export -led Growth. It is 20 years old, and an update, or another similarly granular look at our trade patterns/industry self-discovery is long overdue.

Jamaica's merchandise exports are so low that this should be an obvious area for multilateral attention, particularly if combined with a logistics strategy.

One approach would be to increase the cap on the very successful employee tax credit, currently at 30 per cent, to 50 per cent. That would reduce the standard corporate tax rate of 25 per cent to an effective rate of 12.5 per cent (on par with Ireland), to drive large-scale manufacturing investment, both foreign and local, and thus employment.

Time is now of the essence, before the arrival of the robots.

In a short e-mail, in similar vein, outgoing PSOJ President P B Scott notes, “We need to curb imports. We need to address the minimum capital test and minimum continuing surplus requirements which forces insurance companies to keep assets in short term, eg less than one-year investments. This is warping investment. We need to invest in longer-term corporate debt, thereby allowing savings and funds to flow to productive assets.”

Scott believes potential exporters need to gain market share internally through import substitution, to then allow them to get into the much tougher, and typically less profitable, export market. Essentially, Jamaica needs to sharply raise the value added in Jamaica, and thus its productivity, which may not necessarily jibe with standard, neoclassical theories.

Another key area the IMF needs to change immediately is the cap on public-private partnerships of three per cent of GDP, most of which has essentially been used up by the port transaction.

On our past performance, their fears of contingent liabilities are well founded, the solution being to have strong representation on a transparent oversight committee, as eventually occurred with ESET and our electricity capacity.

We should not delay critical infrastructure that will pay for itself for decades, particularly now that the cost of capital has plummeted.

A new Kingston dam, irrigation, and sewage system to power the revival of downtown Kingston come immediately to mind as paying for themselves.

If the IMF were able to enforce discipline on the “patronage” road-building system, promoting concrete roads, or machines that reuse road surfaces, they could halve the cost per mile of road.

State political party funding would be a fraction of the cost savings from making the parties abandon this system of funding their operations, and could be combined with genuine improvements in climate resilience, rather than frequent road building to fill party coffers and partisan stomachs.

Finally, Sean Newman of Invesco, a Jamaican emerging market fund manager, notes that the Jamaica case study has three main lessons. It highlights the flexibility of the IMF in adopting a tailored programme, suggests that no country should let a good crisis go to waste to implement tough reforms, and demands that the multilaterals do more to construct the right measures to strengthen the business environment and promote activity to shift from the public sector to the private sector.

In terms of our current problems, this is no more than the truth.

The problems of doing business in Jamaica and crime share equal billing. The first can only be dealt with by a much more resourced and thoughtful attack on the key problems, preferably also by funding the major private sector organisations to offer structured feedback to improve the systems, while a sharp rise in employment and opportunities (as outlined above) would help with the latter.

Over to you, Madam Lagarde.




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