'Cancel the debt'

• Washington-based think tank says that’s the only way for multilaterals to help Jamaica • Country to pay out more to multilaterals than it will receive in 2013; to get just US$350 million over 4 years after loan repayment

Wednesday, June 26, 2013

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AFTER scheduled debt repayments to multilateral lending agencies, Jamaica will just get $350 million in cash from them over the next four years, according to the Centre for Economic and Policy Research (CEPR).

What's more, the Washington-based policy think tank projects that there will be a US$100 million outflow to those institutions this year, due to debt service obligations, even after new loans are disbursed from the International Monetary Fund, World Bank and Inter-American Development Bank (IDB).

"After the previous IMF agreement went offtrack in 2011, financing from other multilaterals was also cut; after considering repayments, net cash flow from multilaterals actually turned negative in 2012 and is projected to be negative again in 2013," said a CEPR brief titled "The Multilateral Debt Trap in Jamaica", which was published last week. "Amazingly, Jamaica is actually paying more to the multilaterals than it is getting back this year, even after the approval of the IMF agreement."

The think tank is suggesting that Jamaica would benefit far more from debt cancellation.

Multilaterals are offering US$2 billion in loans over the next four years, but repayments over that period are expected to total US$1.6 billion.

"If the IMF and other multilateral lenders truly want to help Jamaica, they would do better by cancelling existing debt," wrote Jake Johnston, the paper's author and CEPR Research associate. "Right now, Jamaica has the highest debt interest burden in the world, yet it is being forced into a programme of budget cuts and other austerity under its agreement with the IMF."

He noted that previous debt exchanges did not affect external debt, nor did they reduce the principal of the domestic debt.

Jamaica has twice restructured its debt in the last three years, extending the maturity and lowering interest rates, but neither time has external debt been affected.

Funds from the IMF, World Bank and IDB carry much lower interest rates than private loans and so are not necessarily as damaging, yet debt servicing to these institutions still eats up a large share of Jamaican finances, according to the economist.

Debt reduction efforts in Jamaica has thus far been focused on domestic debt, so as not to lock Jamaica out of foreign capital markets.

Also, haircuts on the domestic debt have been ruled out because this would negatively affect local financial institutions.

"The result is that even after two debt restructurings, Jamaica's debt burden remains unsustainable," Johnston wrote. "The IMF's country representative recently stated that "debt reduction will come from very tight government budgets" because "there is no alternative". But clearly there is.

"By providing meaningful debt cancellation, as opposed to providing billions in new loans, the multilaterals could make a strong statement that they are serious about Jamaica's development and the needs of its people."

More specifically, the latest IMF-backed economic programmes aims to achieve a debt to GDP ratio of 126.5 per cent by 2017, according to CEPR estimates, while the ratio could be cut from 146.9 per cent where it is now, to 123.4 per cent through cancellation.

"Debt to GDP ratios can be a misleading target, but if this is truly the goal, it could be achieved virtually overnight," wrote Johnston.

The brief also notes that such debt cancellation would reduce the share of Jamaica's debt denominated in dollars, which would be positive, since as the Jamaican currency depreciates the burden of the dollar-denominated debt increases.

Johnston believes that "Jamaica might have to depreciate its currency in order to have a sustainable current account deficit, thus placing the health of public finances at odds with Jamaica's long-term economic development".

"If Jamaica wants to escape its current cycle of debt, budget cuts, more debt, and more cuts, than Jamaica and its lenders are going to need to try something different," Johnston said. "Debt cancellation would be a step in the right direction."

Jamaica has owed these multilaterals large sums for many years, but the debt reached US$3.26 billion (39.5 per cent of its total external debt) in December 2012, while loans from multilaterals accounted for 70 per cent of the total increase in Jamaica's external debt from 2006 to 2012.




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