IMF deal, or doom
BY JULIAN RICHARDSON Assistant business co-ordinator ?firstname.lastname@example.org
The economy would be doomed if Jamaica does not secure a new International Monetary Fund (IMF) deal, says Christopher Zacca.
A dramatic fall in business and consumer confidence, significant deterioration in local and international financial sentiments, and significant loss of financing from other international development partners are the likely outcomes without an IMF agreement in the short run, the president of the Private Sector Organisation of Jamaica said at a Rotary Club of St Andrew meeting yesterday.
“The fall in market confidence and in sovereign ratings, combined with the loss of multilateral financing ,would lead to a further reduction in the Net International Reserves (NIR) and trigger a speculative attack against the Jamaican dollar; leading to a rapid and significant depreciation of the Jamaican dollar accompanied by higher inflation,” said Zacca.
“Domestic nominal interest rates would obviously rise in response to the higher inflation and currency depreciation. Domestic and external bondholders who would still consider holding GOJ paper would require much more significant risk premiums,” he said.
Higher interest rates would stifle domestic productivity, resulting in less investment and increased joblessness, Zacca warned. What’s worse is that the depressed domestic economic environment, compounded with foreign exchange market instability, would weaken the financial sector and stymie loan growth while fuelling nonperforming loans, he said.
The PSOJ president said the private sector remains confident and supportive of the efforts of Finance Minister Dr Peter Phillips and his technical team, who are presently holding talks with IMF officials on the island. Phillips has expressed hope that the discussions, which began on Monday, would be the concluding round of negotiations.
Phillips told Parliament recently that Jamaica should be able to ink a deal with the institition by December. An agreement would allow the IMF to provide oversight for the Government's management of the economy and will also allow Jamaica to draw down funds in the form of budgetary support from the Fund.
However, Zacca stressed that the commitment of all segments of society would be critical in making an IMF deal work for Jamaica.
“Government, Opposition, public sector, private sector, unions and civil society need to work together, sharing the short term pain of securing an IMF agreement to ensure the very stability and future growth of our economy,” he said.
Zacca also urged the IMF to act responsibly in implementing terms of an agreement against the background of the global economic crisis and Jamaica’s weakened state of finances.
“There is the possibility that the ‘chemotherapy’ of the medium-term programme which is to be administered to cure the ‘cancer’ of debt can be so strongly applied that it ends up killing the patient,” said Zacca, whose team is schedule to meet with IMF representatives next week.
“This is the delicate balance that I am sure the IMF in its wisdom is grappling with constantly. There is a point at which the requirements and in particular the timeframes for implementation could be so onerous, so severe, that it may very well be impossible for Jamaica to comply,” he added.
In the 1970s, the PNP Administration, then led by Michael Manley entered into a borrowing relationship with the IMF in a bid to rebound from the ravaging effects of the world oil crisis.
However, the imposition of strict loan conditionalities forced successive Administrations to effect cost-cutting measures which had devastating social consequences, including massive public sector job losses, wage freezes, the closure of some public institutions, and a significant reduction in government spending.
The previous JLP government resumed a borrowing relationship with the Fund in 2010, but was unable to meet several of the targets under the Stand-by Arrangement, causing much uncertainty over the country's future under that relationship.
See full text on News Pages 13 and 14.