Is the Jamaica Debt Exchange a turning point for Jamaica?
On Wednesday evening, the Financial Services Commission (FSC) put on a timely panel discussion entitled 'The Jamaica Debt Exchange: The Way Forward'.
The opening speaker, Jamaica's Financial Secretary Dr Wesley Hughes, argued that the Jamaica Debt Exchange (JDX) is a "turning point of Jamaica", in that it has "turned an unsustainable fiscal situation into a more manageable or favourable one".
Dr Hughes observes that without the JDX, the much higher debt service in this year's budget meant there was a strong possibility of default and increased economic uncertainty with spillover effects in the foreign exchange market, further draconian tax measures, service cuts in public services, and increased risk of social unrest and political instability.
The positive impact of the JDX includes lower interest rates going forward (with the caveat of much slower adjustment of rates by the commercial banks), and a significant reduction in debt service costs leading to a lower fiscal deficit in Fiscal Year (FY) 2010/11. In Hughes view, this means not only lower future taxation, but supports the projected fall in the real interest rate on the public debt by 5.4 percentage points between FY 2009/10 and FY 2013/14.
He argues that these positive spillover effects lead to the recent rise in business and consumer confidence, required for our economy to rebound. Particularly encouraging, in his view, is that not one entity that participated in the JDX has requested liquidity support from the Financial Sector Stability Fund (FSSF).
Adapting an IMF paper "Ten commandments for Fiscal adjustment in Advanced Economies", Hughes argues that there are five main planks on which Jamaica's fiscal adjustment should rest.
Firstly, he argues that "There must be a credible fiscal and economic plan to gain the trust and confidence of the society." The plan must have targets that are "believable" and "achievable" if market players are to have confidence in the Government's capacity to achieve fiscal sustainability. Hughes believes "The buy-in and participation in the JDX by local market players was a resounding show of confidence in the Government's plans going forward. People were willing to take an interest rate cut, consolidate, and accept longer maturity periods because they expect that, in the long run, there will be recovery and growth for all."
Secondly, "There must be an aggressive debt reduction strategy to reduce the public debt-to-GDP ratio over the medium to long term to sustainable levels." Hughes defines sustainability (pointedly not mere stabilisation), as a debt - to - GDP ratio of no more than 60 per cent.
Hughes reminds us that the Fiscal Responsibility Framework (FRF) agreed with the IMF, legally expressed in the Financial Audit and Administration (FAA) Act, has set a 2016 target to reduce the debt-to-GDP ratio to 100 per cent or less. He advises that the part of Section 48D of the FAA stating that "the total debt is to be maintained at a prudent and sustainable level" is to be toughened. After amendment, it will state that "the total debt is to be reduced and maintained at a prudent and sustainable level."
Thirdly, Government must apply fiscal consolidation strategies in the areas that are most conducive to supporting growth to be successful.
Fourthly, the country must focus on pension reform as part of its medium term expenditure/debt containment strategy. As he puts it, "If we do not address pension reform, the tax system is what will be used to redress the burden on the public purse."
Finally, Jamaica must strengthen its fiscal institutions to ensure there is capacity to effect the fiscal adjustment.
Hughes argues it will require the strengthening of the governance, rules and capacity of our fiscal institutions to sustain a credible and believable fiscal adjustment over time. As he puts it "What we have in place has allowed a runaway growth in the public debt. The present system of governance is clearly in need of fundamental reform. This is the logic behind the FRF: better fiscal rules; better budgeting processes; better fiscal monitoring; better accountability."
Refreshingly, Hughes suggests looking at establishing an independent fiscal agency (similar to the U.K?) to monitor the FRF, going beyond the Public Administration and Appropriations Committee (PAAC) of Parliament to create a Commission of Parliament, similar to the Office of the Contractor General.
Hughes presentation was complemented by that of Central Bank Governor Brian Wynter, who argued that the JDX "by significantly altering the composition, interest costs and maturity profile of the domestic debt stock", was a pivotal policy initiative that had moved the Jamaican economy towards greater economic resilience.
Wynter drew attention to a long neglected, but critical point in Jamaica's economic discourse, namely that both the structure and burden of Jamaica's pre-JDX debt complicated the conduct of monetary policy when the principal aim was to secure price stability.
Wynter observes "Fiscal dominance caused by the high debt overhang severely constrains the conduct of monetary policy. In the event of a domestic shock to prices, when public debt is high and the real rate of return on government securities exceeds the economy's growth rate, tightening monetary policy can have as an unhelpful consequence higher rather than lower inflation."
Apparently referring to our recent history, Wynter argues "This is because one of the consequences of contractionary monetary policy in this scenario can be a dramatically worsened fiscal outturn resulting in, at least initially, the need to issue additional debt."
He observes that the resulting fiscal deficits and pressures on government finances have, in many countries, "left governments and central banks to contemplate the invidious and, in the long run, viciously destructive alternative of pursuing distortionary measures such as the rapid increase in the supply of money, which is in itself inflationary." More simply put, what he calls the 'fiscal dominance of monetary policy' refers to when highly indebted governments are left with no option but to finance deficits through the printing of money.
Wynter argues that the JDX, by altering the structure, composition and interest costs arising from the domestic debt stock, made the structure of the debt more sustainable, government cash flow requirements more certain and, very importantly, reduced the roll-over risks associated with the decline in the age of domestic debt.
By reducing significantly the likelihood of market instability (such as those experienced before the JDX), Wynter argues the JDX played a pivotal role in moving Jamaica from a 'bad equilibrium', characterised by high inflation, high interest rates and bouts of sharp depreciation, towards a 'good equilibrium' with low inflation, low real interest rates and a stable currency.