JAMAICA'S Debt Exchange (JDX) two years ago may have lowered its interest costs, but the country remains in a debt trap, with payments by far the highest in the world, relative to GDP.
A recent report by the Washington-based Centre for Economic and Policy Research (CEPR) said that the savings from the debt swap allowed fiscal policy to adopt a more neutral, less contractionary stance without worsening the overall fiscal deficit.
"Nevertheless, Jamaica's interest payments remain extremely high, amounting to nearly 10 per cent of GDP in 2011, or 2.5 times what was spent on capital programmes," said the report.
"The burden of excessively high interest payments will continue to displace public investments, which are needed to restore normal growth and bring down the persistently high levels of poverty and unemployment."
Greece, which is at the centre of the European financial crisis, came the closest to Jamaica in terms of the debt service burden, with net interest payments totalling approximately six per cent of GDP last year.
The Washington-based group believed the JDX did not go far enough, given that Jamaica's public debt burden remains dangerously high (at over 130 per cent of GDP) and "most likely unsustainable".
"This is due to the sheer size of Jamaica's debt stock and the limited scope of the JDX, which only sought to restructure domestically held debt and did not seek a reduction of principal," the report said, adding that the debt swap didn't sufficiently lower the high interest rates on the debt.
"This situation is problematic for a country of Jamaica's income level, which should be able to invest in infrastructure and human capital, as well as have the financial flexibility to respond to frequent natural disasters and other external shocks," said the report.
The group believes that multilateral institutions, including the IMF, World Bank and Inter-American Development Bank, have "played a particularly problematic role, supporting contractionary policies intended to maximise the primary surplus and prioritise the service of debt".
"This amounts to a consistent transfer of output from taxpayers to domestic and foreign creditors, and a serious impediment to the formulation and implementation of a development agenda," the authors wrote.
"As long as creditors are prioritised over the country as a whole, Jamaica will remain heavily indebted with persistently low growth."
Jamaica's economy grew by 1.5 per cent last year after three years of negative growth rates, but the economy still remains below its 2008 level of GDP.
The group argued that, as a developing country, Jamaica needs to increase spending on health and education, yet debt servicing (interest payments and amortisation) takes up such a huge portion of the budget that social spending is constrained.
Total debt servicing has taken up nearly 50 per cent of total budgeted expenditures over the last four fiscal years.
Health and education combined have only been around 20 per cent.
Jamaica is currently trying to secure a new agreement with the IMF.
Finance Minister Peter Phillips recently led a delegation to Washington to commence negotiations.
Economist and CEPR co-director Mark Weisbrot said a key sticking point between the IMF and the Jamaica government is the cap on the public sector wage bill.
"It's clear workers have had enough of wage freezes, yet if the Jamaican government is unable to ensure more accommodating policy conditions from the IMF, the likelihood of further wage freezes or layoffs is definitely a possibility," said Weisbrot.