The IMF can help us take tough decisions

The IMF can help us take tough decisions


Wednesday, October 10, 2012

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JAMAICA today presents the IMF with a huge opportunity to move beyond its reputation, however unjustified, as a mere agent of international bankers forcing austerity on poor developing countries, such as that outlined in the film Life and Debt by Stephanie Black, to that of a true development agency. The right kind of IMF agreement would also help Jamaica to finally take the tough decisions that the majority of Jamaican's, tired of simply muddling through, and well aware that we are once again in danger of falling off the abyss, may now finally be ready for.

The resumption of the social partnership "Partnership for Transformation" talks today, involving the Government, unions, private sector, civil society and hopefully Opposition, provide a timely opportunity to create a real internal consensus on what should be part of a new IMF agreement. The starting point should be the release of the Article 4 review of Jamaica's economy to all the social partners, providing the various groups with a fact based independent assessment of our economic situation. Indeed, the multilaterals could help provide the technical secretariat, both people and money, necessary to make the process meaningful. Currently, the absence of comprehensive information and the uncertainty about the economic situation is feeding off of itself. The key question on everybody's lips is whether we will get an IMF agreement this year, with most now seeing this as unlikely. This creates an everyman for himself environment with the consequent impact on the dollar.

There is, however, still time to reverse this loss of confidence, and move to a partnership type approach, if we start immediately, and actually mean it. The choice of former Minister Burchell Whiteman, a man of clear integrity, to assist in the partnership process is an excellent start, and should help with the trust deficit. However, to prevent the exercise being merely another talk shop will require a large number of very important other measures to be taken.

The first thing is the realisation that trust is not a prerequisite to a social partnership, but is gradually earned through shared analysis and mutual problem solving. The second is that the initiative must both be led and backed by the power of the prime minister, as the only Minister with the authority over all the areas — economy, investment, crime, justice, energy, education etc that need to be addressed in the agreement. We no longer have the time for the government (and ministers) to operate in their individual silos, but need to find a way to achieve a joined up approach to solving our complex problems.

The first mission of such an attempt to form a social partnership must be to inform an IMF agreement. In the last decades two attempts to form a social partnership, the real underlying approach reflected essentially the political bases of the respective governments. In the case of the Partnership for Progress in 2004, which was never signed, the key agreement was actually the memorandum of understanding (MOU) between the government and the unions, in which the private sector had no participation. In the case of the partnership for transformation, work on which started in November 2008, the related National Planning Summit initiative that had begun a year earlier was basically between the private sector and the government. The most important immediate issues in the current IMF negotiations are the public sector wage and benefit bill, and taxation, both of them absolutely core issues for the unions and the private sector respectively. It is therefore now time for a true partnership approach.

The original vision of the private sector working group (PSWG) to create a unified private sector position on taxation, whilst not perfect (only government has the power to impose a true win win solution on different sector interests), provides an excellent starting point for what needs to be achieved. The essence of the social contract required between the unions and the private sector is clear, and has been outlined some time ago by union leader Lloyd Goodleigh amongst others. The social contract piece of tax reform must be geared primarily to raising the threshold dramatically for the long suffering PAYE, particularly in an environment where a near wage freeze is expected from the public sector. This would allow an increase in after tax income for all public sector workers, which would have to be financed through taxes in other areas. It should be noted that the original intention of the 1980s tax reform was that the threshold would be much higher, approximately double what was implemented, and that both personal and corporate income taxes should be equalised at 25 per cent, and not 33 1/3 per cent. It should be noted that this should finally be achieved with the reduction in corporate tax from January 1st next year to 25 per cent, although certain key categories of regulated companies will stay at 33 1/3 per cent.

There is no reason that the likely outstanding technical issues of the IMF agreement cannot also be addressed in the context of the social partnership. The issue of waivers and incentives is intertwined with competitiveness, the exchange rate and whether Jamaica wants a policy of export led growth. The answer to the latter question has to be yes, we do want a policy of export-led growth, as without it all talk of permanent sustainable job creation is hollow in our current environment and should be ignored as mere politician's promises. The macroeconomic projections involved in estimating the sustainability of the debt should also not be a secret. When Jamaican's own virtually all their own debt, there is no point anyone even talking about haircuts (principal reductions in government debt) unless they have already identified the bank and other financial capital that would be required to recapitalise the financial system, the lifeblood of the economy. Instead, the government can get the Bank of Jamaica to reveal the results of its internal stress tests on the restructuring of the debt, and then we can move on (particularly civil society), understanding instead that the priority has to be faster economic growth. As the bankers should also be part of the partnership, we will also be safe in the knowledge that the financial sector knows it must play its part in financing new industry creation, and simultaneously reducing its exposure to the government over time. In fact, Jamaica needs even lower domestic interest rates in view of our extremely weak domestic economy, something that is only possible with confidence.

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