Will Lagarde give Jamaica and the Caribbean a fresh look?


Wednesday, June 11, 2014

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ON Monday, it was announced that IMF Managing Christine Lagarde planned to visit Jamaica on June 27th to meet with the Prime Minister and the Minister of Finance. The last time an IMF Managing Director visited Jamaica was in July 2010 for a meeting with Caricom, and before that in December 2008, when the same Dominique Strauss Kahn gave the address at the PSOJ's Christmas luncheon just as the global financial crisis was accelerating.

The visit by IMF Managing Director Christine Lagarde, in the words of the Ministry of Finance press release "underscores the Fund's support for Jamaica's Economic Reform Programme, and signals its commitment to assisting the wider Caribbean".

Commenting on her trip, one of the most seasoned international economic observers of Jamaica and the wider Caribbean, Dr Carl Ross, formerly of Oppenheimer and Bear Stearns but now working as a sovereign analyst for Global fund manager GMO observed:

"Jamaica's fiscal improvement has surprised many people, and may be leading to a virtuous circle of lower debt financing costs and sustained lower fiscal deficits over time. Moreover, Jamaica's adjustment could be an example for other neighbouring countries in the Caribbean where debt has become unsustainable. Ms LaGarde's visit is likely aimed at recognising this achievement, and highlighting it as an example for the region. To be sure, Jamaica is still not free and clear of its problems, and in the past Jamaica has shown that it cannot sustain high primary fiscal surpluses for multi-year periods. Thus, her visit could also be a cheerleading visit aimed at encouraging policymakers to stay on the current path."

His key point is the region's unsustainable debt. On Tuesday, the Caribbean Media Corporation (CMC) broadcast a report that the Barbados dollar could soon be devalued, citing former prime minister Owen Arthur, an economist by training, who says he wants their government to tell the people what the country faces.

According to CMC, Arthur made the comments last Sunday night against a backdrop of Barbados last week suffering a downgrade from Ba3 to B3 by international financial rating agency Moody's, and amidst government's cost-cutting efforts to tame a runaway deficit.

"Our fiscal situation at its worst should have been five per cent of GDP," Arthur said, adding, "But the government and [Finance Minister] Sinckler reported to parliament that it was 11, so it is twice as bad as its worst case scenario.

"Moody's is telling us that it had to downgrade Barbados by three notches because the Central Bank has been printing money and it is undermining and threatening the stability of the Barbados dollar."

Arthur's comments came just one day after Prime Minister Freundel Stuart had likened the Moody's report to "garbage." Arthur urged the prime minister to seek advice before speaking on such matters to avoid bringing his office into disrepute.

"This ... is too big a matter to be handled by a group of people from the IMF coming here and giving us technical assistance. This requires
a conversation between government and the governed, and we need to have it now," CMC reported Arthur as saying.

CMC reports that following an IMF Article IV Consultation report in February, a team from the Monetary Fund returned to the island last week as part of a monitoring programme of government's implementation of its recommendations on restructuring and reducing its financial obligations.

It is likely, therefore, that one of the countries IMF Managing Director Lagarde is signalling its commitment to assisting is Barbados, in the same way Strauss Kahn was apparently signalling to Jamaica at the end of 2008. As a former finance Minister of France during the Euro crisis, Lagarde will be acutely aware of the trade-offs between debt restructuring, external devaluation, or the extremely difficult grinding reduction in the fiscal deficit through fiscal stringency and the accompanying internal devaluation of real wage reduction to improve competitiveness, a discussion for another time.

Unlike Barbados, for the past four years Jamaica has been experiencing the immense pain of a massive fiscal adjustment from a fiscal deficit at approximately where Barbados is now, to a Central government deficit of zero. Over the period, to achieve this reduction, Jamaica has endured a large nominal devaluation and restructured its domestic debt twice. While Jamaica remains extremely economically vulnerable, there is a cautious optimism (not least amongst the multilaterals) that Jamaica can turn around.

However, Jamaica, and of course the wider Caribbean, still needs some help (a lot in the case of Barbados), implied in the use of the term a fresh look. Local investors still see Jamaica as very risky, the local fixed income market is still frozen, the stock market is still falling, and the Jamaican dollar remains under pressure, with a general feeling of uncertainty, accentuated by the fact that there is general awareness that the critical Petrocaribe deal may not last much beyond the current fiscal year, at least in its current form.

To help, firstly, the IMF and other multilaterals should give Jamaica substantially more generous and upfront funding to reduce the general perception of risk in the economy, ensuring that we are fully funded with a margin to spare, as occurred in 2010. In particular, eliminating the need to go to the capital market to finance the Eurobond coming due a few months later this year, as well as making sure that it is known that the Petrocaribe financing would be replaced in the event of cutoff from Venezuela (perhaps through an oil financing insurance type policy for which one pays a premium from say the World Bank similar to the hurricane insurance facility), would help. An additional target should be to reduce significantly the current rate of devaluation of the dollar, and to cap expectations of its further decline. In short, the IMF needs to look like it is not encouraging further devaluation, whether actively or passively.

Secondly, creative programmes to unfreeze the local fixed income market are required, perhaps through various forms of debt to asset swaps to finance projects such as downtown Kingston.

Finally, critical capital expenditures could be financed through accelerated privatisation, as long as they were treated as "exceptional" items and not counted as a reduction in the primary surplus.

These and many other creative approaches are required to provide Jamaica with a fresh look.




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