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Has Sandy complicated Government's path to new IMF deal?

Claude Robinson

Sunday, October 28, 2012    

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THE preliminary financial and economic costs associated with the direct hit from Hurricane Sandy were expected to be calculated over the weekend for presentation to Cabinet tomorrow, Prime Minister Portia Simpson Miller said in a broadcast Thursday night.

Already, Roger Clarke, the minister of agriculture and fisheries, has been calling the situation facing that sector "kind of grave" and gave a preliminary damage estimate of $700 million. He affirmed that Government will have to allocate several hundred million dollars to assist farmers to rehabilitate farms and fields, while warning that it will take at least nine months to get production in key crops like bananas and coffee to pre-Sandy levels.

Additional burdens from damage to roads, bridges and other infrastructure will also have to be factored into the overall costs on the public purse. And, of course, individual citizens and the private sector have their own costs to bring normality back to their lives and businesses.

Whatever the final public sector numbers turn out to be, we can safely assume they will be sufficient to put pressure on a national budget in which the Government is struggling to provide services and meet commitments.

While we must acknowledge improved preparedness by first responders, including the Office of Disaster Preparedness and Emergency Management (ODPEM) and the police and security services, Sandy put back on the agenda the perennial issue of inadequate financial preparation to meet natural disasters.

The scramble to find resources to respond to hurricane shocks points to the fact that governments have not factored into the budget process the reality of the past decade or so, which has been characterised by more frequent disasters in the face of global warming and climate change.

Jamaica has been hit by three hurricanes — Ivan in 2004, Dean in 2007, and now Sandy. The country has also experienced severe damage from flooding and land slippages associated with several other storms including Iris (2001), Lili (2003), Charley (2004), Dennis (2005), Gustav (2008) and Nicole (2010).

In an editorial Friday, The Gleaner newspaper commented, "Budgeting for hurricanes, in that regard, can hardly be considered a contingency, but a hazard of the country's economic life, for which the finance ministry has to be constantly prepared."

But they do not.

The effects of Sandy could also complicate the Administration's efforts to work out a new agreement with the International Monetary Fund (IMF). At issue is whether the additional pressures on the budget provide a basis for the Government to press for more lenient terms as the Administration was suggesting.

Portia's hope for a break

In interviews last week, Prime Minister Simpson Miller expressed hope that the fund would take account of Sandy's impact on the economy in determining targets and timelines for a new deal. "I hope that the international agencies, as well as the International Monetary Fund, will recognise the problem that we have as a result of the storm," she said.

The prime minister's comments followed the statement to Parliament last Tuesday by Finance Minister Dr Peter Phillips for the Fund to consider some "buffers" to ease the inevitable pain from the current and projected weaknesses in the global economy.

Against a background of the visit by a negotiating mission from the IMF to Jamaica between September 24 and October 5, he reiterated that "significant progress was made in those discussions. Mutual understandings were established relating to a growth agenda, structural reforms and a preliminary timetable for implementing structural benchmarks to monitor progress. Still there remain some technical issues to be resolved".

He added: "The primary issue centres upon the shared view that given the generally precarious conditions within the world economy and the risks that this negative outlook entails for indebted and vulnerable economies such as ours, there is a need for us to construct buffers for such eventualities.

"Discussions regarding such buffers continue and we are exploring issues regarding the possibility, for example, of additional debt initiatives such as debt for assets swaps with public sector bondholders and debt for nature swaps."

Dr Phillips offered no details on the "buffers" that the Government was seeking to cushion the blows from the external realities, but he firmly rejected a suggestion from Opposition Leader Andrew Holness that the proposals sounded like a "JDX Two."

Mr Holness was referring to the Jamaica Debt Exchange (JDX), introduced by the previous Administration that effectively halved the interest payments to holders of Government bonds denominated in Jamaican dollars. The deal saved the Government more than US$500 million in interest costs in 2010 but bondholders took a haircut in what some analysts called a default by another name.

At some point, sooner rather than later, Dr Phillips and the IMF will have to resolve this "technical issue" as it must be a matter of practical concern to bondholders waiting to hear if they are again being asked to accept something other than the terms of the original agreement.

The prime minister and her finance minister have been avoiding setting specific time frames for securing an agreement, arguing that the critical issue is getting an agreement that is in the best interest of the country and one the Government can implement.

"We could have an agreement tonight if we were prepared to sign to anything (but) we seek to have an agreement that when we have it we are able to honour it and be able to have it in the best interest of the country," the Observer (October 26) reported Phillips as telling Parliament.

But the Government also acknowledges that the deal on the table is essentially the same one that the previous Administration signed on to and was unable to deliver because they lacked political will to take some very difficult decisions that would, in the words of Mr Holness, require Jamaicans to take some "bitter medicine".

Essentially, the deal is Government has to borrow less and bring its spending in line with its income. This means reforming the public sector to achieve efficiency and reduce cost; asking civil servants to contribute more to their pensions; and revising the tax system to minimise evasion and corruption to ensure that more people pay their fair share. The details of these are yet to emerge.

Meanwhile, the nature of the crisis as outlined by the finance minister in presenting the budget in June remains the same: Jamaica's debt of $1.7 trillion (128 per cent of GDP) was, and remains, sustainable; debt servicing accounts for $334 billion, more than half of the $612-billion Government plans to spend in 2012-2013; debt and public sector wages together account for 78 per cent of the projected expenditure for this financial year.

Some of these numbers have been moving in the wrong direction since June, and Sandy is likely to worsen that process. In time, we will see whether the devastation from Sandy puts the Government in a position to get the IMF to cut us some slack, as yet another buffer, or has made the medicine more bitter.

kcr@cwjamaica.com

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