Should Jamaica renegotiate or extend the IMF agreement?

ID: INTERACTIVE DIALOGUE

DAVID MULLINGS

Sunday, May 08, 2011

SOME segments of Jamaican society have been calling for the current IMF agreement to be renegotiated while others are pushing for an extension. As far as I could tell on my trip to Jamaica last week, there is no significant segment pushing to merely let the current agreement end when it is slated to end.

Bearing this in mind and the fact that the budget debates are still going on in Parliament, it is critical that Jamaicans at home and abroad understand where the economy stands at this time, how the IMF agreement has been impacting it and what the medium-term holds. Too many discussions about the economy are clouded by whether participants are wearing green-tinted or orange-tinted glasses, and I seek to be impartial, mainly by using an impartial source.

The Centre for Economic Policy and Research (CEPR) in Washington, DC this month released a paper titled Jamaica: Macroeconomic Policy, Debt and the IMF written by Jake Johnston and Juan Antonio Montecino. The release is extremely timely and is required reading for any person wanting to see all the facts about Jamaica's economic performance instead of just spin from either political party. (You can download a free copy from http://www.bit.ly/jadebt).

The introduction to the paper says "Jamaica's economic and social progress has suffered considerably from the burden of unsustainable debt; and that even after the debt restructuring of 2010, this burden remains unsustainable and very damaging." This, of course, should not be any revelation to Jamaicans who have been paying attention to the economic progress of the country over many decades. Some people may be surprised about the reference to the JDX.

The single biggest problem faced by the country is the fact that the debt burden and the payments required each year leave little money for other important areas. In fiscal year 2009/2010 only about three per cent of GDP was invested in education and infrastructure and "poses a severe problem for Jamaica's long-term development prospects, as evidenced by its very weak per capita GDP growth over the last two decades, which averaged less than 0.7 per cent annually", as stated in the report.

Naturally, some people will then raise the "success" of the JDX as helping to free up money in the budget to be spent in these areas, but the following paragraph from the report is very instructive: "While the JDX has succeeded in lowering the debt-servicing costs in the short run, the domestic debt's maturity profile will still pose a problem for public finances in the medium run. Although the amount of debt maturing within one year was dramatically lowered, from 26 per cent of the total domestic debt to six per cent, the share of debt coming due within one to five years remained virtually unchanged, decreasing slightly from 50 to 46 per cent."

This is rarely brought up in discussions about Jamaica's economic policy. The paper goes on to say that "the maturity profile could also pose significant problems for the Government in the event that refinancing needs were to coincide with unfavourable external conditions or any number of possible scenarios negatively affecting borrowing costs". In other words, don't count on being able to refinance debt in five years' time, similar to the bond that was just refinanced because the environment can change.

How does this all affect the debate about extending or renegotiating the IMF agreement?

The Planning Institute of Jamaica itself said that "in the absence of sustained growth, a fiscal consolidation programme will have to be supported by unsustainable cuts in public expenditures or additional revenue enhancement, the limits of which will be quickly reached". It is quite clear that Jamaica must grow its way out of the problem and so we must have pro-growth policies in place.

The current agreement in place is "pro-cyclical", which means that it is contractionary. It has focused on cutting expenditure with conditionalities similar to the ones Jamaicans decried in the 70s and 80s. A focus on increasing taxes as evidenced by the tax packages, which have now been acknowledged as raising less revenue than projected, and expenditure cuts such as containing the wage bill and putting pressure on health and education spending.

Containing Expenditure

The paper explains that this containment "can have negative consequences for a developing country that needs to increase spending on sectors such as health and education". The single biggest threat to the Jamaican health sector is the "difficulty in retaining trained and qualified health care professionals" and it is critical that we recognise that, according to the World Bank, between 2002 and 2006 it is estimated that 1,800 nurses left the Caribbean compared to the 7,800 working there, and that the survey revealed that 95 per cent of those leaving Jamaica were leaving because of wage concerns.

If we don't invest in the health sector and pay people properly they will leave and the country will suffer as a whole. A population with declining health cannot be more productive and actively help to grow the economy.

IMF agreement focusing on wrong things?

A number of commentators in the past have correctly pointed out that Jamaica's yearly deficit problem which the IMF seeks to dramatically reduce has not been caused by excess government spending on items outside of interest. In fact, the CEPR states in no uncertain terms that "although the IMF programme puts an emphasis on controlling expenditure as a means to reduce the deficit, a look at recent history suggests that non-interest spending has played only a minor role in increasing the deficit".

It goes on to say that "the main determinant was lower than expected revenues, followed by higher than budgeted interest payment". Simply put, we rarely take in enough taxes and oftentimes have to pay out more than we budgeted for, causing a wider deficit, which is plugged with borrowed money. We have to increase revenue, either through better tax collection or growth, or both, while also having more realistic targets.

Still, the IMF has insisted on reducing expenditure, an area that has not been a major contributor to deficits and is important for GDP growth. The conclusion of the CEPR paper states that "Jamaica offers a stark example of the long-term costs an excessive debt burden can impose on a developing country, especially when the interests of creditors are prioritised over the needs of the country as a whole".

The IMF policy mix is focused on making sure Jamaica does not follow Argentina and default on external debt, but "this unfavourable policy mix risks perpetuating an unsustainable cycle where public spending cuts lead to low growth, exacerbating the public debt burden and eventually leading to further cuts and even lower growth".

You can asses that conclusion to answer the question posed in the headline of the column, but it is clear that learned economists are advocating counter-cyclical policies and it is clear that the IMF is doing the opposite.

David Mullings is the Future Leaders Representative for the USA on the Jamaican Diaspora Advisory Board. He is on Twitter at twitter.com/davidmullings and Facebook at facebook.com/InteractiveDialogue

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Should Jamaica renegotiate or extend the IMF agreement?