What to expect from the IMF agreement


Sunday, February 03, 2013    

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CONTRARY to the popular notion that the IMF agreement will be the panacea to Jamaica's economic malaise, I dare say this is a myth. Yes, it hangs over the country like the sword of Damocles. It will help Jamaica regain access to the capital market, but this will only be a Band-Aid solution.

Obviously, a chasm has opened up between the IMF and Jamaica. No doubt the Government has been profligate. Wasteful spending is prevalent throughout. There is nothing in the anticipated agreement that addresses the real problem of the Jamaican economy, which is growth. And austerity will only diminish domestic demand even though this could be only temporary.

Even the IMF's own projection has the economy growing less than two per cent per annum through 2017. Given the current policies of the Government this seems overly optimistic. We have a debt and deficit problem but the most pressing issue is to get the economy growing at its true potential, which is realistically above five per cent per annum.

The economy is operating below its capacity, so there is no need to fear inflation. What Jamaica needs is to get its nominal GDP growth rate above the rate it pays on its external debt.

Any effort to tighten fiscal policy is bound to reduce GDP growth. As Oliver Blanchard, the IMF chief economist, said, cutting the deficit too aggressively will have a negative impact on growth and will increase the debt-to-GDP ratio. He also said that "decreasing debt is a marathon, not a sprint".

The Government should be leery of any proposal which tries to vigorously cut the debt and deficit without an equal plan to enhance GPD growth. What Jamaica needs is the relaxation of austerity in the face of a weakening economy.

Some in the business community are giving the impression that this agreement is a nirvana. Mostly likely, though, this will turn out to be a mirage. We all know that the Jamaican economy is in dire need of both fiscal and structural reform.

Whether or not the Government has the necessary fortitude to implement the needed reform to promote growth is yet to be seen. What seems to be prevalent is a virtual circle leading back to the IMF's doors. Jamaica is being treated to beguiling simple thesis which gives the impression that the public is sophomoric.

If the recent IMF agreements with Portugal, Greece, Ireland, Romania, Jordon, Cyprus and Suriname are to be a guide, then Jamaica can expect some painful requirements. This will include:

* A reduction of 10-15 per cent in the public sector workforce.

* An informal devaluation of the Jamaican dollar to $100 to US$1.

* Forced divestiture of assets such as the Norman Manley Airport.

* Salary cut for public sector workers in the five per cent to 10 per cent range.

* Reduction in tuition subsidy.

* Significant increase in excise, GCT and property taxes.

* Pronounced reduction in benefits and pension. Also, the elimination of cost of living increase for the public sector workers.

* Targeted debt-to-GDP ratio of 110 per cent by 2017 and a restriction that Jamaica cannot resume borrowing until this ratio is below 130 per cent.

* Targeted fiscal surplus of 7.4 per cent by 2016.

* The banking industry being asked to strengthen its capital buffer.

Austerity does not always work. Ask Chancellor of the Exchequer George Osborne. As the United Kingdom demonstrated, cutting government spending caused the economy to decline mainly because of a fall in the overall output. As a matter of fact, the deficit has almost doubled since Mr Osborne implemented his austerity programme.

He grossly underestimated the negative impact on unemployment, consumption and investment. The British GDP is now less than when the Cameron Government took over in 2010.

Jamaica should look no further than The Philippines which has judiciously addressed its economic challenges, reducing its fiscal deficit to two per cent by implementing audacious reforms. This has resulted in 55 consecutive quarters of growth averaging 5.4 per cent.

The Philippines declared war on tax evaders, which substantially increased revenue. Consumption is now 70 per cent of GDP. This indicates that a vast majority are benefiting from the new polices.

Another country to look at is Peru, which has grown its per capita GDP 109 per cent between 2001 and 2012. Its economy is now averaging growth of over six per cent.

We are likely to see another attempt to buy back debt at a steep discount. This would be accompanied by a maturity extension and deferred payment. Also, there might be a lowering of interest payment and some degree of debt write-down. Remember that deferred interest payment can significantly reduce the debt. There could also be a plan to tender debt for government assets.

Any IMF agreement which does not address the revenue and tax collection in Jamaica would be lacking a workable solution. Successive governments have been known to coddle tax evaders. It is estimated that the underground economy is in the range of 25 per cent to 30 per cent of GDP. As was done in The Philippines, Jamaica needs to develop a programme to name and shame these evaders.

The tax system needs to foster a sense of inclusion. Tax as a per cent of GDP at only 25.6 per cent is way too low for Jamaica. It needs to be in the 35 per cent range. In Canada it is 32 per cent, UK 34.2 per cent, Germany 37.3 per cent, Luxemburg 37.6 per cent, Sweden 46.7 per cent and Denmark 48.1 per cent.

We can expect a recalibrating of net reserve and foreign debt.

Don't be surprised to see the IMF insist that Jamaica gets some equilibrium in its current account and balance of payment. This could involve a programme for import substitution and a substantial emphasis on export. Manufacturing will have to play a bigger role in the economy, possibly in the range of 15 per cent to 20 per cent of GDP.

Regardless of what the IMF proposes, the focus should be on growing the economy. A robust economy can solve any debt or deficit problem. Yes, there are risks to put the saliency on growth, but the Government must realise that to win without risk is to triumph without glory.





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