C’bean must not lose sight of debt stranglehold

Tuesday, February 02, 2016

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Jamaica’s small but encouraging success in its fight to reduce the stranglehold of debt should not cause us or the region, to forget that Caribbean countries continue to be among the most indebted in the world.

The debt remains a major impediment to economic growth because it has deprived our governments of the ability to use fiscal policy to promote growth. By now, it must be immediately obvious that everything has to be done to reduce the debt, because it is inadvisable to be burdened by such a stifling level.

Conventional wisdom in the economics profession is that when the debt stock is over 75 per cent of Gross Domestic Product (GDP) the debtor country cannot grow its way out of debt. Several Caribbean countries are already in this debt trap. Jamaica leads with a debt/GDP ratio of 130.5 per cent in 2014 (now reduced by a little over 20 per cent), followed by Barbados at 108.5 per cent, Grenada at 99.1 per cent, Antigua at 96.4 per cent, The Bahamas at 82.4 per cent, St Vincent at 79.4 per cent, St Lucia at 78.4 per cent, St Kitts at 78.0 per cent, Belize at 77.3 per cent, and Dominica at 74.1 per cent. This represents a considerable slippage in debt sustainability.

The governments of the region seem incapable of prudent fiscal management, whether at the technical or political levels. The United Nations Economic Commission of Latin America and the Caribbean (ECLAC) in its latest economic report on the Caribbean notes that for the region, as a whole, public debt declined marginally from 72 per cent of GDP in 2013 to 70.7 per cent of GDP in 2014. However, ECLAC was quick to warn that "significant borrowing in the first quarter of 2015 suggests that the gains could be quickly reversed".

Debt servicing increased in 2014 to 23 per cent of fiscal revenue and required 26.9 per cent of current fiscal expenditure with Barbados leading the profligate with 35.3 per cent. Debt at these levels portents debt rescheduling and restructuring as has happened numerous times. This is what happened in Jamaica, as our insatiable appetite for debt since the early 1970s finally has forced the current supervision of the International Monetary Fund acting on behalf of international financial markets. Credit is due to Dr Peter Phillips who, as minister of finance, has managed to reduce the level of debt; but it is still far too high.

Debt restructuring (sometimes repeated) in the Caribbean, as the experience of Belize, Grenada, St Kitts and Jamaica, shows it is ephemeral and often more cosmetic than real. The enigmatic irony is that it is only in the Caribbean that debt restructuring is hailed as a triumph of economic management; everywhere else it is correctly taken as an unmistakable sign of failed economic management.

One would think that Jamaica’s experience would be a salutary lesson to the rest of Caribbean, and governments would be shy about further borrowing and would instead seek to improve their fiscal policy and debt management. Unfortunately, that’s not the case. Regrettably, those who cannot see and hear will certainly feel.

The problem is that it is not the politicians that feel the economic pain of failed debt management; it is the people.

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