...IMF must beware of chemotherapy that kills the cancer patient

Wednesday, September 26, 2012    

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As the head of the PSOJ, I want to posit the view that an IMF deal is vital as it will facilitate the implementation of policies and strategies which are urgently required for the modernisation of the country and for putting us on a path for long-term sustainable economic growth and development. These reforms may be tied to the IMF deal as conditionalities, but we should see this as extremely necessary. These possible conditionalities are initiatives which as a country we would need to implement to address the long-standing structural impediments which have resulted in the underperformance of the country.

For an IMF deal to be inked, the Government has to demonstrate its commitment to a stable macroeconomic environment, conditioned on continued fiscal consolidation over the medium term. Fiscal consolidation plays a critical role in stabilising the macroeconomic environment through low inflation, stable exchange rate and low interest rate, while creating facilitatory conditions for private investment.

However, fiscal consolidation reform has to be perceived as credible if it is to signal to the private sector that the Government will be more efficient and complementary, and provide services at a lower tax-price, and if it is to be foundational in economic expansion. Its success rests exclusively on the emergence of a positive psychology and positive expectations by households, workers and firms in the economy. Participants in the economy must be convinced that the fiscal consolidation programme is credible, that is, properly rationalised and/or timely and/or sustainable and/or irreversible, for them to extend their rational expectations and economic planning beyond the short term. The IMF approval of this reform programme will add the credibility needed at this time.

That is the kind of environment as business persons we certainly desire. But the truth is the Government on its own cannot guarantee such an environment. As the private sector, we also have to demonstrate our commitment by being willing to make the necessary sacrifice now and partner with the Government in the fiscal consolidation and reform efforts. The sacrifice will entail some pain but the consequences of the alternative are even more painful. I introduce here the concept of Team Jamaica; Government, Opposition, public sector, private sector, unions, civil society working together, sharing the short-term pain of securing an IMF agreement to ensure the very stability and future growth of our economy. We are all part of the same team, it's not us and the IMF versus the Government, it is all Jamaica ensuring that the economic policy wrongs of the past are righted, once and for all.

The alternative — no IMF agreement

Let us examine a scenario in the event there is no IMF deal. This scenario that I will outline in the event of no IMF deal is not only plausible but extremely likely:

• The most immediate impact would be (a) dramatic fall in business and consumer confidence; (b) significant deterioration in international and local financial sentiments, and (c) continued delay in the disbursement of funds or even worse, a significant loss of financing from other International Development Partners (IDB, World Bank) given that additional disbursements are linked (implicitly or explicitly) to the finalisation of an IMF agreement. Lack of these multilateral funds would compromise the reform agenda and infrastructure programme of the Government.

• The deterioration in market sentiments against Jamaica would undoubtedly be supported by the assessments of rating agencies, ie eventual downgrades.

• The fall in market confidence and in sovereign ratings, combined with the loss of multilateral financing would lead to a further reduction in the Net International Reserves and trigger a speculative attack against the Jamaican dollar, leading to a rapid and significant depreciation of the Jamaican dollar accompanied by higher inflation.

• Domestic nominal interest rates would obviously rise in response to the higher inflation and currency depreciation. Domestic and external bondholders who would still consider holding GOJ paper, but risk premiums would rise substantially.

Higher real rates of interest then depress domestic production activity, reducing the growth of investment and increasing the likelihood of job losses.

• The depressed domestic economic environment, together with the forex market instability then weakens the financial sector: loan growth dries up, but non-performing loans (within existing loan portfolios) rise, and financial institutions that are mismatched in terms of currency will incur significant losses.

• The higher interest rates and exchange rates will also obviously lead to a rise in the GOJ's debt servicing costs, inducing larger budget deficits (bearing in mind that the higher inflation is also likely to inflate GOJ expenditures proportionately more than revenues, as the latter will be dampened by lower economic activity).

To address the worsening fiscal indicators (fiscal deficit, debt service cost and debt stock) the GOJ would have to implement corrective measures such as a reduction in expenditure and/or an increase in revenue, ie more austerity and more taxes.

All of the preceding conditions mentioned above will lead to a further reduction in domestic demand, higher unemployment levels and higher poverty rates; ie a downward spiral of negative consequences for our country. It should be obvious that this cycle cannot feed on itself for an extended period.

And who will feel the most pain? The vulnerable in our society; the poor, the aged, the underprivileged.

I must stress in the strongest possible way that thankfully these outcomes have not happened yet as we remain confident and supportive of the efforts and commitment of the minister of finance and his technical team.

Thus in my humble opinion the pain of no IMF agreement is vastly more than the pain of an IMF agreement.

Finally, I turn to the role of the IMF in this process which is vital to our nation's future. As in any deal there are two sides. In this one there is Team Jamaica and there is the IMF.

In the collective view of the wider private sector, both sides have to display responsibility to act in a way that does not compromise the future stability of Jamaica. There is the possibility that the chemotherapy of the mediumterm programme which is to be administered to cure the cancer of debt, can be so strongly applied that it ends up killing the patient. This is the delicate balance that I am sure the IMF in its wisdom is grappling with constantly. There is a point at which the requirements and in particular the time frames for implementation could be so onerous, so severe, that it may very well be impossible for Jamaica to comply, especially in the context of the global economic recession and our weakened state of social and economic stability.

The consequences of such a scenario would be untenable and unimaginable, and as such the PSOJ would like to make it clear to the IMF that just as much as we as part of Team Jamaica will uphold our part of the bargain and do our best to ensure that the rest of our team does too, we expect the IMF to also act in an enlightened and responsible way and contextualise their final positions in the environment of Global stagnation, a very weak Jamaica, and a Jamaica whose entire society is finally united against the past evils of fiscal irresponsibility and low growth, and for the future of fiscal consolidation, fiscal responsibility, and economic structural adjustment.

Christopher Zacca delivered this address yesterday at the Rotary Club of St Andrew luncheon at the Jamaica Pegasus Hotel in New




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