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There was a precipice, alright...


Wednesday, September 23, 2020

Dr Peter Phillips has signalled his intention to resign as president of the People's National Party (PNP). It was expected that he would have honoured his word given on election day that he would go if his party lost the election. That resignation, when it occurs, will bring to an end his run of public service as a Member of Parliament and as a minister of Government. With the exception of the “Secret MOUs” which he signed with the US Government without Cabinet approval, his public service is a record of which he can be justly proud.

Dr Phillips's enduring contribution to his party is that, in a large measure, as minister of finance in the critical years 2013-2016, he rescued its credibility that had been shattered by its prior 18 years (1989-2007) of poor governance.

Jamaica Observer on Friday, August 28, 2020 had carried an article with the headline 'P J Patterson endorses Peter Phillips for prime minister' but it was a dream that was not to be. In that endorsement, Patterson commented that Phillips's “greatest contribution is by far his work under the astute leadership of my beloved successor Portia Simpson Miller in pulling Jamaica back from the precipice of economic disaster…” In making this statement, Patterson fell for the false narrative that was being pushed by some apologists inside and outside of the PNP leadership that the 'architect' Dr Peter Phillips had rescued Jamaica from the cliff to which they say we were brought to at the end of 2011. Of course, there is absolutely no truth whatsoever to that narrative. The truth is that Dr Phillips did rescue Jamaica, but as I will show, it was from the precipice of economic disaster on which it stood on March 31, 2013.

The gross domestic product (GDP) of the Jamaica that the PNP inherited had just grown by 1.7 per cent in 2011. It had net international reserves (NIR) of US$1.967 billion. The International Monetary Fund (IMF) had only recently supported the significant US$100-million World Bank and US$218-million Inter-American Development Bank (IDB) loans to Jamaica in September 2011 and November 2011, respectively. That was evidence not only that Jamaica's credit was still good then, but more so that Jamaica was on the threshold of concluding a new IMF agreement. The fact was that the Bruce Golding/Andrew Holness administrations had laid a firm economic foundation on which Jamaica could build. This was what the PNP inherited. There was absolutely no “economic precipice” as at December 31, 2011. What existed then was opportunity.

But was there a precipice by March 31, 2013? Definitely so.

So what went wrong in 15 months of PNP governance? What caused Jamaica's NIR to decline rapidly from US$1.967 billion at December 31, 2011 to US$884 million at March 31, 2013? What was it that caused the IMF, that had previously given its support for major loans to Jamaica as recently as November 2011, to get “cold feet” on Jamaica? Why was the IMF still reluctant to deal with Jamaica even after the PNP officers had desperately lobbied their influential friends in Washington, DC, including US President Barack Obama? Why was it that Jamaica was reputedly denied the capacity to make drawdowns during 2012/13 on the World Bank and IDB loans that it had signed almost immediately prior to the 2011 General Election?

The answers all come back to Jamaica's failure under Dr Phillips as minister of finance to conclude an agreement with the IMF within that 15-month time frame.

It is clear that the positive attitude of the IMF and its negotiating stance towards Jamaica had changed between November 2011, when it gave support for US$218-million IDB loan, and January 2012 when the PNP effectively took office. The only catalytic change in Jamaica at that time that could have triggered this obvious change in the IMF's attitude and negotiating stance was the arrival of the PNP as the new Government. Why this is so, and why Dr Phillips found himself as minister of finance in this embarrassing position, are questions that all should be examining.

But let me help. In my view, the IMF had a reluctance to engage with the new PNP Administration because the IMF seemingly viewed them as lacking the capacity and will to administer and deliver the fiscal discipline that the times required. The PNP's prior 18-year dismal record in economic policy and financial administration, which had increased Jamaica's national debt from less than $40 billion to over $950 billion, had evidently given pause to the IMF's considerations. But where, one may ask, did the PNP go wrong in its prior 18 years of governance? Let's look at just one policy exhibit, exchange rate liberalisation.

In March 1991 the PNP Government liberalised the exchange rate in the presence of significant payment arrears of over US$150 million and in the presence of negative NIR. That simple-minded decision caused the J$ to decline by 182 per cent in 12 months; from $8.30 to US$1 in March 1991 to $23.39 to US$1 in March 1992. Such dramatic movement in the exchange rate had an equally dramatic continuing impact on inflation. World Bank data showed that the inflation rate soared by 51.1 per cent in 1991, 77.3 per cent in 1992, 22.1 per cent in 1993, 35.1 per cent in 1994, 19.9 per cent in 1995, and 26.4 per cent in 1996. These increases compounds to inflation of 569 per cent over six years. That pace of inflation, and the high interest rate regime introduced to control it, wreaked havoc with investment decisions, significantly reduced the purchasing power value of pensions and that of fixed income earners and exposed thousands of erstwhile relatively financially secure people to the indignity of poverty.

The consequential high interest rate regime to control the decline of the J$, compounded by the 100 per cent penalty interest rate which Bank of Jamaica subsequently began charging banks for overdraft accommodations, almost laid waste the entire network of Jamaican-owned financial institutions. The proud giants of the industry, like National Commercial Bank, Jamaica Mutual Life, and Life of Jamaica, were laid low and “Finsacked” by Government's acquisition of majority interests in them to prevent them from falling into bankruptcy. Smaller players like Jamaica Citizens Bank, Century National Bank, Eagle Commercial Bank, Workers Bank, Eagle Merchant Bank, Island Victoria Merchant Bank, Island Life insurance Company, etc, were similarly Finsacked. Government's majority interests in these entities were packaged and sold to foreign entities; apparently without any thought to the long-term effect they would have had on the development and expansion of a vibrant Jamaican-owned financial sector, on domestic Jamaican capital formation, on the J$, and on the economy. The consequential results of these ill-advised decisions include significant annual foreign exchange outflows of US$ dividend payments to the new foreign owners. These payments exert significant negative pressure on the J$ to this day. To add insult to injury, the significant profits from which these dividends are paid out in US dollars yet are mainly earned in Jamaica from domestic transactions.

Through its high interest rate policy, the Government destroyed thousands of Jamaican businesses and demolished much of Jamaican enterprise and entrepreneurial spirit. Their incapacity for fiscal discipline so evident in their 18-year ”run wid it” fiscal practices had resulted in Jamaica paying out over 60 per cent of its taxation revenue to service debt. The credibility for governance had been shattered.

This brief governance history of the PNP that I have related may well have been the root cause of their failure to impress the IMF of its capacity for fiscal discipline. During the 15-month period of the stalemate on the IMF negotiations, Jamaica lost US$1.083 billion in NIR. That was the economic precipice on which Jamaica stood with no IMF agreement in place on March 31, 2013. That was the crisis from which the novel invention of the Economic Programme Oversight Committee (EPOC) rescued us. EPOC, as an oversight body, was the schoolmaster that kept the Government on its toes. The then managing director of the IMF, Christine Lagarde, described it as a real innovation. Dr Peter Phillips must take full credit for this.

He was the man for the hour. It is to his credit that, in 2013 to 2016, he held his team to the terms of that IMF agreement and thereby restored or rescued his party's credibility for good governance and fiscal discipline from the ignominy it had earned for this in its prior 18 years of governance. In that short period he arrested the decline in the NIR and saw it grow very creditably to US$2.2 billion in February 2016. Through his active legislative agenda and firm and unpopular fiscal discipline in the period, Dr Phillips laid a firm foundation for successor administrations. He rescued Jamaica from the economic precipice on which it stood on March 31, 2013. His efforts in securing this success must to be remembered, not forgotten.

As he leaves the limelight of politics for the calmer waters of retirement, I wish for this man the best of times and the happiest of days.


Garnet Weir is a political observer. Send comments to the Jamaica Observer or