The concept of rational expectations assumes that rational economic agents use all available information in their decision-making process. If they don’t use information that is available in the public domain in their decision making, they will have to live with the consequences. Thus, business people who ignore information that is available, either because they are too busy or lazy to incorporate that information in their business decision, will have to live with their losses. In the legal circles the concept is expressed as “ignorance of the law is no excuse”.

Last week’s editorial in one of the major newspapers castigated the Department of Economics of the UWI for not being activist enough or simply deafeningly silent in the face of bourgeoning debt, global recession and the devastation of Haiti by natural disasters. By now sombre reflection might have convinced readers that the Department of Economics has indeed been addressing the national debt and the global recession, although not as stridently and consistently as the editor might want.

It is obvious that the national debt has been growing rapidly throughout 2000-2008 as shown above.

Has the Department of Economics addressed the growing national debt problem? The answer is a resounding yes. The Department of Economics and Association of Development Agencies organised a seminar on the national budget in January 2000. I presented a paper entitled: “Monetary Policy and Deficits Financing in Jamaica”, and Professor Alfred Francis presented a paper entitled: “Dynamics of Debt … Domar versus Omar …” which addressed the unsustainable national debt. Other members of the department also presented papers to highlight aspects of the unsustainable national debt.

On September 7, 2007, the Department of Economics at the UWI and the Association of Caribbean Economists organised a conference on: “Empirical Reflections, 2007 Conference on Economic Growth and Transformation: Reassessing Challenges and Prospects at the Dawn of the 21st Century”. I presented a paper entitled: “The Budgetary Process and Economic Growth in Jamaica: Some Empirical Evidence”.

The findings explain that the rapid growth of the national debt and the fact that the real interest rate exceeds the national economic growth is unsustainable. It further suggests that because taxes drive government spending in an unsustainable debt environment, concerns about financing the budget deficit compel the government to find revenue sources before committing itself to spending. The last fiscal year when the sources of funding the budget were not identified before committing the nation to spending has only highlighted and confirmed the significance of the findings. It has also brought into bold relief the need to find solutions to the rapid growth of the unsustainable national debt.

On May 7, 2009, following the national budget debate and the recent global recession, the Department of Economics at the UWI organised a panel discussion on the fiscal Budget 2009-2010. I presented a paper on: “Macroeconomic aspect of the 2009/2010 Fiscal Budget: Contextual Implications and Consequences.” I discussed the budget in the context of the recent global recession. There were other pertinent views shared by the panelists and members of the audience on the national budget. It should also be noted that the principal of the UWI Mona Campus organised an economic policy forum with the Department of Economics, which brought people from all walks of life to share their views in finding solutions to the national debt, and the anaemic economic growth experience of the nation last year.

But this opinion piece is meant to address the rumours of devaluation that was alleged to be a possible recommended line of action by the IMF in last Friday’s prime time news. It should be emphasised that any attempt to devalue the Jamaican dollar cannot benefit the nation in solving the national debt problem.

I emphasised the words “not again” because the problems associated with devaluation have been well discussed at least by myself through various newspaper opinion columns in the past dating back to 1995.

The national debt consists of an external component and domestic/internal component. The debt exchange initiative addresses only the internal/domestic debt. It does not address the external debt. Considering that the external debt is denominated in US dollars, any devaluation will exacerbate the size of the external debt to the GDP ratio. This will mean that the government will have to find additional revenues to fund the external component of the national debt. Additionally, devaluation will result in inflation which will erode the net gains from the debt exchange by driving up interest rates. Thus, it will defeat the debt exchange goal of reducing interest rates to spur the country’s economic growth. The cost of production will increase considering that our manufacturers (and even our exporters) import most of their resources: raw materials and inputs required for production in the country. The only beneficiaries of a devaluation policy will be foreigners, who can buy resources and products of the country cheaply. Expectation of inflation which will be born out of the devaluation policy will wipe out the anaemic economic growth. In our current economic environment where the government is faced with fewer sources of raising revenues to fund the national budget and promote economic growth, policymakers must be cautioned against any policy that will ignite inflation fire, and devaluation, the IMF’s main policy instrument of yesteryear, is a sure match to do just that.

Edward E Ghartey is a professor in the Department of Economics, UWI, Mona.