August is an important month for the Jamaican people. August 1st is the date of Emancipation Day and on August 6, 2015, Jamaica will celebrate 53 years of being an independent nation. The road to independence was not that agonizing but the experience of economic development has been more than trying.
The truth of the matter is that the management of the economy for decades has been wanting. For most of those fifty-three years, the country lived above its means. There was no evil intent but governments, both PNP and JLP, engaged in borrowing and deficit spending that brought the country to the brink of bankruptcy in 2011. The mountain of debt accumulated was higher than the Blue Mountain peak. International capital markets were closed after the collapse of the worldwide financial markets. After the JLP fiasco with the IMF, it took the PNP government two years, from 2011 to 2013, to chisel out an agreement with the International Monetary Fund.
The question for the Jamaican people as we celebrate 53 years of independence, is do we now have a better understanding of accelerated economic development than heretofore? Are there signs that the conditions of the IMF package, onerous as they are, the Jamaican government has been forced to get its fiscal house in order? The present economic team steering the ship of state has a much better understanding of what is needed for Jamaica to extricate itself from the quicksand of economic stagnation to successfully grow the economy and sustain that growth over decades.
The Governor of the Bank of Jamaica, Brian Wynter, is responsible for monetary policy. In a speech to Actuaries at the University of the West Indies in March, 2015, the Governor made the case that the depreciation of the Jamaican dollar was not something to be unnerved about. In Wynter’s logic, the Jamaican dollar had been over-valued and the depreciation has made Jamaican exports more competitive and reduced unnecessary imports. The dollar is now at a level of foreign exchange that will not necessarily need further depreciation.
As a result, Governor Wynter can point out that in the first three months of 2015, Jamaica had a surplus in its current account. The balance of payment imbalance last year has been cut from over 13 percent of GDP to approximately 5 percent of GDP.
The Governor of the Central Bank is most pleased at the reduction in inflation. One of the dangers of depreciation of a currency is that it can trigger an inflationary cycle and thus negate the objective of the depreciation. The inflationary forecast that the Bank of Jamaica made for 2015 was 7 to 8 percent inflation. But for the year 2015 the inflationary rate is coming in at a lower rate than expected and at the end of the year, Jamaica could have its lowest rate of inflation below 5 percent in many a decade. That has enormous implications for interest rates and the overall economy.
The Jamaican government has passed 8 IMF tests since signing the Extended Funded Facility agreement. But as the Minister of Finance, Dr. Peter Phillips has warned, the Economic Reform Program is not yet complete. The Government prior to 2013 was spending 60 cents of every dollar on the public debt and another 21 cents of every dollar on the public sector wage bill. That left government with 19 cents to run the ailing railroad – providing funds for infra-structure, education, healthcare, capital investment, etc.
The debt has been restructured that it now extrapolates 42 cents of every dollar but the wage bill of the public sector has increased from 21 cents of every dollar to 31 cents which means that 73 cents of every dollar is paid to debt service and the wage bill, a marginal improvement but not good enough.
Government now balances its budget and produces a primary surplus to pay down the debt. The Financial Reserves that were falling at $800 million in 2011 is now replenished at a healthy at $2.4 billion. Foreign investment according to the Finance Minister came in at $700 million last year.
There is the realization that the country has to become more productive and more entrepreneurial. Government has established 9 Agro-Farms to boost food production and 21 more are in the pipeline. These Agro-Farms should be seen as raw material for food processing plants that can expand export markets. The other critical issue is the cost of energy. The reduction in oil prices has helped the Jamaican economy but there is an attempt in the energy sector to rely less on fossil fuel and more on solar energy. As has been the case for decades, tourism has been increasing the number of visitors and there is an additional 2,000 rooms that will be added when certain projects are completed.
Jamaica is in the eye of its economic storm. The macro-economic indicators are well aligned and what is needed for accelerated growth is a new generation of Jamaican entrepreneurs to seize the competitive advantage of exports and to expand domestic production. The forecast for 2015/2016 is that the economy will grow by 1.9 percent of Gross Domestic Product. But the forecast for the Bank of Jamaica vis-à-vis inflation was beaten and if Jamaica can begin to grow at 3-5 percent of GDP and absorb some of our surplus labor, then the next fifty years will be quite different from the previous fifty.
*Dr. Basil Wilson is Provost Emeritus of John Jay College of Criminal Justice and Executive Director of the King Research Institute, Monroe College, Bronx, New York. He can be reached at: firstname.lastname@example.org.