Jamaica is Extricating Itself From Its Own Debt Trap

Basil Wilson's picture

Jamaica has had an agonizing experience with the International Monetary Fund.  This on again off again relationship that has spanned nigh five decades is also a reflection of the developmental difficulties that the Jamaican economy has experienced since the 1970s.

Left intellectuals have always been distrustful of agreements with the IMF and some vigorously contend that such an agreement subsequently exacerbates the debt trap rather than extricate countries from the debt trap.

Jamaica’s first encounter with the IMF was in 1977 when the democratic socialist government of Michael Manley had won the election of 1976 but found the financial coffers of the country utterly bare. The skeptical Manley government was forced to negotiate with the IMF in order to ensure that foreign exchange infusions would continue to flow in order to purchase essential commodities necessary to keep the economy afloat.  One can debate whether the IMF conditions in the 1970s are any different from the conditions established by the PNP government in May, 2013.

Jamaica has changed in many respects since the 1970s when ideological warfare was rampant between the left leaning PNP and the right leaning JLP.  The world has also changed.  The Soviet socialist experiment has been discredited and the fallacy of autarkic development no longer has any basis in reality.  All nations compete “Darwinian-style” in the global economy.  There is no refuge, no respite from the global economy.

In the 1970s agreement with the IMF, the world organization was ideologically opposed to social programs but in its recent dispensation now recognize that anti-poverty measures must march in step with strategies aimed at economic expansion.

The PNP in the 1990s under the Prime Ministership of P.J. Patterson was able to wean itself from IMF dependency and was able to finance government capital needs from world capital markets.  The financial collapse of 2008 put an end to that alternative path of access to capital and at this historical juncture the IMF is the only game in town.

On its own, the PNP government of the 1990s failed to put its fiscal house in order.  The collapse and governmental rescue of Jamaica’s banking system led to a ballooning of government debt. Those years were marked by anemic growth and chronic borrowing to bridge budget deficits that subsequently made the accumulation of debt even more burdensome on the backs of the Jamaican people.

The brief interlude of the JLP government which lasted from 2007 to 2011 also entailed an IMF agreement.  There was much fanfare in budget debates by Prime Minister Golding and Finance Minister Audley Shaw about “game change”.  But their handling of the IMF agreement was disastrous.  The IMF set strict quarterly benchmarks and the JLP government failed to comply and simply irresponsibly walked away from the agreement without any accountability to the Jamaican people.

The return of the PNP to government in December, 2011, meant that Dr. Peter Phillips, the PNP Minister of Finance had to go hat in hand to negotiate a new agreement. The four year Extended Facility Fund is geared to trigger some level of economic growth during and after the agreement has ended.

At the end of September the PNP government passed the strictures of the IMF test and will face another test on December 31, 2013.  The agreement invariably means a downward spiral in the living conditions of the Jamaican people.  The Jamaican dollar has depreciated in respect to the American dollar. Consumers have seen the rise of basic commodities and government budgets have been placed under “heavy manners”.

The strategy is to reduce the accumulated debt from 146 percent of GDP to 96 percent by 2020 and even lower in years going forward.  There is a good faith effort being made to augment the revenue stream of the government to be able to balance the budget.
The government is committed to tax reform of a comprehensive nature that will provide incentives to businesses.  The new round of national debt exchanges has reduced some of the debt burden in the government without destabilizing the financial system.  Budgets will no longer be elastic but adhere to strict agreed upon expenditures.

One can see the toll that the agreement has brought on the Jamaican people.  There has been an increase in unemployment and an increase in the number of persons living below the poverty line.  Consumer spending has slowed and the Christmas season will be far from merry.

What is critical is what will be the ultimate outcome of the sacrifice?  It is necessary to pass the IMF test but it is even more critical to spur economic growth.  The economy grew by 1 percent in the last quarter.  The year 2014 will determine if the economy can pick up some momentum.  Much rest on taking advantage of the expansion of the Panama Canal and the benefit that will accrue to the Jamaican economy by way of expanded global trade.

A lot rest with Chinese investment and whether the Goat Island project can have a multiplier effect on economic activity.  There has been some upturn in non-traditional exports and the state, the private sector and labor need to establish a partnership to maximize non-traditional exports.

The stakes are high and if Jamaica’s democracy is going to endure in the coming years, the albatross of debt will have to be brought under control and the plans afoot for economic growth will have to succeed.  The present years of famine can only be worth it if there is some evidence that the years of plenty is in the making.

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: basilwilson@caribbean-events.com