For the greater part of the past 20 years, Jamaica has been caught in a pernicious cycle of low growth and unsustainable fiscal and debt dynamics. This type of situation is not sustainable in the long run as high public sector debt imposes high debt servicing costs, leaving the country vulnerable to adverse shocks, increasing macroeconomic uncertainty and lowering its ability to produce long-term growth as public investment capacity is crowded out by debt service obligations. On the social side, the result has been inadequate infrastructure, the declining quality and quantity of public services and rising rates of crime and violence. This untenable situation has kept the country on the brink of crisis.
Jamaica's debt problem has been coupled by a history of low growth. Our growth rate over the past decade has been anaemic at best, at an average of 1.3% from 1999 to 2008. That 10-year period represented a time of insurmountable growth for emerging markets, and our neighbours Trinidad and Tobago and Barbados grew at rates higher than ours, 7.7% and 2.1%, respectively.
The unsustainability of Jamaica's fiscal situation was compounded by the global financial crisis, which became starkly manifested in the country during the past fiscal year as the share of revenue earmarked for interest payments peaked at 66% and the export sector contracted severely.
This predicament precipitated the thrust toward re-engagement with the International Monetary Fund (IMF) in 2009, the passing of a big tax package in December of the same year, the subsequent divestment of the perennially loss-making national airline (losses last year amounted to J$10bn, or $116m), and the execution of the Jamaica Debt Exchange (JDX) in February 2010.
Jamaica's re-engagement with the multilateral institutions predated the financial crisis, and more than $1bn in cash has since been secured at interest rates of between 0.63% and 5%. By using cheaper multilateral budget support loans to replace more expensive commercial debt, Jamaica's government generated savings that can be used to further reduce debt and alleviate poverty.
The JDX has been a resounding success. The transaction, which opened on January 14, 2010, closed with a participation rate of 99.2% on February 24.
Domestic bondholders rallied around this effort to tackle an increasingly unsustainable debt burden. The weighted average maturity of the domestic debt after the JDX increased by four-and-a-half years to nine years, a level not achieved in all the years leading up to the JDX. The fixed rate and newly introduced consumer price index-linked portion of the domestic debt increased to 41% from 34%. The average coupon on outstanding domestic debt declined by an average of 650 basis points to 12.5%, rates comparable to domestic borrowing costs in the period immediately prior to the financial crisis in the US and Europe. The estimated interest cost savings for the government is J$41bn annualised.
The JDX was envisaged as an integral part of Jamaica's strategic economic programme, including significant fiscal reforms and policies aimed at the virtual elimination of the fiscal deficit in four years, as well as institutionalising principles of prudent fiscal management. It has achieved J$700bn domestic debt refinanced from an average of 18% to 12%, 25 new benchmark securities replaced 350 illiquid bonds and 99.2% participation is the highest on record worldwide.
IMF on standby
On February 4, 2010, the IMF approved a $1.27bn loan for Jamaica that underpinned a 27-month economic programme. This meant increased spending on social safety net programmes, policy reforms and a debt exchange programme to break the cycle of budget crises.
The IMF Standby Facility will help Jamaica implement its two-year programme, which includes the reform of the public sector to substantially reduce the large budget deficit, a debt management strategy to reduce debt servicing costs and reforms towards strengthening the financial sector. Within the programme, economic growth in Jamaica is expected to increase from -3.5% in 2009, to 0.5% by late 2010 and 2% in 2011.
To ensure that Jamaica's recovery is sustainable in the long run, the programme also includes a number of reforms in key areas, including tax policy reforms to improve collection and administration, public sector legislation to reduce costs and increase efficiency, and fiscal responsibility reform to improve budget planning and public financial management, making the government more accountable.
Forward planning: Jamaica is working hard to put public finances on a firmer footing, leaving the country better equipped to deal with future economic shocks
Positioning for Growth
The government's medium-term economic and financial programme is designed to return Jamaica to a path of sustainable growth and development. The focus is on the monetary and fiscal requirements needed to fundamentally transform the Jamaican economy in order to achieve this objective. The aim is to reduce inflation, create greater stability in the exchange rate, strengthen the financial system and lower interest rates while reducing the debt overhang and stabilising the fiscal accounts. In the process, the programme aims at building a more resilient economy so that there is more manoeuvring room to cope with external shocks, such as the devastating effects of the recent global crisis.
Interest rates are currently in single digits, down from more than 15 years of double-digit rates. The latest Treasury bill rate is the lowest in more than 30 years. Similarly, since the end of January 2010, the Jamaican dollar appreciated by 3.9%. The exchange rate at that time was J$89.87 to one US dollar and at the end of June, the weighted average rate was just over J$86 (the weighted average selling rate in both instances), suggesting that the government's efforts to achieve stability and build confidence in the economy are succeeding.
Proper fiscal management, reduced deficit, lower interest rates, less borrowing, building confidence, and greater transparency and accountability are the ingredients of Jamaica's policies for the future. Improving the country's fiscal dynamics is seen as a necessary but insufficient precondition for generating growth. We continue to encourage the banks to demonstrate their commitment to the recovery programme by matching the reduced interest on government paper with a commensurate reduction in interest rates charged on loans.
While the effects of the global economic crisis are not over, developing economies have a chance to put an end to the negative cycles of high debt and low growth. This is an opportunity to put public finances on a sustainable path and to take measures to raise productivity. While our economies continue to face significant challenges and vulnerabilities, the occasion of the economic crisis should sharpen our focus and strengthen our resolve.
Jamaica welcomes the additional resources provided by G-20 countries through the IMF and other multilateral agencies. However, the conditions for accessing these funds often require deflationary fiscal and monetary policies that leave beneficiary countries with little room to effectively address the challenges of development. In this regard, the government has urged the international community to help Caribbean countries find creative ways to deal with these challenges. More incentives need to be provided for countries that cannot afford the necessary investment in critical areas such as education and infrastructure, even while they have managed to contain debt and keep fiscal deficits down.
Audley Shaw is minister of finance and the public service for Jamaica
