The government in Kingston, the IMF, the ratings agencies and creditors were all making reassuring noises in September. There are indeed signs that the Jamaican economy may be stabilising. But with its massive foreign debt overhang, Jamaica isn’t out of the woods yet.
There were two pieces of good news for Prime Minister Portia Simpson Miller in late September. First, the International Monetary Fund (IMF) disbursed a US$30.6m tranche of its four-year US$944m EFF (Extended Fund Facility) programme, signalling that it believes the country is on the right track to overcome its serious economic imbalances. The IMF’s deputy managing director Nayouki Shinohara praised the government’s commitment to “strengthening Jamaica’s fiscal position and creating the conditions for sustained economic growth” which he said would be “critical to a revival of investor confidence and domestic demand in the period ahead”. Second, the international ratings agency Standard & Poor’s (S&P) raised its assessment of the country’s local currency debt a notch to B-, up from CCC plus. S&P said it expected the government to meet its fiscal targets this year, push ahead with the tax reform agenda (broadly designed to lower some rates but widen the tax base), and avoid further falls in foreign currency reserves. It also expected Jamaica’s large current account deficit to narrow from 12.6% of GDP last year to 10% in 2013.
While these are positive signs, it is also true that Jamaica’s economy remains in a very exposed position. Other ratings agencies such as Fitch still rank the country’s debt only two notches above default level. The very heavy debt overhang is critical. The IMF estimates that total Jamaican debt stood at 142% of GDP at the end of Q113. It says that through the existing programme this should be reduced to 96% by 2020, but even that level would be unsustainable. IMF officials have privately argued that further reductions will be required.
The question has to be whether such reductions are achievable purely through market mechanisms such as ongoing restructuring and austerity, or whether some form of Greek-style payments default and forced write-down will become unavoidable.
The macroeconomic numbers are daunting. Real annual GDP in the fiscal year to March 2013 fell by 0.7%, placing Jamaica at the bottom end of the Latin American growth table. GDP fell again by 0.4% in the quarter ending in June 2013, the fifth consecutive quarter of contraction. Unemployment was over 16% in the first half of this year, with inflation touching 10%. Youth unemployment is over double the national rate, something that feeds criminality and gang culture, one of the country’s persistent social and political problems. Any increase in violence can hit the important tourist industry, setting up a vicious circle by reducing foreign currency earnings. The Jamaican dollar has lost more than 10% of its value since the beginning of the year. As a large proportion of Jamaican debt is US dollar denominated, this means that debt-servicing costs measured in local currency are becoming increasingly burdensome.
The prime minister is aware that she is walking a tightrope. While forced to reduce government spending, she says she is mindful of the effect this is having on the majority of the population, and particularly on the poor and those on fixed incomes. In a recent speech she said her four ‘priority focus areas’ included fiscal austerity and debt reduction; achieving sustainable economic growth and job creation; protecting the vulnerable sectors of society; and “providing a realistic basis for hope to persons experiencing the brunt of the adjustments”.
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