Caribbean & Central America - February 2012 (ISSN 1741-4458)
JAMAICA: PNP struggles to find solutions
The most pressing task of Jamaica’s new People’s National Party (PNP) under Prime Minister Portia Simpson Miller, elected in late December, is to negotiate a new agreement with the International Monetary fund (IMF). The problem with the IMF was spelled out by Finance Minister Peter Phillips on 25 January when he said: “The IMF Programme, which expires in May 2012, has not been completed because various critical structural benchmarks and targets were delayed or missed. An entirely new programme now has to be negotiated and new targets set focusing on growing the economy. The failure to successfully complete the Stand-by Arrangement resulted in the non-disbursement of multilateral funding, including US$220m from the IDB. We expect that progress on the IMF negotiations will help unlock these funds.” Phillips has warned ominously about “a breakdown of trust between Jamaica and our international partners”.
An IMF mission visited Jamaica from 18-24 January to meet the new government to discuss its priorities. A statement issued by the IMF after the visit gave little away, although it emphasized the importance attached by the government to growth. It said that the IMF team and the government had “a concurring view” of the key challenges facing Jamaica, arising from the high public debt and low economic growth, and that they agreed on the need for a strong policy response.
The government reportedly told the IMF team that they are working on the early implementation of a set of policies aimed at placing the debt-to-GDP ratio “on a decisive downward path, while stimulating growth and job creation in a sustainable way”.
In its election manifesto, the PNP had hinted that it wanted more flexibility from the IMF. It had said that while the PNP recognizes that the present economic crisis demands fiscal responsibility and prudence, at the same time the social crisis gripping Jamaica “requires creative and aggressive growth strategies”. But Jamaica’s room for policy manoeuvre, as Phillips has now recognized, is very limited.
The government is continuing to work on its economic programme for submission to the IMF, and a government team will visit Washington for talks with IMF officials on 17 February. Finance Minister Philips is also set to explain his plan to the nation on 8 February following a four-day ministerial conclave that ended earlier in the week. The government hasn’t given much away yet as to the shape of the new plan, but the tension between the contradictory needs of growth and debt reduction has, if anything, intensified. Based on current projections, the primary surplus is expected to be 1.5% of GDP below the budgeted target.
Debt is Jamaica’s perennial problem. The debt-GDP ratio was 212% in 1994. This came down to 111% in 2007 but then climbed back to 131% by end-March 2011. As Phillips said following the IMF’s visit in January: “The stranglehold of the national debt is impeding the provision of funding for vital social services and necessary capital investments to support growth.” The finance minister added: “We recognized that there has been a worsened economic situation in the medium term, which has increased significantly Jamaica’s vulnerability to economic shocks. We have agreed that these problems need to be addressed urgently.”
But almost every statement seems to re-emphasize the classic Catch-22 in which Jamaica finds itself. It must reduce debt, but how can it generate growth at the same time? There appear to be very few ideas, apart from issuing some anodyne comments about targeting key sectors for growth and improving competitiveness. Jamaica is now listed as being 107th in the competitiveness league table, compared with 67th in 2006. On the World Bank’s ‘Doing Business’ rating, it has slumped from 43rd in 2006 to 88th in 2010-11. Growth for 2011 is expected to have been 1.3% after a contraction of 1.3% in 2010. Unemployment is estimated to have been 12.6% in 2011, slightly up from 12.4% in 2010.
One eye-catching suggestion from Jamaica’s new PNP government has been to switch Jamaica’s power plants to coal. Most of Jamaica’s ageing power generation is fuelled by oil, which is around US$100 per barrel. Liquefied natural gas (LNG) is an obvious alternative, but there remain uncertainties about supplies from Trinidad. Coal-fired plants, on the other hand, while costing perhaps three times as much to build as an equivalent LNG plant, are far cheaper to run. Phillip Paulwell, minister of science, technology, energy, and mining, has suggested that a switch to coal could bring down the cost of electricity to consumers by over 50%. However, even if this projection is correct, the World Bank, amongst others, has been discouraging the use of coal for environmental reasons.
There have also been hints at a less friendly attitude towards free trade emerging from the government. Speaking to members of the diplomatic corps on 31 January, Minister of Foreign Affairs and Foreign Trade, Senator AJ Nicholson said that as a small vulnerable economy, Jamaica had to be careful about free-trade agreements. He said that free trade agreements must lead to increasing exports “otherwise [they] will only lead to the accumulation of more debt by encouraging imports”. He added: “The administration will therefore continue to require that trade agreements go beyond trade liberalization and market access to embrace development issues”.
Nicholson said that Jamaica would continue with the negotiations for a Caricom-Canada Trade and Development Agreement and would continue to engage with the Doha Round in the World Trade Organization (WTO). However, he emphasized to the assembled diplomats: “Jamaica, as a small vulnerable highly indebted economy, must be able to benefit from the trade agreements which it negotiates. In exchange for opening our markets, we must be able to take advantage of reciprocal market access.”
Interestingly, this caution about free-trade deals chimes with indications coming from elsewhere in the Caribbean. At the beginning of February, for instance, the Barbados Private Sector Trade Team (BPTT) warned that Canada’s aggressive trade liberalization policy would undermine key Barbadian businesses and industries and lead to a flood of cheap Canadian imports. Joel Richards, head of the BPTT, warned: “At the moment I can’t say exactly what the Canadians are requesting, but what I can tell you from the evidence of what they have done with Costa Rica, Chile, and Peru, the Canadian approach is to go for 100% liberalization.”
The one piece of slightly better economic news for Jamaica is with regard to remittances. For the first eleven months of 2011, net remittances were US$1.586bn, which represented an additional US$102.2m or 6.9% increase over the corresponding period of 2010. Remittance companies recorded an increase of US$96.5m, an increase of 6.6%, while other remittances grew by US$17.2m or 6.7% compared with the corresponding period in 2010. The improvement in remittance inflows occurred against the backdrop of the improving macroeconomic conditions in source economies.