Caribbean & Central America - October 2015 (ISSN 1741-4458)

On 23 September, the International Monetary Fund (IMF) published its ninth review of Jamaica’s economic performance under the current Extended Fund Facility (EFF) in which it pronounced Jamaica’s performance “exemplary”. But it also warned that “risks to the program remain high”.

The main source of the IMF’s pleasure is the continued commitment that Prime Minister Portia Simpson-Miller’s People’s National Party (PNP) government is showing to implementation of the agreement. In its latest review, the IMF reported that all key performance targets had been met, including the primary balance target where higher tax receipts and lower-than-projected capital expenditures more than compensated for “a slight overrun in program spending and lower non-tax revenue and grants”. The IMF was pleased that tax revenues exceeded budgetary expectations. It was also happy to report that Jamaica’s structural reforms “are broadly on track”.

One vital area of improvement has been in Jamaica’s public debt position. At end-March 2013, this was at a clearly unsustainable 146.5% of GDP. By end-March 2015 it was down to 136.9% of GDP, and it is projected to fall to 125% of GDP by end-March 2016 and eventually to 98.5% of GDP by end-March 2020. This is slightly higher than the 96% target set at the beginning of the program, but still an impressive achievement.

Much of the success has been due to “sustained fiscal consolidation”, with central government operations posting a primary surplus of 7.5% of GDP during the past two years and likely to do so again in the current fiscal year.

Other key factors have been the buy-back from Venezuela in July 2015 of its outstanding (as of end-December 2014) debt incurred under the PetroCaribe scheme. The total amount of retired debt and associated interest payment savings came to US$3.25bn. This was a politically controversial move, with the opposition Jamaica Labour Party (JLP) arguing that Jamaica was swapping a low interest debt for newly raised debt of US$2bn at a higher interest rate, albeit with longer maturity. The IMF, however, endorsed the swap and calculated that there would be overall fiscal savings of US$287m as well as a short-term 10% instant reduction in the debt-to-GDP ratio.

Apart from the arithmetic of the debt-swap, the fund-raising exercise also marked the crossing of an important threshold in that Jamaica proved that it was once again able to tap into the international bond market. A 13-year bond for US$1.35bn was issued at a yield of 6.75% and a US$650m 30-year bond was issued at 7.875% - a historic low. The bond issue was also oversubscribed and led to rating upgrades in May by Standard & Poor and Moody’s (to B and Caa2 respectively).

One further point of satisfaction for the IMF was the fact that the current account registered a surplus (of 0.3% of GDP) in the first quarter of 2015 for the first time in more than a decade. This was brought about by the decline in oil prices and a decent growth in revenues from tourism. Nevertheless, the IMF is still projecting a current account deficit of 3.7% for FY2015/16.

But for all the good news, and the optimism shown by the international bond market, there is an underlying sense that Jamaica may yet fall off the tightrope that it is walking. The threats are both economic and political. As the IMF put it, “risks to the program remain high” because “growth remains frail and high unemployment persists”. Jamaica’s recovery could be hit by external shocks, and (warns the IMF) “the run-up to elections before end-2016 could also potentially delay reform progress”.

One particular area of concern, given possible electoral pressures, is the need to keep the government wage bill under control. It is projected to amount to 10.1% of GDP in FY2015/16 with the aim of lowering it to 9% of GDP in FY2016/17. Meeting this latter target, however, “would require measures for 0.4% of GDP”. The IMF warns that current measures under consideration, such as a reduction in the head count through attrition and voluntary redundancy, may need to be supplemented “by additional reform measures to modernize the public sector and transition towards a smaller and more efficient civil service”.

The IMF argues that the costs to the economy of failing to contain the wage bill at 9% of GDP “are likely to be high” as options to offset the additional wage expense “would then be limited to undesirable choices of either compressing non-wage primary spending, including capital spending at a time when growth is weak, or raising additional revenue”.

There is another major point that was not raised in the Review, and that is the effect that the renewed debate over debt relief for heavily indebted countries may have on Jamaica’s determination to continue with the hard decisions required by the IMF.

The issue of debt relief was raised at the time of US President Barack Obama’s visit to Jamaica in April by the US-based Center for Economic Policy Research (CEPR), which pointed out that Jamaica was running the most austere budget in the world and that its interest burden was one of the highest in the world at 8% of GDP. It argued that alternatives to the IMF-imposed austerity “are key if Jamaica is going to emerge from its debt trap and begin economic recovery”.

A boost to this argument was then provided by the IMF itself in the context of the Greek debt crisis when an IMF memo was leaked in which it said that it would not get involved in a debt restructuring unless there was “an explicit and concrete agreement between Greece and its Eurozone partners on how to provide debt relief”. Not surprisingly this comment was seized upon by many in the Caribbean. For instance, veteran Caribbean diplomat and commentator Sir Ronald Sanders wrote in mid-July: “What’s good for the Greeks should be good for the Caribbean and other small and vulnerable nations.”

Further support for debt relief was then provided by the United Nations’ Economic Commission for Latin America and the Caribbean (Eclac), which presented proposals for debt relief at an international conference on ‘Financing for Development’ held in Ethiopia in mid-July. It proposed that multilateral institutions should “gradually…write off 100% of small states multilateral debt stock”.

None of this was lost on Jamaica, and on 30 July Prime Minister Simpson Miller took the opportunity to add her own plea for debt relief during a contribution to a UN Security Council debate on ‘The Peace and Security Challenges of Small Island Developing States’. She told the Security Council that debt was a major contributor to lack of security, and she specifically drew “the attention of the Council” to the Eclac proposals. She said: “Comprehensive debt relief for Caribbean Small Island Developing States that would write off 100% of their multilateral debt stock is timely. In our view, this proposal is worthy of serious consideration and support from the international community.”