Jamaica and the IMF

Colin Bullock, Contributor

The human psyche is strange and variable. The sudden onset of a major problem may be regarded as a crisis and may elicit a rush to the emergency room with an overwhelming rage to live. If the same problem emerges over a protracted period, or if the patient continues to live with it for long enough, it may come to be regarded as 'normal' and treatable with aspirin.

As Jamaica continues to live with a massive debt overhang, the measurable benefits of the Jamaica Debt Exchange notwithstanding, several countries in Europe, variously affected by elements of the international financial crisis, the evaporation of real estate and financial bubbles, and creative fiscal accounting, are subjecting themselves to shock adjustment. Among them is one that, until very recently, was widely promoted as the (latest and greatest) absolute blueprint for Jamaica's economic salvation. It is also worthy of observation that the capacity of these European economies for independent adjustment is constrained by their membership of the euro-currency zone, effectively removing monetary and exchange-rate adjustment as tools of national economic policy.

Jamaica has been 'surviving' with a massive debt overhang over the last 10 years. Following some improvement in fiscal and debt management, up to the middle of the 1990s, the current debt overhang was driven by the massive issue of public debt instruments to 'heal' the financial-sector crisis. Following a peak in the ratio of public debt to gross domestic product of close to 150 per cent in 2002-03, in the subsequent years we were engaged in ambitious and only partially successful efforts to ease the debt burden through progressive elimination of the fiscal deficit.

Making progress

In a context of over-optimistic revenue projections and delayed reaction to the realities of the global financial crisis, the fiscal and debt indicators deteriorated in fiscal years 2008-09 and 2009-10. Government was making progress in negotiating lower-cost loan facilities with the World Bank, the Inter-American Development Bank and the Caribbean Development Bank and significant grant financing from the European Community (EC). It is worthy of note, though, that despite the stated concerns of the governor of the central bank regarding official net international reserves, the official position of Government, subsequent to the tabling of the budget in April 2009, was that Jamaica did not need a borrowing agreement with the International Monetary Fund (IMF). Considering that the IMF does not provide budgetary support and, in the clear and certain anticipation of budgetary support from the other institutions, this position had its own peculiar persuasiveness.

By July 2009, Jamaica sent an 'exploratory' mission to the IMF which culminated in a new borrowing agreement by February 2010. What had changed to make this approach necessary? Local commentators were almost unanimous that the 2009/10 budget, as tabled, was unrealistic. The anticipated revenue would not materialise and the expenditure budget was understated. By as early as June 2009, it was clear that these concerns were well-founded. Despite Jamaica's 'approach' to the IMF, the various supplementary estimates, despite very substantial tax packages, did not correct the problem.

No effective transformation

So while Jamaica belatedly recognised its need for balance-of-payments support, what would the other international 'development partners' have been thinking? Recall that the multilateral development banks lend money, and, for their own survival, expect to be repaid. Both the development banks and the EC provide financial support for the economic transformation of Jamaica. There would have been a recognition that unless Jamaica resolved its fiscal and debt problems, there would be no effective economic transformation, loan repayment would be threatened and grants would be money down the drain. It would not have been unreasonable then for these development partners to want some insurance for their loan and grant funds through a parallel IMF exposure, policy conditionality and the IMF 'seal of approval' - Jamaica shall not waste and shall repay.

In the context of the foregoing, the borrowing programme though 'owned' by Jamaica, is as much the IMF's programme as it is Jamaica's. The IMF has recognised the severe challenges to make the programme work but, at the same time, must be extremely concerned that it is neither prematurely aborted, nor that it fails to create the basis for sustained improvement of its fiscal debt and financial-sector management. In this regard, the IMF staff was candid in its listing of risks to programme success including the continuing debt overhang and the international economic environment.

Not excessively ambitious

At a Department of Economics forum on the then recently signed IMF agreement in February 2010, I observed that, perhaps in recognition of the depth of our fiscal misery, the medium-term fiscal and debt objectives for 2014 were not excessively ambitious. There certainly was no shock treatment like Ireland having to reduce fiscal expenditure by 20 per cent in the near term. I opined then that perhaps the more important targets were those for structural change to create the basis for permanently enhanced public-sector financial management.

The IMF has been kind and even laudatory in its reviews of the borrowing arrangement to date. All quantitative targets have been met, sometimes with substantial margins. The quantitative targets that have been met include the requirement that subsequent to March 31 2010, no new arrears have been accumulated. This raises questions of the nature of the arrears database and how these arrears are measured.

Regarding the structural benchmarks, the IMF, in its first review, said, "The authorities are proceeding well with their structural-reform agenda and all end-March structural benchmarks were met." In the same review, however, the IMF made reference to other structural changes that were anticipated or committed. These included legislation to strengthen sanctions for non-compliance with fiscal responsibility requirements, prohibition of deferred financing, reinforcing consistency between the budget and the medium-term fiscal framework, restriction of tax incentives, waivers and exemptions and annual parliamentary approval of these latter tax-revenue concessions.The second review (August 2010) certified compliance with all end-June 2010 quantitative performance criteria but noted that one structural benchmark was missed, "owing to circumstances beyond the Jamaican authorities control". Macroeconomic improvements were noted and growth was anticipated in the second half of the financial year. The IMF reiterated its concerns about risks and re-emphasised the imperative for timely implementation of structural changes.

Smaller than projected

The third review (November 2010) certified that all end-September quantitative performance criteria were met, and the "deficit of the public entities was significantly smaller than projected". This latter would need to be sustained to facilitate some accommodation of originally unbudgeted expenditure for road and flood rehabilitation. Reflecting concern expressed at the end-of-mission press conferenced however, the press release stated "Performance related to the structural benchmarks was mixed" and, unlike the second review, no absolution is extended to the authorities. The IMF also reported a downward revision of growth projections for the fiscal year and, in the context of poverty and unemployment, found this "worrisome".

"The mission discussed macroeconomic reforms that could help spur growth, including in tax policy; the environment for doing business; and expenditure management, to secure the fiscal space for priority social and infrastructure projects."

From experience, the IMF uses extremely diplomatic language (especially in the written form) which has been fondly referred to as "Fundspeak". Against the risk of staff marginalisation or separation, it does not include language that can be remotely considered offensive to the authorities of a member country. Instead, it uses language like, "We are somewhat concerned about", "We should consider the downside risks of", "Have you considered an alternative means of?" and "worrisome".

Concerns

The IMF 'is concerned' about the achievement of medium-term interdependent debt sustainability and growth objectives. The modesty of the reduction in the primary surplus target (reduced cumulatively by 0.7 per cent), relative to the potential cost of flood and road rehabilitation, reflects 'worry' that further slippage may seriously undermine debt sustainability, while threatening the interest-rate benefits from the Jamaica Debt Exchange (JDX). Delays in the attainment of structural benchmarks are likely to inflate primary (non-interest) expenditure and undermine the attainment of fiscal and debt objectives.

The 'anxiety' about growth betrays more than a concern about poverty and unemployment. There is also an underlying understanding that the benefits of the JDX in lowering interest rates will be undermined unless the sharp increase in the public-debt stock is made more manageable by a reversal from negative growth and then an acceleration of economic growth.

So Jamaica and the IMF have a borrowing programme where failure is not an option for either party. As the IMF staff, in its original recommendation, reported to its board, the programme is fraught with risk. The largest puzzle is how to make fiscal reform and compression consistent with growth. The IMF staff has identified this issue. Jamaica needs to 'worry' about this too.

Colin F. Bullock lectures in the Department of Economics, UWI, Mona. Feedback may be sent to columns@gleanerjm.com