IMF Approves Jamaica Loan – Pain, No Gain

May 23, 2013

After months of speculation, in early May the IMF formally approved a new lending agreement with Jamaica worth $932.3 million. With additional commitments from the World Bank and Inter-American Development Bank, the total loan package amounts to $2 billion. But, after another year of negative economic growth (the fourth in the last five years), will this time be any different?

Jamaica previously agreed to an IMF loan in early 2010, which was coupled with a debt exchange that sought to lower interest rates but did not provide any haircut (a lowering of the debt’s principal). The agreement mandated harsh austerity measures and despite the debt exchange, Jamaica’s interest burden remained the highest in the world, at 11 percent of GDP. The agreement eventually broke down after a Jamaican court ruled that the government had to distribute back pay to public sector workers, against the wishes of the IMF. Nevertheless, Jamaica has largely continued the austerity measures from the first agreement. After a return to growth –albeit slow- in fiscal year 2011/12, Jamaica slipped back into a recession this past year, after cutting non-interest expenditure by over 2 percentage points of GDP. Even some within the IMF warned that the fiscal consolidation efforts were going too far and could threaten “the fragile recovery and social cohesion.”

As a precondition for the new IMF agreement, the Jamaican government undertook a second debt exchange in February of this year, seeking to lower interest costs and “bring down the debt burden over time.” However, similar to the previous exchange, the principal of the debt was not touched and interest costs remain extremely high and damaging. Of the 131 countries for which IMF World Economic Outlook data is available, Jamaica will still have the highest average interest burden in the world over the next six years. The debt exchange succeeded in extending the maturity profile of domestic debt (the amount coming due within five years decreased from 53.2 percent to 23.4 percent), but Jamaica is still expected to spend some 8 percent of GDP on interest payments for the next three years, crowding out needed spending elsewhere. Overall debt servicing is projected to take up 45 percent of total government expenditures over the next three years, only a slight reduction from the 46 percent average over the previous three.

Unsurprisingly, and despite the internal dissent, the IMF agreement calls for more of the same austerity measures from the last agreement. Jamaica is required to run primary surpluses (revenue minus expenditure, excluding interest costs) of 7.5 percent of GDP, which according to the latest IMF World Economic Outlook, would mean Jamaica would have the highest primary surplus in the world outside of oil producers in 2013. And, as Jamaica would need to maintain that surplus for a number of years, over the period 2013-2018, Jamaica would have an average primary surplus higher than all other 131 countries for which data is available other than Norway and the United Arab Emirates. (The primary surplus in those two countries does not require cuts to expenditure as in Jamaica; rather it is a result of hydrocarbon revenue pushing revenue above primary (non-interest) spending).

Indeed, while the debt exchange aimed to get Jamaica’s debt on a downward path, the IMF country representative Jan Kees Martijn recently countered that:

most of the debt reduction will come from very tight government budgets. Put in simple terms, the government will have to live within its means and improve its financial position over time. Sustaining this approach will be a serious challenge, but there is no alternative. The benefits of this effort will become very evident over time.

Already there has been some skepticism over the program, even from those who are funding it. Earlier this week, the Financial Times reported that the new IMF agreement “is controversial even among its bankrollers,” adding that the World Bank and IDB “were sceptical of the programme’s design, and Jamaica’s ability to adhere to its conditions.” As for the $2 billion in loans from multilaterals, if one subtracts out the hundreds of millions in debt servicing going to those very same entities, it shrinks to about $350 million, or less than one half of 1 percent of GDP from 2013-2017.

In the meantime, most Jamaicans will continue to suffer from stagnant economic growth and reduced investment in needed infrastructure and public works. The budget for fiscal year 2013/14 calls for an additional 1.7 percent of GDP cut in spending, and over the duration of the IMF program, allocations to the ministries of health and education will be reduced from 8.7 to 6.9 percent of GDP. Most public sector workers have already been forced to agree to a wage freeze for at least the next two years. This all comes on top of the last five years, during which Jamaica experienced an average growth rate of -1.0 percent. Unemployment increased from below 10 percent in 2007 to over 14 percent currently. Poverty has doubled. And despite all of this, the IMF is calling for the same failed policies of the past. The prioritization of creditors over the people continues.

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