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Opposition spokesman on finance, Audley Shaw, has said that one of the central tenets of the Jamaica Labour Party’s (JLP) macro-economic policies will be a reduction of the debt to gross domestic product (GDP) ratio from the current level of 130 per cent through multilateral debt rescheduling. However, we believe that this is an extremely flawed and dangerous assumption, which could have a negative impact on investor confidence.
Shaw’s statement also conveys a lack of understanding of the structure of the country’s debt, as well as how the international financial system operates.
An examination of the structure of the country’s debt indicates that over 50 per cent of the external debt is owed to private individuals and institutional investors, while the remainder is owed to multilateral and bilateral sources.
The multilateral institutions, which Jamaica owe are the Inter-American Development Bank (IDB), World Bank and the Caribbean Development Bank (CDB). The country has already fully discharged its liabilities to the International Monetary Fund (IMF), and currently does not have a borrowing relationship with that agency. It is also instructive to note that the bulk of Jamaica’s debt is owed to local institutions and individuals.
Data
Data provided by the Ministry of Finance and Planning indicate that as at the end of August 2006, the public debt stood at $884.4 billion or almost 130 per cent of GDP, with the external portion at $370.6 billion and the internal debt at $513.8 billion. This is a big jump of $42 billion compared with the total debt stock of $842 billion as at the end of January 2006, when the external debt stood at $352.6 billion and the internal debt at $489.6 billion.
Against this background, it is clear that the country’s internal debt is a bigger problem than the external debt, therefore the focus on the external debt is misguided, particularly since Jamaica does not qualify under the current multilateral debt rescheduling initiatives.
The current multilateral debt rescheduling initiative is mainly directed at the world’s most highly indebted poor countries (HIPC) with per capita GDP of US$380 and debt to revenue ratios of 250 per cent and above. Jamaica’s per capita income is currently US$4,000, while its debt to revenue ratio is about 240 per cent. This initiative was first proposed by former British Prime Minister John Major and agreed upon at a summit meeting of the Group of Seven held in Lyon, France in 1996.
The initiative was, however, revised at the G7 meeting held in Cologne, Germany in 1999 and extended four times. A total of about 50 countries, particularly those in Sub-Saharan Africa are eligible to benefit from this initiative, which is expected to lead to a US$61-billion reduction in the debts of the countries which qualify.
Although Jamaica has one of the highest debt to GDP ratios in the world, the country does not qualify for debt relief under this initiative because the multilateral agencies, as a rule, do not reschedule the debts of middle-income countries such as Jamaica because their interest rates are already very low.
It is, therefore, against this background that we contend that Shaw could use his time more productively by developing strategies to rationalise, re-engineer and re-energise the public sector in order to reduce the cost of running the government. This would contribute to a reduction of the fiscal deficit.
Reducing the fiscal deficit as a percentage of GDP is of paramount importance to the slashing of the country’s debt burden and by extension interest rates, leading to the generation of higher levels of economic growth and employment on a sustainable basis. The debt is an accumulation of fiscal deficits over the years, therefore in order to reduce the debt to GDP ratio we must eliminate the fiscal deficit and drive growth. The talk of multilateral debt rescheduling can attract a lot of traction and sound bites on the campaign trail, but this argument will be dismissed as heres
Opposition spokesman on finance, Audley Shaw, has said that one of the central tenets of the Jamaica Labour Party’s (JLP) macro-economic policies will be a reduction of the debt to gross domestic product (GDP) ratio from the current level of 130 per cent through multilateral debt rescheduling. However, we believe that this is an extremely flawed and dangerous assumption, which could have a negative impact on investor confidence.
Shaw’s statement also conveys a lack of understanding of the structure of the country’s debt, as well as how the international financial system operates.
An examination of the structure of the country’s debt indicates that over 50 per cent of the external debt is owed to private individuals and institutional investors, while the remainder is owed to multilateral and bilateral sources.
The multilateral institutions, which Jamaica owe are the Inter-American Development Bank (IDB), World Bank and the Caribbean Development Bank (CDB). The country has already fully discharged its liabilities to the International Monetary Fund (IMF), and currently does not have a borrowing relationship with that agency. It is also instructive to note that the bulk of Jamaica’s debt is owed to local institutions and individuals.
Data
Data provided by the Ministry of Finance and Planning indicate that as at the end of August 2006, the public debt stood at $884.4 billion or almost 130 per cent of GDP, with the external portion at $370.6 billion and the internal debt at $513.8 billion. This is a big jump of $42 billion compared with the total debt stock of $842 billion as at the end of January 2006, when the external debt stood at $352.6 billion and the internal debt at $489.6 billion.
Against this background, it is clear that the country’s internal debt is a bigger problem than the external debt, therefore the focus on the external debt is misguided, particularly since Jamaica does not qualify under the current multilateral debt rescheduling initiatives.
The current multilateral debt rescheduling initiative is mainly directed at the world’s most highly indebted poor countries (HIPC) with per capita GDP of US$380 and debt to revenue ratios of 250 per cent and above. Jamaica’s per capita income is currently US$4,000, while its debt to revenue ratio is about 240 per cent. This initiative was first proposed by former British Prime Minister John Major and agreed upon at a summit meeting of the Group of Seven held in Lyon, France in 1996.
The initiative was, however, revised at the G7 meeting held in Cologne, Germany in 1999 and extended four times. A total of about 50 countries, particularly those in Sub-Saharan Africa are eligible to benefit from this initiative, which is expected to lead to a US$61-billion reduction in the debts of the countries which qualify.
Although Jamaica has one of the highest debt to GDP ratios in the world, the country does not qualify for debt relief under this initiative because the multilateral agencies, as a rule, do not reschedule the debts of middle-income countries such as Jamaica because their interest rates are already very low.
It is, therefore, against this background that we contend that Shaw could use his time more productively by developing strategies to rationalise, re-engineer and re-energise the public sector in order to reduce the cost of running the government. This would contribute to a reduction of the fiscal deficit.
Reducing the fiscal deficit as a percentage of GDP is of paramount importance to the slashing of the country’s debt burden and by extension interest rates, leading to the generation of higher levels of economic growth and employment on a sustainable basis. The debt is an accumulation of fiscal deficits over the years, therefore in order to reduce the debt to GDP ratio we must eliminate the fiscal deficit and drive growth. The talk of multilateral debt rescheduling can attract a lot of traction and sound bites on the campaign trail, but this argument will be dismissed as heres
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