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Ignorance or ploy?
Dennis Morrison
Sunday, April 22, 2007
There has been an incredible amount of loose talk in the country's Parliament and on talk shows since the start of the Budget debate.
Dennis Morrison
Whether out of ignorance or a deliberate intent to exploit the naiveté or in some cases, plain ignorance, of ordinary people about economic matters, some spokesmen have offered quick fixes to a number of the country's economic problems. In several instances, private sector spokesmen have echoed these quick-fix solutions but have been confounded when challenged to explain their utterances.
The most obvious case is the proposal put forward by the Opposition that Jamaica can reschedule its debt by going to Washington and telling the multi-lateral financial agencies there - World Bank, IMF and Inter-American Development Bank - to lend us money at interest rates and payback periods to be determined by us. With the proceeds from such loans we would then be in a position to pay off high interest, short-term debt. Since I cannot envisage that Opposition spokesmen are ignorant of the workings of these multi-lateral agencies, I can only assume that these ideas are being put forward out of a belief that our people can be easily tricked.
Anyone with the vaguest knowledge of the mandate of the IMF and the conditions under which it operates would know that it lends to countries that are suffering loss of foreign reserves and balance of payments problems.
Its loan is meant to help borrowers cope with difficulties in meeting their international payments. Jamaica does not fall into any of these categories and would not therefore be able to borrow money from the IMF, much less loans for refinancing its debts.
On the contrary, the country's net international reserves increased by US$250 million to reach US$2.3 billion over the one year period that ended March 31, 2007. These reserves have put Jamaica in a position to easily meet its international payments for goods and services for many weeks, a far cry from our position over the period from the late 1970s to the mid-1990s.
My disappointment is that the nonsense about "getting" from the IMF to refinance our debt could be spoken after the education which the whole country got when we had a borrowing relationship with the Fund under successive governments from the late 1970s to the mid-1990s.
Back in those days it was public knowledge what were the conditionalities of the Fund, the quarterly performance tests and, most important, why it was that we were borrowing from that source. It seems that either there has been an un-learning of the lessons on the part of the Opposition, or they are assuming that since the majority of today's population would not have been exposed to those lessons, that they would be vulnerable.
One of the other Washington multi-lateral agencies that presumably would be targeted in the alternative debt strategy being proposed would be the World Bank. The Bank also does not lend for debt refinancing. Its loans are geared to financing projects and programmes. Money borrowed is tied to new activities and therefore cannot be used to reimburse the government or pay out debts created by programmes and projects that are already implemented.
I am pained by the need to have to explain these basic facts.
Similar conditions apply to the Inter-American Development Bank, (IDB) which is the other Washington-based multi-lateral financial agency.
Programme or project loans by this bank usually have to be matched by counterpart funds from the government. One is puzzled as to how lending from the IDB could be structured to refinance government debt.
Even more perplexing is the idea of this approach being applied to the refinancing of domestic debt. One need not be puzzled or perplexed if this idea being put forth is just a ploy. Our innocent young people could, however, fall victims to this should there not be some effort to point out the fallacies.
At least one other aspect of the international debt management arrangements of which the public should be aware relates to the Paris Club. Some developed creditor countries operate a mechanism whereby debtor countries can negotiate rescheduling of debt under specific conditions. Jamaica was a beneficiary up to the early 1990s of the rescheduling of some of its external debt under the Paris Club arrangements. The country, however, no longer qualifies for these facilities based on its per capita income status. In other words, we are not poor enough to merit such treatment.
The hard truth of Jamaica's high debt to GDP ratio and the need to reduce the interest costs of servicing our debt portfolio cannot be denied. But it should also be recognised that there is no stroke of magic that will send these problems away. For sure, the wiping out of the fiscal deficit as soon as possible is one of the necessary steps to bringing down the stock of debt. It will also contribute to reducing domestic interest rates which, in turn, will help to cut the costs of servicing the debt portfolio. Of course, lower domestic interest rates would be a stimulus to economic growth that would enhance the country's ability to service the debt.
Other than the wiping out of the fiscal deficit, critical attention must be given to finding ways of managing the debt. The Ministry Paper on debt management strategy tabled in Parliament at the start of the Budget debate points out that a combination of measures will be applied. These are: replacing short-term debt with long-term maturities, prepayment of high-cost debt, and replacing high interest rate debt with lower interest rate debt. The financial authorities have had some success by way of recent long-term bond issues with improved interest rates.
The Petro Caribe facility also provides an avenue for securing longer term maturities and lower interest rates, and the proceeds of future divestment of state assets would be the main means of pre-paying high-cost debt. The world is in a period where international financial markets are swamped by excess liquidity, and this provides opportunities for creative methods of refinancing debt. Rather than dreaming about the multi-lateral agencies, what should be further explored is how Jamaica can tap the commercial markets using new approaches to improve our debt profile.
None of these approaches is going to be available to us if parliamentarians remain slaves to the habit of demanding more government spending on every single item, while contradictorily insisting that the budget deficit should be controlled.
To qualify for favourable consideration by the markets we must demonstrate the will to curb losses by state agencies, now a source of pressure on the fiscal deficit, and to hold the line, except on the most essential expenditures. In this regard, the new budget does reflect a lower borrowing requirement, moving from 18 per cent of GDP to 15 per cent, even though the deficit is somewhat higher than would have been desired.
This lower borrowing requirement will release more money to be lent to the private sector as part of the push to speed up economic growth.
The projected reduction in the tax to GDP ratio from 30 per cent to 27 per cent is also a move in the direction of leaving more of the nation's resources in the hands of investors and consumers to stimulate increased economic activity.
The government itself has expanded the amounts being made available for lending to the private sector as part of the benefit of the long-term, low interest Petro Caribe facility.
These are some of the directions that need to be aggressively pursued if we are to get out from under the heavy debt burden and get our economy to grow faster.
Dennis Morrison
Sunday, April 22, 2007
There has been an incredible amount of loose talk in the country's Parliament and on talk shows since the start of the Budget debate.
Dennis MorrisonWhether out of ignorance or a deliberate intent to exploit the naiveté or in some cases, plain ignorance, of ordinary people about economic matters, some spokesmen have offered quick fixes to a number of the country's economic problems. In several instances, private sector spokesmen have echoed these quick-fix solutions but have been confounded when challenged to explain their utterances.
The most obvious case is the proposal put forward by the Opposition that Jamaica can reschedule its debt by going to Washington and telling the multi-lateral financial agencies there - World Bank, IMF and Inter-American Development Bank - to lend us money at interest rates and payback periods to be determined by us. With the proceeds from such loans we would then be in a position to pay off high interest, short-term debt. Since I cannot envisage that Opposition spokesmen are ignorant of the workings of these multi-lateral agencies, I can only assume that these ideas are being put forward out of a belief that our people can be easily tricked.
Anyone with the vaguest knowledge of the mandate of the IMF and the conditions under which it operates would know that it lends to countries that are suffering loss of foreign reserves and balance of payments problems.
Its loan is meant to help borrowers cope with difficulties in meeting their international payments. Jamaica does not fall into any of these categories and would not therefore be able to borrow money from the IMF, much less loans for refinancing its debts.
On the contrary, the country's net international reserves increased by US$250 million to reach US$2.3 billion over the one year period that ended March 31, 2007. These reserves have put Jamaica in a position to easily meet its international payments for goods and services for many weeks, a far cry from our position over the period from the late 1970s to the mid-1990s.
My disappointment is that the nonsense about "getting" from the IMF to refinance our debt could be spoken after the education which the whole country got when we had a borrowing relationship with the Fund under successive governments from the late 1970s to the mid-1990s.
Back in those days it was public knowledge what were the conditionalities of the Fund, the quarterly performance tests and, most important, why it was that we were borrowing from that source. It seems that either there has been an un-learning of the lessons on the part of the Opposition, or they are assuming that since the majority of today's population would not have been exposed to those lessons, that they would be vulnerable.
One of the other Washington multi-lateral agencies that presumably would be targeted in the alternative debt strategy being proposed would be the World Bank. The Bank also does not lend for debt refinancing. Its loans are geared to financing projects and programmes. Money borrowed is tied to new activities and therefore cannot be used to reimburse the government or pay out debts created by programmes and projects that are already implemented.
I am pained by the need to have to explain these basic facts.
Similar conditions apply to the Inter-American Development Bank, (IDB) which is the other Washington-based multi-lateral financial agency.
Programme or project loans by this bank usually have to be matched by counterpart funds from the government. One is puzzled as to how lending from the IDB could be structured to refinance government debt.
Even more perplexing is the idea of this approach being applied to the refinancing of domestic debt. One need not be puzzled or perplexed if this idea being put forth is just a ploy. Our innocent young people could, however, fall victims to this should there not be some effort to point out the fallacies.
At least one other aspect of the international debt management arrangements of which the public should be aware relates to the Paris Club. Some developed creditor countries operate a mechanism whereby debtor countries can negotiate rescheduling of debt under specific conditions. Jamaica was a beneficiary up to the early 1990s of the rescheduling of some of its external debt under the Paris Club arrangements. The country, however, no longer qualifies for these facilities based on its per capita income status. In other words, we are not poor enough to merit such treatment.
The hard truth of Jamaica's high debt to GDP ratio and the need to reduce the interest costs of servicing our debt portfolio cannot be denied. But it should also be recognised that there is no stroke of magic that will send these problems away. For sure, the wiping out of the fiscal deficit as soon as possible is one of the necessary steps to bringing down the stock of debt. It will also contribute to reducing domestic interest rates which, in turn, will help to cut the costs of servicing the debt portfolio. Of course, lower domestic interest rates would be a stimulus to economic growth that would enhance the country's ability to service the debt.
Other than the wiping out of the fiscal deficit, critical attention must be given to finding ways of managing the debt. The Ministry Paper on debt management strategy tabled in Parliament at the start of the Budget debate points out that a combination of measures will be applied. These are: replacing short-term debt with long-term maturities, prepayment of high-cost debt, and replacing high interest rate debt with lower interest rate debt. The financial authorities have had some success by way of recent long-term bond issues with improved interest rates.
The Petro Caribe facility also provides an avenue for securing longer term maturities and lower interest rates, and the proceeds of future divestment of state assets would be the main means of pre-paying high-cost debt. The world is in a period where international financial markets are swamped by excess liquidity, and this provides opportunities for creative methods of refinancing debt. Rather than dreaming about the multi-lateral agencies, what should be further explored is how Jamaica can tap the commercial markets using new approaches to improve our debt profile.
None of these approaches is going to be available to us if parliamentarians remain slaves to the habit of demanding more government spending on every single item, while contradictorily insisting that the budget deficit should be controlled.
To qualify for favourable consideration by the markets we must demonstrate the will to curb losses by state agencies, now a source of pressure on the fiscal deficit, and to hold the line, except on the most essential expenditures. In this regard, the new budget does reflect a lower borrowing requirement, moving from 18 per cent of GDP to 15 per cent, even though the deficit is somewhat higher than would have been desired.
This lower borrowing requirement will release more money to be lent to the private sector as part of the push to speed up economic growth.
The projected reduction in the tax to GDP ratio from 30 per cent to 27 per cent is also a move in the direction of leaving more of the nation's resources in the hands of investors and consumers to stimulate increased economic activity.
The government itself has expanded the amounts being made available for lending to the private sector as part of the benefit of the long-term, low interest Petro Caribe facility.
These are some of the directions that need to be aggressively pursued if we are to get out from under the heavy debt burden and get our economy to grow faster.
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