- By Sir Ronald Sanders
Jamaica’s harsh experience with the International Monetary Fund (IMF) to get a new $750 million loan signals equally harsh conditions for many Caribbean countries in the not too distant future.
Under a National Debt Exchange Offer (NDEX), Jamaican holders of Government debt instruments are expected to exchange such instruments for new ones that, in some cases, will have a lesser value and in all cases will mature over a longer period at reduced rates of interest.
The NDEX was launched on February 12 with a closing date of February 21. By the time this commentary is read the results of the offer will be known.
There are several important aspects of the NDEX that should cause other Caribbean countries to be troubled.
First, the IMF has made it clear that if there is not an NDEX, there would be no loan. Second, while Jamaican creditors are categorically required to join the debt exchange, foreign creditors are not. Third, the length of time from the launch of the NDEX to its closing was a mere 9 days. It had the feel of a gun to your head -– do or die.
The IMF justifies the requirement for the NDEX on the basis that Jamaica’s debt is “unsustainable” – the official debt to GDP ratio is over 140 per cent. It rationalizes not applying the same requirements to foreign holders of Jamaica’s debt instruments to join in the NDEX, by arguing that Jamaica must repay its foreign debt to give confidence to foreign capital markets in the future. In as much as the latter point may be arguable, it is clear that the IMF insisted upon it as a pre-requisite of its loan, and the Jamaica government had no choice but to accept it.
There are now several Caribbean Community and Common Market (CARICOM) countries that are in programmes with the IMF as lender of last resort. They are there, in part, because their debt to GDP ratios are more than a hundred per cent or very close to it. After debt servicing, they have little money left to provide goods and services to their populations.
Now that the precedent of a National Debt Exchange Offer (the world “offer” in this context is a misnomer if ever there was one) has been established in Jamaica, every Caribbean country that seeks an IMF loan, or an extension of it, can expect a similar requirement. This will have consequences for those governments that have borrowed heavily from local statutory bodies such as social security and national health organisations. If those bodies are compelled to exchange existing debt instruments for ones that are less favourable, they will be depleting monies contributed by the public for pensions and health care.
The unfairness of the NDEX is that the entire burden falls on the local population; the foreign creditors are assured of being repaid even though they too took the risk of lending and should be open to the same requirements that apply to local lenders.
If the NDEX was the only condition applied to Jamaica it would be bad enough. But, there is more. The government also has to increase taxes and introduce a raft of new ones. Spending must also be reduced. This means public service retrenchment and a cut back on infrastructural projects.
Whether this bitter medicine will cure the needy Jamaica economy, or worsen it, is left to be
seen. What is certain is that Jamaicans are now in for a tougher time. The IMF Executive Board will meet in March to judge whether the government has met the pre-conditions for the loan of $750 million spread over four years.
The Jamaican government does not have much of an option. There are no “white knights” on the IMF Executive Board championing the cause of Jamaica or any other developing country in similar circumstances, and arguing for less harsh conditions. And, with 55% of government earnings going toward paying back debt and 25% being spent on wages, only 20% is left for everything else — including education, security and health.
A few other Caribbean governments are at the same point as Jamaica or pretty close. Their fate will not be much different, unless they implement policies that reduce their borrowing significantly particularly within their own domestic economies; find creative ways of increasing export revenues including in tourism and the creation and sale of new services; reduce government spending on unnecessary projects; and encourage the private sector – both local and foreign – to take on more of the capital risk and to increase employment. In other words, governments have to re-think their roles – focussing on facilitation and regulation rather than competing with the private sector. Further, governments have to build genuine partnerships with the private sector and trade unions.
Caribbean governments also have to stop treating the opportunities that regional economic integration offers as though they do not exist or are not worth pursuing. The integration of the factors of production – natural resources, capital, management know-how and labour – can increase production and export earnings. Perfecting the Caribbean Single Market remains a vital step in this process. And, of course, that won’t happen if governments persist in the decision made two years ago to ‘pause’ integration.
A joint Caribbean approach to external debt negotiation, including with the IMF, would also give the region more bargaining strength. It is not beyond the creativity of regional technicians to work out how.
CARICOM countries should be swimming together; right now many of them are sinking alone.
Sanders is a Consultant, former Caribbean Diplomat and Visiting Fellow at London University.
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