After more than five decades of economic ups and downs, Jamaica’s rocky relationship with the International Monetary Fund (IMF) is drawing to a close. “Jamaica has reached a place where [the IMF] doesn’t need to be here all the time. We are taking the back seat and Jamaica is in the driver’s seat. We believe Jamaica is ready to exit the IMF and run its own business,” IMF Resident Representative Dr Constant Lonkeng Ngouana told a public forum in Kingston this summer.
The country officially exits its IMF agreement next month and financial experts are hailing the break as a positive sign of Jamaica’s newfound economic maturity. So how exactly did the indebted Caribbean nation, whose public debt once reached almost 150 per cent of its GDP, claw back some measure of economic independence?
A rocky road
Jamaica received its first IMF loan in June 1963, just a year after the country gained independence, but it wasn’t until the 1970s that the devastating cycle of loan-dependence began. Then Prime Minister Michael Manley touted the importance of economic freedom and sought to build industry, reduce inequalities and improve the standard of living for all Jamaicans. Unfortunately for Jamaica, the move towards fiscal resilience was doomed to fail in the face of surging oil prices and dwindling foreign exchange reserves.
Manley was forced to concede defeat and the country began borrowing to keep afloat. As its debt skyrocketed, the constant stream of IMF loans became more a means of keeping creditors at bay than stabilising the national balance sheet. To date, Jamaica has availed itself of 16 IMF agreements and has ‘failed’ most of them – often invoking an Extended Fund Facility (EFF) in order to renegotiate repayments. In 2013, when Jamaica’s debt was at its peak, the country obtained a four-year US$932 million EFF (later replaced in 2016 by a US$1.6 billion Precautionary Stand-by Arrangement) which coincided with the launch of an Economic Reform Programme. Six years and two administrations later, it is widely acknowledged that 2013 was a turning point.
Former IMF Managing Director Christine Lagarde praised Jamaica for its efforts during those six years, saying: “Through two programmes [and] two different administrations with very strong commitment, you have managed to actually create jobs, reduce unemployment to the lowest level ever, reduce debt, stabilise inflation and accumulate reserves.”
Director of the Western Hemisphere Department of the IMF, Dr. Alejandro Werner added: “Budget discipline, combined with a reorientation of the fiscal system, including the shift from direct to indirect taxation pioneered by this government, has helped put public debt on a sustained downward path and also generate a fiscal and tax system that is more conducive to investment, growth and employment.”
Reform and results
The praise heaped upon Jamaica may sound like institutional hyperbole, but the numbers don’t lie. The country’s unemployment is at an all-time low of 8 per cent, non-borrowed reserves are US$430 million above target and there was 1.7 per cent GDP growth in 2018 buoyed by gains in construction, mining and agriculture.
How did the government achieve this feat? Taking its cues from the Economic Growth Council, which included representatives from the private sector and trade unions, the government pursued a policy of reform and fiscal discipline. After years of outdated tax structures, the government switched to a new model relying on indirect rather than direct taxation, therefore easing the burden on the private sector, encouraging new business and spurring development. As business confidence rose, unemployment dropped and consumer spending improved.
The government also reprioritized spending, diverting much-needed funds from the bloated public sector into infrastructure, housing, security, transportation networks and educational and health initiatives. The work of the EGC in keeping stakeholders accountable and ensuring that all sectors of society had a voice in Jamaica’s recovery was commended by the IMF, with Lagarde noting that the success of reforms was due to “your own creativity, the way you have managed to embark everybody on that journey”.
Next steps
For all the fanfare, Jamaica is not entirely out of the woods. The country is still shouldering a weighty debt that amounted to 95 per cent of its GDP in March 2019. After decades of austerity, it’s critical that the country avoids backsliding and the IMF recommends strengthening domestic institutions to safeguard against this.
Delivering her review after a summer visit to Kingston, IMF Mission Chief for Jamaica Uma Ramakrishnan said: “Enhanced central bank supervision and risk management practices at lending institutions will be critical to ensure careful assessment of risks to maintain financial stability. Looking ahead, having strong institutions in place will be critical to entrench the hard-earned gains from the economic reforms.”
To ensure stringent oversight, the Jamaican government has committed to establishing an independent fiscal council, creating the necessary infrastructure for natural disasters risk financing and reforming the Bank of Jamaica. Although Jamaica’s current arrangement with the IMF comes to an end in November, the Fund will continue to provide technical support and its Kingston office will remain open for another two years.
For now the country is focusing on the big barriers to growth through measures to cut crime, invest in agriculture, improve education and facilitate private sector development. If it continues on its current trajectory, Jamaica aims to reduce its debt to a record 60 per cent of GDP by 2025-26.
Delivering this year’s budget, Minister of Finance Dr Nigel Clarke hit an optimistic note, telling parliament: “Economic independence means that we as a country are empowered to chart our economic destiny. We are a people of destiny, a nation of purpose.”
