CEDRIC WILSON, Guest Columnist
Cedric Wilson
LATE LAST month, the International Monetary Fund (IMF) issued a favourable interim staff report on Jamaica and the Government is understandably pleased. This comes almost three months after Finance and Planning Minister, Dr. Omar Davies, announced in Parliament that the Government had paid off all the debt the country owed to the IMF. These two incidences clearly indicate that the nature of Jamaica's relationship with the IMF has changed. The IMF can no longer be seen as lender cracking a whip but rather as an observer taking notes and making comments.
Jamaica's borrowing relationship with the IMF started in July 1977, when the Michael Manley-led People's National Party (PNP) government, hit hard by a slump in bauxite-alumina exports, paralysed by its inward-looking strategy and still reeling under the effects of the first oil crisis, entered into a standby agreement with the institution.
In 1976, the economy had declined by 6.5 per cent, the countries foreign exchange reserves were depleted and the fiscal deficit stood at a staggering 15 per cent of GDP. Economist Kari Levitt, formerly of the University of the West Indies, suggests that the conditionalities imposed by the IMF in that initial agreement were 'remarkably soft'. However, the agreement fell through after the country failed a performance test six months later.
SECOND AGREEMENT
In May 1978, after long and heavy negotiations, a second agreement with the IMF was concluded. This agreement came with strong and bitter medicine - drastic currency devaluation, the imposition of wage ceilings and the removal of price controls. The economy was unresponsive to the IMF adjustment package as economic slide continued, capital flight persisted and the living standard of the average Jamaican declined.
The Edward Seaga-led Jamaica Labour Party (JLP) took the reigns of government in 1980 and early in 1981, obtained a new US$477.7 million three-year facility with the IMF agreement. This facility amounted to 430 per cent of the country's quota to the fund. It was based on inordinately optimistic expectations of Jamaica's export and represents one of the highest given to any country relative to its quota. Under the JLP government, there were four agreements with the IMF, the last in March of 1997. And these agreements were not without the failure of tests, the imposition of more stringent conditionalities and the protest on Jamaica's part.
The most dramatic protest came in October 1985 when the Government, amid rising discontent, unilaterally revalued the currency to $5.50 from $6.40 to US$1 after the IMF suspended the facility in the previous month. Since then, there have been several agreements with the IMF, but the long and short of it is that the IMF has exerted enormous influence on the structure of the economy.
CRITICISMS OF IMF
One of the criticisms of the IMF, particularly in the 1970s and 80s, is that it imposes a set of cure-all conditionalites on countries. John Cavanagh, an expert in development economics argues that: "The IMF in many ways is like a medieval doctor who, no matter what the ailment, applies leeches and bleeds the patient." Indeed, looking back at the Jamaican experience, it does not seem that this is entirely the case because the evidence suggest that the institution has shown some degree of flexibility. However, the appropriateness of some of its measures and the pace at which it expected adjustment to occur, in the Jamaican context, is highly questionable.
A second criticism of the IMF is that its stabilisation programmes are more focused on directing the country's resources towards debt repayment rather than long-term economic development. During the 1990s, there have been anti-IMF riots in several countries: Nigeria, Indonesia, Venezuela and South Korea. Really, while there has been evidence which suggests that the IMF programmes result in the containment of inflation and improvement in balance of payments, they are attended by the redistribution of income from the poor to the rich.
Of course, the IMF's standard response to this criticism is that you should not blame the medicine but the disease. They contend that when countries approach them because they are experiencing deep financial problems, the belt-tightening that comes as a result of their programme would have been worse without their intervention.
SIGNIFICANT ELEMENTS
There are three significant elements in the IMF Interim Report. The first is the expression of support for the Government achieving its balanced budget target during the current fiscal year. This is not without reservation, as it suggests that the financial weakness in public entities like Air Jamaica, could create negatively impact target.
Secondly, while it considers the medium-term strategy to achieve growth rates within the region of 3.5 per cent to four per cent achievable, this could be subverted by the country's vulnerability to shocks such as hurricanes and policy deviations, that may undermine confidence.
Thirdly, the IMF welcomes the objective of the government to achieve a public debt to GDP ratio of 100 per cent over the next four years. However, it asserts that this will require much fiscal discipline and commitment to make it happen.
Since 1970s, a lot has changed in relation to the country's debt burden. In 1975, the country's external debt to GDP ration was 31 per cent. In other words, the debt owed to the rest of the world was less than one third of all the income earned in the economy in one year. Today, it is approximately 50 per cent. But that is not the full story. Another 81 per cent is domestic and as a result, the overall government debt to GDP ratio is approximately 131 per cent.
The fact is, we are no longer indebted to the IMF, but the country is nonetheless severely indebted. The relationship with Jamaica and the IMF has been a strange tale of love and hate. The IMF at present cannot ram its medicine down our throats yet, with the best intention in the world, the Government has very little options outside of using the IMF prescription.
Cedric Wilson is an economist specialising in market regulation. Send feedback to conoswil@hotmail.com.
