Sticking to debt reduction the right policy

We are encouraged by the announcement by Finance Minister Dr Nigel Clarke that his recent trip to the financial capitals of the world had confirmed that the confidence in Jamaica’s economy is not only rock solid, but has surged past countries that usually are thought to present much lower risks.

This is measured by the return demanded by investors to buy bonds issued by the Government. All countries compare themselves with the United States. To get investors to buy Jamaican paper instead of bonds issued by the US, we have to pay an extra 1.25 per cent. However, many countries have to pay a lot more than that, and it is getting worse as governments around the world have increased debt and their economies are hit hard by Russia’s war in Ukraine.

Not only is confidence in Jamaica higher than Caribbean powerhouses like the Dominican Republic and Trinidad and Tobago, but we have surpassed even massive neighbours in Latin America like Mexico and Chile. In fact, we have even passed some countries in the european Union.

How was this achieved and why does it matter?

The novel coronavirus pandemic presented the most important test so far of the debt reduction path started by the Portia Simpson Miller Government in 2013 and which has been led faithfully by the present Administration for the last six years. Institutions like the Inter-american Development Bank and the International Monetary Fund urged Jamaica to increase debt to buffer the impact of the pandemic. even the current Opposition departed from its previous fiscal discipline by calling for increased spending. Thankfully, the Government rejected calls akin to ‘run wid it’.

This break with the past was based on the simple fact that Jamaica’s previous policy of always borrowing and spending its way out of economic shocks has not worked. Running up the debt to recover from shocks — such as surges in oil prices, and hurricanes that damaged our infrastructure — made interest rates go up, accelerated inflation, stifled growth, and made the poor even poorer. Higher debt delayed our recovery from each shock by up to a decade. It took us so long to recover that the shocks started to pile up on each other and Jamaica was continuously recovering from one shock or another.

The simple fact is that by sticking to debt reduction, despite the pandemic and the war in Ukraine, Jamaica has earned valuable credibility with international and local investors whom we rely on to purchase our government debt.

This matters because it means that the Government will now pay less to refinance its loans as they mature. That is important to understand as we dig away at the mountain of debt we still need to service — the part of it we haven’t got rid of yet. The lower the price the Government has to pay to service the debt means that there is more room to increase the social safety net, improve education and health services, fight crime, increase salaries, subsidise electricity bills for the poor, and build infrastructure.

Policy choices matter, and we should understand and pay attention to them. If we had stuck with the traditional failed policies we would be in the group of countries facing long delays to recover — and high prices to service their debts will just make it worse.

On this score, the Government has done well and deserves commendation.