‘We should con­tinue with the IMF af­ter 2017’

Jamaica Gleaner - - OPINION & COMMENTARY -

THE DEPART­MENT of Eco­nom­ics at the Uni­ver­sity of the West Indies, Mona, last Thurs­day held the first in a se­ries of pol­icy dis­cus­sions to help guide the na­tion and, by ex­ten­sion, the re­gion for­ward.

JA­MAICA’S RE­CENT RE­LA­TION­SHIP WITH THE IMF

Collin Bul­lock ad­dressed the new In­ter­na­tional Mon­e­tary Fund (IMF) agree­ment which was an­nounced last week by Prime Min­is­ter An­drew Hol­ness. He as­serted that the US$1.7 bil­lion set aside by the IMF to as­sist Ja­maica in the case of any neg­a­tive shocks is pre­cau­tion­ary.

Bul­lock made it clear that the role of the IMF is to help a coun­try gain macroe­co­nomic sta­bil­ity. The coun­try must then de­sign its own growth agenda. “Ja­maica should own the pol­icy de­ci­sions and stop try­ing to hide be­hind the IMF,” he noted. He pointed out that the prom­ise of tax re­lief by the Gov­ern­ment was borne as a tax re­form and ques­tions whether or not the Gov­ern­ment can com­plete phase two with­out the as­sis­tance of the IMF. He said Ja­maica’s growth strat­egy is not anec­do­tal and sug­gests that the coun­try needs a com­pre­hen­sive growth strat­egy.

THE DE­VEL­OP­MENT OF JA­MAICA BE­YOND 2017

Dr Chris­tine Clarke high­lighted that Ja­maica’s growth and de­vel­op­ment ob­jec­tives might be dis­ad­van­taged by both ex­ter­nal and do­mes­tic fac­tors be­yond 2017. Weak ex­ter­nal de­mand is ex­pected to con­tinue along with spillovers from the global struc­tural re­forms, which in­clude cli­mate change, that will po­ten­tially af­fect health, tourism and agri­cul­ture. The re­sults of the United States elec­tion in Novem­ber might also chal­lenge the de­vel­op­ment of Ja­maica. The coun­try might come un­der strain from the fol­low­ing do­mes­tic chal­lenges: So­cial (crime. poverty, age­ing pop­u­la­tion); In­fra­struc­ture (road net­works, trans­port net­works); Rep­u­ta­tion (lot­tery scam­ming); Eco­nomic struc­ture (in­for­mal­ity, pri­vate-sec­tor un­der­de­vel­op­ment, public­sec­tor in­ef­fi­cien­cies, low pro­duc­tiv­ity, con­tin­ued higher debt); Vul­ner­a­bil­i­ties (cli­mate change: health, wa­ter avail­abil­ity, de­ci­sion-mak­ing and im­ple­men­ta­tion in­er­tia, in­com­plete re­form and fa­tigue). On a brighter note, the coun­try is ex­pected to re­main on a pos­i­tive tra­jec­tory in re­cov­er­ing from the global fi­nan­cial cri­sis and man­u­fac­tur­ers might be faced with lower tar­iffs as a re­sult of Brexit. In terms of ar­range­ments with the IMF, there are other op­tions that could be ex­plored, such as the non-con­ces­sional op­tions or flex­i­ble line credit that has been in­tro­duced to coun­tries like Mex­ico, Poland and Colom­bia. Clarke placed em­pha­sis on the pri­ori­ti­sa­tion of the need to re­form and put in place a trans­for­ma­tion agenda for the public sec­tor, con­tin­ued strength­en­ing of the

IIIII­fi­nan­cial sys­tem and con­tin­ued fis­cal dis­ci­pline and debt man­age­ment for the macroe­con­omy.

WILL JA­MAICA NEED THE IMF BE­YOND 2017?

Richard Byles is strongly in favour of the con­tin­u­a­tion of an IMF agree­ment be­yond 2017. He be­lieves that with­out the IMF, Ja­maica has not dis­played the dis­ci­pline re­quired to im­ple­ment the struc­tural re­forms nec­es­sary to move for­ward. The IMF brings good will, and many in­ter­na­tional lend­ing agen­cies might be re­luc­tant to lend to Ja­maica with­out the IMF’s stamp of ap­proval. The IMF has a very in­tri­cate mod­el­ling ca­pac­ity that has been built up over the years, which is also ben­e­fi­cial. Ad­di­tion­ally, Ja­maica has a long path ahead in reach­ing a First-World sta­tus, but at the base of that suc­cess is the so­cial con­sen­sus that Ja­maica does, in fact, need the IMF.

THE GROWTH AGENDA

Ja­maica’s for­eign-cur­rency debt is un­sus­tain­able even though it has been trend­ing down­wards since the lat­est Ex­tended Fund Fa­cil­ity (EFF). My re­search sug­gests that the debt can be cur­tailed if Ja­maica im­ports less, lower the real in­ter­est rate, con­trol the rate at which the ex­change rate de­pre­ci­ates or in­crease do­mes­tic prices, although the lat­ter wouldn’t be the pre­ferred strat­egy. Data have also shown that the rev­enue from ex­ports of tra­di­tional goods (ba­nana, baux­ite, cof­fee, alu­mina and su­gar) has been the same on av­er­age for the last 25 years and is not cor­re­lated with the ex­change rate strat­egy cur­rently in place. Re­sults from the re­search show that tem­po­rary nom­i­nal shocks, in­clud­ing price move­ments, im­prove the cur­rent

ac­count and the ex­change rate in the short run, but wors­ens cur­rent ac­count in the long run be­cause it is not driven by pro­duc­tiv­ity.

Fur­ther re­search on the in­ter­est rate pass-through and the mon­e­tary trans­mis­sion mech­a­nism in­di­cates that in­ter­est rate pass-through has been im­prov­ing since the global fi­nan­cial cri­sis. Since the lat­est EFF af­ter 2010, the gap between the lend­ing rate and the three-month Trea­sury bill rate has in­creased. The widen­ing of the gap in­di­cates that although com­mer­cial banks are in­creas­ing the rate of passthrough, they are do­ing so at a higher markup at the ex­pense of lo­cal in­vestors.

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