‘We should continue with the IMF after 2017’
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.