Jamaica can now contemplate loosening fiscal, monetary policies

Jamaica can now start to think about loosening fiscal and monetary policies because the country's debt is on a downward trajectory and trending towards a sustainable level, and the net international reserves are at a comfortable point.

That is according to International Monetary Fund (IMF) resident representative Dr Bert van Selm, who said that, earlier on, tightening of fiscal and monetary policies were necessary to get the debt under control and build international reserves.

"All of that is well behind us now," Dr van Selm said. "In the monetary sphere we already see that the tide has turned, so the Bank of Jamaica has twice this year already reduced its key policy interest rate; and on fiscal policy, I'm going to argue also that we are on the cusp of the turning of the tide now," he added.

"So, earlier on, we had a tightening of fiscal policy and now we are starting to think about a slight loosening of fiscal policy and that, of course, should help to support the economy," the resident representative told participants at an investors forum organised by Sterling Asset Management at The Jamaica Pegasus hotel, New Kingston, recently.

Dr van Selm noted that when the four-year economic reform programme started in May 2013, "reserves were not only low but also decreasing fairly rapidly. But that trend has been turned around: reserves are increasing and, also, already they are at a level that is quite comfortable."

Noting the international benchmark which requires a country to have at least three months of imports in terms of reserve coverage, he said "Jamaica is far beyond that, so that puts the Bank of Jamaica in a position to reduce its interest rates, something that is difficult to do if reserves are under pressure".

Debt-to-GDP ratio down

He also observed that Jamaica's debt-to-gross domestic product (GDP) ratio was very high at the start of the programme at almost 150 per cent, but is now projected to be 125 per cent by the end of the 2015/16 fiscal year.

"And while that is still very high by international standards it's a lot of progress in three years," he said.

Asked Dr van Selm, "And how has this been possible?"

He said "part of it is prudent fiscal policies, part of it is supply-side measures to try to stimulate economic growth and part of it is also the liability management operation with Venezuela, the PetroCaribe debt deal" which resulted in a decline in Jamaica's debt-to-GDP ratio by 10 per cent in one fell swoop.

The IMF representative said that "that helps a lot because that is the first number that anybody who is thinking about Jamaica's debt sustainability is going to look at. Not only did it come down immediately, but it's also projected to stay on a lower trajectory."

He said that meant a lot for the programme because one of the anchors of the economic reform programme has been the plan to reduce debt-to-GDP ratio to 96 per cent by 2020, "and it is because of this PetroCaribe debt deal that we are actually now in the neighbourhood of this 96 per cent".

Creates opportunity

Having made the projections for 2020, "what we see now is that we might hit it and that, then, also creates the opportunity to start thinking about a loosening of fiscal policy," Dr van Selm said.

However, he explained that "you can only start thinking about loosening monetary policy when you have the reserves to do so.

"On the fiscal policy side it's similar - you can only start thinking about loosening fiscal policy when your debt is on a clear trajectory to a sustainable number. And that is the situation where we are today."

Dr van Selm also noted that for the current account deficit, "we now project for this year and the coming year somewhere around three or four per cent of GDP, which for a country like Jamaica is normal - it's not too high, it's not too low".

He added that "that's a major difference from where we were when we started this economic reform programme, when we were well in to double digits. Right now, we think it's roughly where it should be."

mcpherse.thompson@gleanerjm.com