Editorial | Going for growth
Niggles of disappointment notwithstanding, we take pride in Jamaica’s broadly successful completion of its US$1.6-billion standby arrangement with the International Monetary Fund (IMF), aware that it doesn’t represent the end of the country’s economic transformation. There is still work to be done to transform macroeconomic stability to strong and sustained growth.
Anyone who would underestimate what has been achieved should be reminded where Jamaica has come from. By 2012, following the derailment of an agreement with the Fund two years earlier, we were teetering at the edge of a fiscal cliff. With a debt bearing down on 150 per cent of gross domestic product (GDP) and its servicing consuming more than a third of the Government’s annual Budget, the island was all but shut out of global financial markets. Domestically, the Government gobbled up credit, leaving little for the private sector to affordably borrow to invest and create jobs. Jamaica‘s current account deficit was in double digits.
Over the past seven years, starting with a more than J$11-billion tax package, which the Government was required to impose as a show of good faith to the IMF and other multilateral agencies, Jamaica, across administrations, undertook one of the world’s toughest fiscal-reform programmes ever. Where the Greeks, during their parallel crisis, bristled and protested at being made to return a primary surplus of three per cent of GDP, Jamaica, without social upheavals, delivered on its required 7.5 per cent, which, by the end of the programme, declined to six per cent of GDP. This meant that the Government was forced to spend less on running the country, including providing services, upgrading infrastructure, and remunerating staff.
There, however, have been significant returns from the period of austerity. The debt, as a proportion of GDP, has been cut by over 50 percentage points, to now stand at just below the annual value of national output. The current account deficit is now in low single digit. Unemployment, at below eight per cent, is the lowest in decades. Inflation, too, is low and stable.
A great part of the reason for these gains is that, unlike the 1970s and ‘80s when IMF agreements were at the centre of ideological fights and lacked political consensus, these recent ones achieved national buy-in, engendered primarily by the policing role of the Economic Programme Oversight Committee (EPOC), which gained public trust.
There was the sense that the Government, if it couldn’t be directly held to account, would, at least, be called out by the committee if it failed to adhere to its commitments. That is why we support the Government’s acceding to EPOC’s continued oversight of its economic programme until the establishment of the promised independent and full-time fiscal council.
Acceleration of growth
But the work at hand is about more than the fiscal council. A critical element is the acceleration of growth. Despite the increase in employment and the central bank’s aggressive reduction of its policy rate – now at 0.5 per cent – growth, to our admitted surprise, has been stubbornly difficult.
Growth reached 1.9 per cent in the 2018-19 fiscal year but has recently fallen back, which will probably be exacerbated by drought in the first half, which will hit agriculture, and the closure, for up to two years, of the Alpart alumina refinery, whose production, by government estimates, contributed 40 per cent to last year’s growth.
The challenge for the Government in the circumstance is to find the inducements that will unlock growth, including transference mechanisms that narrow the differential between the central bank’s 0.5 per cent rate and the near 11 per cent, on average, commercial banks now charge their best business customers.
The administration needs also to look for ways to encourage a diversion of credit away from individuals, who account for more than half of all bank borrowings, to firms engaged in investment and production, while using its additional fiscal space to increase spending without becoming reckless. It also has to decisively tackle, as the IMF has warned, the governance issues, including corruption, which impede confidence and growth.