EDITORIAL - Government must keep debt-swop compact

It is foregone that by Tuesday, the Government will have all the commitments it needs from domestic bondholders to go ahead with its plan to redeem, and reissue at lower interest rates, over $700 billion in debt, which is among the pre-conditions for US$1.3 billion in loans that Jamaica is to receive from the International Monetary Fund. More than 90 per cent of the bondholders will say yes.

So far, public discussion on this is largely voluntary, and, in the context of Jamaica, unprecedented action by financial institutions and their savers, has centred primarily on its potential impact on the Government's accounts. In the first year, for instance, the debt swop will 'save' the Government an estimated $42 billion in interest costs, which will thus be free for investments elsewhere.

That focus is understandable, given the state of the global economy and Jamaica's wretched fiscal situation. Even in better times, the public debt of 137 per cent of gross domestic product (GDP), whose servicing consumed more than 60 per cent of tax revenues and a similar amount of the total budget, was burdensome. It is now clearly unsustainable.

But financial institutions and savers will pay a real price for their investment in change. The analysis is ongoing, but the reduced yield values of the reissued bonds will weaken the balance sheets of some financial institutions, with the greatest stress likely to be on the smaller and/or less-capitalised security dealers. They will have to make adjustments, or even restructure.

Expected returns

So, too, will savers, including tens of thousands of people who had calculated their retirement incomes, in part, on the expected returns on government bonds, on the basis of existing contracts. As this newspaper reported on Friday, actuaries have estimated the contributor to defined contribution pension schemes could see a drop in pensions of up to 40 per cent. For those in defined benefit schemes, they will be cushioned by the fact that their employers will have to soak up the impact of the decline in returns on investments.

In exchange for this sacrifice in the national interest, the Government must undertake with vigour its promised reforms and must give Jamaicans bankable assurances that it will fulfil its obligations. Up to now, the public has, by and large, been given declarations of intent without the defined routes to the expected outcomes.

For example, the Government has talked broadly about its proposed fiscal-responsibility legislation, but is yet to provide the level of specifics, in either a green or white paper, to allow for an informed discussion on the matter.

Similarly, a handful of proposed big-ticket undertakings in the so-called fiscal consolidation programme have been declared, but details remain lacking on too many fronts. The public-sector reform programme, whose implementation Prime Minister Golding initially promised to begin in April, is among these. Now, it seems that the report of the 'transformation' project will not be ready until the third quarter.

Public-sector reform, which will include cutting jobs, is not a pleasant business and our government would prefer not to address it. It would probably hope that the reduction in wages-to-GDP ratio could be achieved through the normal impact of growth and inflation and further cushioned by the $42 billion in breathing space afforded by savers.

That is not on. The administration must keep its compact with savers.

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