The IMF and the fork in the road

Edward Seaga, Contributor

We are approaching two periods in our history which coincide incidentally. First, there is a pending crisis in the economy resulting from a serious fallout in meeting the targets of the current International Monetary Fund (IMF) standby agreement. Unless rectified, this could lead to possible calamitous consequences. 

A stable, functional economy generating growth would be an appropriate link between these two periods. In fact, this would be one of the major achievements of the past half-century which could be trumpeted since it could mark the end of the dismal period of the last 20 years, which produced no growth, negative growth or little growth, starting in 1991. Further, a successful economy would enable funding to be provided to celebrate national achievements for the 50th Independence anniversary.

Unfortunately, this has not been the case. The economy has been stunted and anaemic, and the fundamental problems of the country in critical areas have shown little or no forward movement.

More specifically, the economy is now facing another crisis identical to what occurred in the global recession of 1980-83. Familiarity with the history of that period and the economic circumstances of the current recession reveals that in both cases, the relationship with the IMF was the centrepiece.

Balancing the budget

In the earlier period, 20 years ago, the IMF required steep cuts in expenditure to enable the extraordinarily high fiscal deficit to be lowered substantially to help balance the budget. The fallout was also critical in foreign exchange inflows to pay debt and to purchase essential goods and services such as oil, food, drugs, raw materials and capital goods to counter the outages, shortages and stoppages in the economy arising out of the dwindling available foreign exchange.

The IMF, while cognisant of the drying up of foreign exchange, was very concerned in that period also with the ballooning fiscal deficit at 18 per cent of GDP, one of the highest in the world. Its prescription was to severely cut expenditure. The only way in which this could have been done effectively is by the steep reduction of 10,000 employees from a total of 100,000.

In March 1980, a decision was taken by the People's National Party (PNP) National Executive to discontinue its agreement with the IMF rather than accept this savage cut in employment in the public sector. As noble as this decision was, it was foolhardy, because this blocked critically needed foreign-exchange funding from the IMF and other sources in the free world.

In fact, the eventual out-turn of this decision by the PNP was that only US$10 million was left in the Bank of Jamaica when the new JLP government took over after the general election of October 30, 1980.

In the present situation with the Golding administration, there are similarities. Once again, there is a crisis with the IMF. This involves many areas of non-performance in meeting the targets of the existing IMF standby agreement. Also, there were unilateral decisions by Government to embark on massive new expenditure and commitments for expenditure not agreed in the standby agreement. Chief among these was the recent decision to meet the demand from the public-sector trade unions to honour the considerable amount of $7 billion in arrears owed by Government to various categories of staff.

But this is not the crucial problem underlying the current IMF-Government impasse. The major problem, as in the case of the Manley administration, is the non-performance of a commitment by the JLP Government to reduce expenditure on salaries from 11.5 per cent to 9.5 per cent of GDP, cutting the number of personnel employed to Government by 10,000-15,000. This would save approximately J$20 billion to help close the fiscal gap and to reduce the Jamaican debt-service ratio from one of the highest in the world. Both of these were crucial conditionalities critical to future solvency of the economy.

Critical decision looms

Against this background of non-performance, the IMF has withheld drawdowns of the December, March and June disbursements to Government, totalling US$300 million (J$26 billion). The Fund, it appears, is now demanding performance in cutting the staff complement by the number agreed in order to reduce the fiscal deficit and debt-service ratios.

The same critical decision, as in 1980, now looms: to go with the IMF and avoid the collapse of the Budget, or tough it out with the IMF and face a worse collapse in the economy. In human terms, this is a heart-rending decision which no leader wants to take. In the case of my administration, the 10,000-staff cut which Manley refused to carry out became 27,000 because of the worsening situation. I took the decision to comply because the alternative was to face a collapse of the economy, in which case we would all be speaking Spanish now.

In these circumstances, there is certainly little room to meet the date with destiny, the celebration of the 50th anniversary of Independence, although most of the first 50 years of Independence have hardly been worthy of a cheer.

The areas in which the greatest impact should have been made are in the transformation of the economy, the education system and the criminal justice system. These are the pillars of the State.

The economy is little better off today, if at all, than it was at the time of Independence. Economic growth then was robust, especially in the last half of the 1960s; today, it is anaemic. The education system in the 1960s was considerably expanded to allow open-door entrance of primary-school students for the first time to 70 per cent of secondary places; but this was to no avail because, today, 70 per cent of students in secondary schools leave with inadequate or no passes, leaving many of them to wither as 'wutless bwoys' and 'careless gyals'. The only forward movement in these fundamental categories has been the raising of hope that justice for all will prevail by the passing of the Charter of Fundamental Rights and Freedoms.

Bright spots

On the other hand, there have been some bright spots worthy of celebration - the development of the bauxite/alumina industry, tourism and telecommunication.

Beyond these, the panorama of the best national achievements includes the magnificent performance of unbridled creativity in the development of a whole new genre of popular music which has entrenched itself as a vibrant expression of the soul of Jamaica, appreciated throughout the world. It features young Jamaicans as world stars. This is truly an amazing achievement.

Of equal merit is the gradual growth over the years since Independence of athletic talent propelling young Jamaicans into a world they have now conquered with athletic skills. In the Olympics and World Championships in 2008 and 2009, respectively, Jamaican athletes performed beyond the accomplishments of any other small country and most bigger ones. The future points to more to come.

These two awesome achieve-ments have created heroes of ordinary Jamaicans who enjoy no privileged social positions, outstanding education, or wealth.

Creating brighter future

There is a third category of Jamaicans whose extraordinary efforts as their brother's keeper have created for them a special role in the Jamaican economy and society as the greatest providers of foreign exchange for the economy, far exceeding the net earnings of bauxite/alumina and tourism together. The remittances of the diaspora to help family, friends and country have become the most powerful leg of the economy, and especially over the past 20 years when help at home was needed most. This has been a supreme exemplary effort, displaying the character of the people.

It would be wonderful if it were possible to mark off the disappointments of the last 50 years and to begin now a new half-century in which, with knowledge of the experience of the past, we could create a brighter future to recapture some of the lost ground which has plummeted Jamaica almost from a position of pride at Independence to the bottom of the ladder today.

We should start now to rethink the next 50 years in terms of creating a new focus, starting with the fundamentals of creating a fully literate/educated society and a more prosperous economy. Deal with them as the focal point and the rest will follow.

Edward Seaga is a former prime minister. He is now chancellor of the University of Technology and a distinguished fellow at the UWI. Email feedback to columns@gleanerjm.com and odf@uwimona.com.