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How the IMF can help put Jamaica first


Friday, November 10, 2017

An excellent editorial in yesterday's Jamaica Observer, entitled “Resist the politicking and put Jamaica first”, ended by noting, “We don't expect the Opposition, after running such a brilliant first leg, to resort to old strategies of seeking political advantage by encouraging labour unions, or any other groups for that matter, to destabilise the economy. Jamaica must come first.”

It noted that Jamaica's stabilisation programme “is arguably the toughest implemented by any country in recent world history”, adding that the IMF recently described Jamaica's reform programme as a “sustained, superb performance”.

The editorial noted that last month GlobalMarkets, the IMF's partner publication, awarded Finance Minister Audley Shaw its prize for best finance minister in the Caribbean. Minister Shaw deserved the award for achieving what the IMF recently referred to as Jamaica's “deeply entrenched macroeconomic stability”.

My article in Sunday Finance goes into more detail as to what this means. But simply put, as the editorial notes, “our extraordinarily tough programme segued seamlessly from the previous People's National Party Government to the current Jamaica Labour Party Administration. In other words, it has become a truly Jamaican programme.”

Not only has Shaw successfully implemented a radical, and long-overdue shift from direct to indirect taxation through raising the threshold for the long-suffering Pay As You Earn (PAYE) income earners — of which roughly 40 per cent was in the public sector — but he has done it without endangering the macroeconomic stability bought at such a high price by his predecessor.

Indeed, our macroeconomic situation has improved substantively further under his watch, with the seeming emergence of a long-awaited virtuous financing circle.

The best evidence of this is that our government felt able to redeem US dollar-denominated restructured domestic debt at an already low 5.25 per cent because they can get even better rates of roughly 4.5 per cent for 10-year US dollar-denominated Jamaican Eurobonds.

There are also increasing signs of a further shift down in the domestic yield curve, as the government recently reissued a domestic Jamaican dollar bond, with over 3.5 years left to maturity, at just under 6.3 per cent, or around one per cent below the restructured interest rate of 7.25 per cent.

In short, Shaw's unceasing efforts to get lower interest rates are truly bearing fruit.

Finally, Shaw is pushing hard on the access to finance issue, never missing an opportunity to push for better terms for small and medium-sized enterprises, for which he should be commended, even lauded.

His restoration of the Junior Market tax incentives is again bearing fruit with the local stock market — which had seen a pause in capital raising after their cessation — now definitely open for business once again. The IMF may want to use this example to rethink its position on certain incentives

Indeed, we expect one of Jamaica's largest-ever initial public offerings later this month.

We should not take this achievement for granted, as for the past two or even three decades one could only raise equity capital on the local stock market for very brief periods.


The IMF, however, needs to help more in other areas, such as loan finance. Regulation put in place after the domestic financial crisis of the 1990s was far too restrictive and has not been revisited. Part of the reason for this appeared to be a reluctance to acknowledge the equal role of macroeconomic instability in the collapse, as opposed to just lax regulation, as it was simply politically more palatable to blame the businessmen involved for such a disaster.

With regard to the issue of access to finance, it is particularly interesting that the timing of the completion of the Finsac report will coincide with a Financial Sector Assessment Programme by the IMF, the last one having occurred more than a decade before, and that a specific stress-testing exercise is being undertaken by the IMF to assess the impact of likely regulatory changes to access to finance.

With regard to that stress- testing exercise, current PSOJ President Paul Scott's comments on access to finance are highly relevant.

“Our economy needs investment in productivity to grow. However, we are keeping a considerable amount of domestic capital locked up because of regulatory requirements. What Jamaica is doing is the same as a person who keeps all their cash under their bed and hopes every morning it is still there. However, by leaving it there it will not grow. We are forcing insurance companies and other regulated stewards of our capital to keep the majority of their money in short-term instruments, and then we expect to still have domestic investment. This approach is simply not compatible with trying to get increased productivity, and we need to address this if we are serious about growth.”

As importantly, from the perspective of Shaw (and most Jamaicans), the IMF no longer regards the Jamaican dollar as overvalued (I agree), and therefore the issue of whether the IMF has had a policy of depreciation is now irrelevant.

The recent appreciation of the Jamaican dollar to below $127 to the US dollar is not only unsurprising (see my article on the foreign exchange rate about a year ago), but further evidence of increasing confidence in the success of Shaw's macroeconomic stabilisation policy.

Foreign direct investment is now a multiple of the current account deficit, meaning that we have a balance of payments surplus in the sense that non-borrowed reserves are increasing as a proportion of total reserves. This incidentally means the Bank of Jamaica will also continue to redeem its US borrowing, making the local market even more liquid in US dollars.


The editorial adds that “the Brian Wynter-led Bank of Jamaica has just been shortlisted for Capital Finance International's award for Best Central Bank Governance in the region”. Based on his performance in maintaining domestic financial stability since the global financial crisis in 2008, under some extremely trying circumstances including two debt exchanges, in my view, the Governor undoubtedly deserves to win.

It is also worth noting that next year, with a decade under his watch, Wynter will become one of the more experienced central bank governors in the world, with knowledge, contacts and credibility with his international central banking and multilateral colleagues that it is impossible to build up overnight.

As his international counterparts who went through the global financial crisis continue to retire, this matters more and more, particularly in today's world of near unprecedented policy uncertainty.

In summary, it is no coincidence that IMF chief Christine Lagarde is “making it Jamaica again”, to use an old tourism catchphrase, as we are now described as the shining star of economic reform in the Caribbean by many international observers. Indeed, some international bond traders believe we will become investment grade if we keep this up — an incredible turnaround after decades of near insolvency.

We should give Ms Lagarde a warm welcome when she arrives next week, and ask for her assistance in the “marathon” (to use her own words from her last visit) turnaround of the Jamaican economy. We will have more to say on how the IMF can help “Put Jamaica first” in future articles.