NWC loan laudable but puzzling at the same time

Sunday, December 18, 2011

The US$115-million loan pact just signed between the National Water Commission (NWC) and Scotiabank has the appearance of being a two-edged sword.

On one hand, the objective of the loan cannot be disputed. The money will fund the much-needed second phase of the Water Supply Improvement Project.

When that phase is completed, it is projected that the much too frequent water lock-offs in parts of the Corporate Area and St Catherine — the geographical area with the largest proportion of the Jamaican population — will be a thing of the past.

On the other hand, the loan appears to be a contradiction of the Government's external debt management policy, which is to replace loans at commercial rates with much less expensive money from multilateral financial institutions like the World Bank and bilateral donors such as China.

We are curious because just a week before, the Inter-American Development Bank provided a loan of over $130 million to the NWC at 1.24 per cent interest over 20 years with a grace period of 5 1/2 years. The loan from Scotiabank is at 5.8 per cent interest over seven years with a grace period of 2 1/2 years. The up-front fees are what allow the grace period and make the real interest much higher.

Some clarification is needed from the finance minister, because it was our impression that funds could have been sourced from less expensive sources.

We are still dealing with a debt burden that inspired the Jamaica Debt Exchange. The debt/GDP ratio is well over 100 per cent and debt servicing requires half of recurrent expenditure. The accepted empirically based wisdom in the economics profession is that when a country's debt/GDP ratio is over 90 per cent the country cannot grow itself out of debt and must restructure its debt portfolio.

Has Mr Shaw abandoned his evangelical crusade to wean Jamaica off its addiction to borrowing, or is it that cheaper money has dried up, possibly to await a new pact with the International Monetary Fund (IMF)?

All previous administrations are responsible for, in fact guilty of, accumulating our enormous debt, starting with the 1970s People's National Party (PNP) Government which borrowed commercial bank money to stimulate the economy savaged by the first oil crisis that tripled Jamaica's oil import bill in one year.

Far more egregious was the Jamaica Labour Party administration's doubling of the external debt in the first two years of the 1980s to generate ephemeral debt-funded economic growth.

The PNP Government of the 1990s opted to continue the binge of foreign borrowing by raising money on the international capital markets because of its refusal to abide by the stringent conditionalities attached to loans from development financing institutions.

Fiscal policy is a collective responsibility of central government and all government-owned entities. This loan undermines any prospect of the kind of fiscal policy which the country must have and which is required by the IMF.

Every time any government of Jamaica borrows money it is digging the country deeper into the debt trap. There could be a perfectly good explanation for the terms of this US$115 million, but the country must be told.

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Water woes to affect sections of St Catherine and the Corporate Area

NWC loan laudable but puzzling at the same time