I have to applaud the government on their recent achievements. I call them achievements because, well, if you had a set of objectives and you got them- then you achieved, right? It doesn’t matter here and now whether they were the right goals to achieve.
This Government was swept into power during a Standby Arrangement (SBA) with the IMF, a stable exchange rate, low inflation and interest rates and modest economic growth that was similar to that achieved in the US. They idled for about a year, allowing that deal to expire. They then pursued an Extended Fund Facility (EFF) to give them a fresh four years. Well played! The gamble they made is that in Jamaica we are only concerned with the short term. Therefore, the ~40bn tax package would soon be forgotten when a fresh and more current reality/crisis emerges. Well played again!
There are many sides to this story- all of which I will eventually ventilate- but I want to spend some time talking about the difference between a Standby Arrangement and an Extended Fund Facility. They are not the same.
In 2009 the Jamaica Government (JLP) sought assistance from the IMF for Balance of Payment support. They wanted a SBA for U$1.2bn that would help plug a hole in the economy and allow for time to establish a platform for sustainable growth. This article brings back some fond memories of how Jamaican politicians can sometimes make tough but correct decisions.
How the SBA works is that the IMF makes funds available to us, based on the targets we agree to, ( to ensure they can get repaid) and then we are free to do what we feel is best. If we end up not wanting all the money- we don’t have to take it. However, if we want it, we just have to keep passing the economic tests and ‘unlocking’ more funds- kinda like a video game. The beauty of this, is that the IMF can’t tell us what to do. They can say to us- please ensure that you achieve stability in your exchange rate- then Jamaica does what it feels is best to achieve that.
Now, there were some points of diversion in the agreement. The facility was meant to last two years (2010 to 2012) and have an unlocking process along the way. Jamaica and the IMF agreed that to meet the next economic hurdle to unlock more funds a few things had to be in place:
- Tax Reform
- Pension Reform (so the Government stops carrying that bill forward- like a defined contribution plan)
- Public Sector Reform (reduce the size of the public sector and define a formula that will be used to determine the rate of wage increase based on the performance of the economy)
There was always energy reform- but the government had the LNG project in train- so that wasn’t a major show stopper.
The government was able to access U$800m from the total loan amount but did not implement the remaining three reforms that would have made the final U$400m available. Why not? This, this and this. You would be surprised at how destabilizing an activity of that magnitude is to a small country like ours. The now Government would have lambasted the then Opposition for being Enemies of the State in their attempt to derail the government.
The last I’ll say about the SBA is that it seemed to have been the right path for Jamaica. All the economic indicators from the 2011-12 financial year show that we were making great strides. We were not over though- we needed to solve those other elements, get the remaining U$400 and then start achieving Vision 2030.
Unfortunately, today’s blog is too long, but I would be doing a disservice if I didn’t talk about the EFF. I only recently realized the grand scheme of the Government. It makes me wonder if I live in the same country that did the gas riots- because this is something to protest about.
EFF has a longer duration than SBA and works similar to what Jamaica had in the 1990s under Michael Manley and PJ Patterson. This is where the IMF not only lends us the money but dictates how we spend it. This is called “Structural Reform” and is not a feature of SBA.
Therefore, when Min of Fin, Agent Peter Phillips said that he has no choice but to triple tax Jamaicans and raid the NHT- I now believe him. He has negotiated us into a deal that gives us few options for self-determination.
Watch the DVD Life+Debt if you want a quick review of the Structural Reforms of the 1990s. (Disclaimer: In the video below you will see a note about SBA in 1977- that isn’t the deal Manley put us in during the 1990s.)
Crying over Spilled Milk
Q. Did we have to reach this path?
Q. How could this have been avoided?
A. Implement Tax Reform, Pension Reform and Public Sector Reform in early 2012 and receive the U$400m draw down to maintain the positive effects of the programme that led to growth in 2011-12. (In some circles the shorter answer would have been to give the JLP a 2nd term.)
Q. Do we have other choices?
A. Not really. After this extensive delay we are now in a crisis. However, the reforms are still necessary- and perhaps even more so.
The rub? The PNP continues to demonstrate their expertise at negotiating borrowing agreements for Jamaica. Let us learn from history.