Dr Paul Chen-Young, Contributor

Chen-Young

The Gleaner's editorial of October 28, 2008, 'Placing debt negotiation on the agenda', is most timely, especially during this extraordinary period of financial strain internationally.

It is an issue that Jamaica must now address since the economy faces potentially serious disruption from these international developments. A resolution to our debt problem will impact on the process of economic recovery in Jamaica.

The debt problem cannot be considered independently of other important related economic issues.

Economic growth

Jamaica could face an eventual backlash from an anaemic economy that could create conditions that might lead to major social instability. - File

Given the heavy debt burden inherited by the present Government and the current world financial crisis, the prospects for significant economic growth, say over five per cent per annum, seem extremely unlikely.

In the determination of economic growth, exports have a positive effect while the opposite is true for imports. Jamaica's trade gap is getting out of hand, with imports almost three times the value of exports. Compounding this pro-blem is the outflow of investment income, which becomes larger each year, especially from profits earned by the foreign-dominated financial sector. These two developments are a drag on economic growth.

Remittance flows are expected to slow down. Tourism and bauxite/alumina earnings are also likely to decline. These will impact adversely on economic growth and place strains on the Jamaican dollar.

The other components of econo-mic growth are investment, consumption and Government spending. The tourism sector is expected to receive substantial investments and will contribute to growth. But given the high import dependency of Jamaica with its widening trade gap, higher consumption is to be discouraged.

The heavy national debt burden limits the capability of Govern-ment to increase spending to stimulate growth. And continued depen-dence on borrowing, which is not translated into economic growth, will cause Jamaica to creep along its present low growth path without any significant improvement in living standards.

Given these developments, I am not optimistic about the prospect of Jamaica achieving any significant economic growth in the near future. Ameliorating the debt servicing burden would have favourable effects on growth. With nearly 60 cents from the annual budget being used for debt servicing, I support the call in the editorial that Jamaica needs meaningful - even unconventional and radical - debt restructuring.

Lower interest rates

Very poor countries have had to seek debt restructuring through the Paris Club, where major lenders come together and negotiate longer repayments at lower interest rates with realistic moratorium on principal repayments.

Jamaica would not qualify for such assistance. Nearly 50 per cent of the national debt, or about J$500 billion, is domestic debt, which has to be addressed locally. I suggest that Jamaica needs a domestic type Paris Club, where all of the major holders of local debt come together to renegotiate with Government longer terms at lower interest rates and with appropriate moratorium on principal repayments.

Any debt restructuring exercise must set a target by which interest rates should be reduced. For illustrative purposes, if the target savings in interest rate is five percentage points, which I believe is realistic, annual debt servicing could be reduced by about J$25 billion.

I would suggest that any agreement on debt restructuring should require explicit policy commitments by Government not to use the windfall annual savings for housekeeping expenditures and even to adhere to tight fiscal targets. Such targets should aim at having a less inflationary impact, which should lead to a more stable exchange rate, lower interest rates and investment.

Financial institutions

For any scheme of the type being suggested to work, some protection will have to be offered to note-holders of domestic debt to win their support. It will be a difficult task to have them take an interest rate cut. But if there is to be any debt restructuring that is unavoidable. The trade off, especially by financial institutions, is that they would be giving up some short- term returns to place the Jamaican economy on a stronger basis, which will benefit all in the long run.

Because debt restructuring is a very complex exercise that will reduce returns to entities and persons holding domestic debt, the negotiations will have to determine what would be appropriate mea-sures to deal with some of the ramifications.

One consideration would be to provide some type of exchange rate guarantee on the restructured debt. This would move Jamaica closer to a 'dollarised' economy, which has its advantages and disadvantages. However, on balance, I believe that this would bring about policies that should lead to greater stability that would encourage investment and growth.

Realistically, there will be strong and vociferous objection by holders of domestic debt to any major restructuring. These concerns will be genuine. It is therefore of critical national importance that the Government and the Opposition close ranks along with the leadership of concerned business groups and citizens organisations to arrive at a consensus with holders of domestic debt.

Legislative action

Jamaica needs statesmanship of the highest level to tackle this issue. The domestic debt is fully guaranteed by the Government of Jamaica. Legislative action for implementing a national debt restructuring programme to replace old debt instruments with new ones would have to be taken. Concomitant with such action should be legislative measures to bind the Government to explicit policy commitments.

The cause is urgent and Jamaica now needs a national united effort and support to address this problem. Otherwise, Jamaica could face an eventual backlash from an anaemic economy that could create conditions which might lead to major social problems and instability.

Jamaica cannot afford to wait any longer in dealing with this problem.

Dr Paul Chen-Young is an economist and investment banker. Feedback may be sent to columns@gleanerjm.com.