Jamaica's foreign-exchange system has been under pressure for the last several weeks, exacerbated by the international financial market crisis and its attendant effects on global economic activity.

Policy response have included foreign exchange loan support for beleaguered financial institutions, facilitation of inter bank credit, sharp tightening of monetary policy (in different tranches), announce-ments of financial support from multilateral financial institutions, announcement of initiatives to support productive sectors and assurances of Jamaica's capacity to weather the storm.

These policy responses appear to have overlooked some fundamental aspects of Jamaica's economic reality.

Recognition of these factors and a credible effort to address them will enhance Jamaica's capacity to effect stabilisation as a basis for sustainable economic growth.

Jamaica has a major public sector financial crisis that has been ongoing for the last several years.

Efforts at fiscal consolidation in the mid-1990s were reversed by the costs of financial sector crisis resolution, making Jamaica one of the most heavily indebted countries in the world. Debt-servicing costs make fiscal balance more difficult to achieve and fiscal deficits add to the public -debt stock.

After repeatedly missing targets, there is urgency for Jamaica to set and achieve targets towards elimination of its fiscal deficit and the consequent easing of the debt burden.

With Debt/GDP at 125 per cent, fiscal deficit/GDP approximating five per cent and debt service/public expenditure exceeding 50 per cent, Jamaica has limited options for managing its way out of this public financial crisis.

The stated medium-term focus has been on fiscal adjustment towards deficit elimination and easing the debt burden.

In the context of the burden of debt servicing, natural disasters and international economic fluctuations, this goal has been elusive.

This difficulty has encouraged companion and alternative proposals, such as 'growing out of debt' and debt 'reprofiling' - including lower interest rates and longer maturities, and with the support of multilateral financial institutions.

Growing out of debt might not be a feasible solution in the very short run.

With the extent of resource pre-emption for debt-serving, the Government might not be able to allocate significantly more to capital development.

To facilitate stronger growth, Government has to either increase the already challenged deficit and debt or sharply reprioritise within existing expenditure ceilings.

Non-debt expenditure has a very significant public emoluments component. Restructuring public sector expenditure is difficult, time-consuming and not without significant costs - (for example, costs of redundancy).

Growth is desirable, but is best achieved and sustained after the stabilisation battle has been won. Adding fiscal expansion to monetary contraction will only lead to sharper increases in interest rates.

Monetary policy, without fiscal policy support, is insufficient to the objectives of sustainable stabilisation.

The immediate impact of monetary tightening is increased interest rates that make private-sector credit more expensive, increase debt-service expenditure and undermine the attainability of fiscal targets.

With risk-based international interest rate differentials, capital inflows do not necessarily increase with sufficient volume to facilitate foreign exchange market stability.

Interest rate expectations might themselves not be independent of movement in interest rates.

Monetary contraction, accompanied by fiscal contraction, holds out a prospect for relatively stable interest rates.

It might be neither politically nor emotionally attractive in our straitened economic circumstances, but objectively, only fiscal consolidation and re-prioritisation can underwrite market stability with lower interest rates in the near term.

Multilateral financial institutions are not charitable organisations.

They really want to be helpful in facilitating socio-economic reform, stabilisation and growth.

They do not give away money and generally do not reschedule debt.

Like all lending institutions, they maintain a credit capacity profile of actual and potential debtors.

As in the case of private market creditors, this profile will be heavily influenced by fiscal balance and debt. For a country that has been sustaining fiscal deficits and debt, any continuation of financial assistance from multilateral financial institutions will demand an en-hanced capacity of the borrowing country to service its debt.

Fiscal consolidation and public-sector reform will be required. It is worthy of note that even US$1 billion from MFIs over the next three years represents only 16 per cent of external debt at March 2008.

The objective circumstance of Jamaica is fundamentally different from that of the United States, western Europe and Japan.

Much of the criticism of Jamaica's efforts to stabilise while "the rest of the world" is undertaking massive fiscal and monetary expansion, fails to recognise this difference. Jamaica already has a very significant deficit and debt problem and cannot sustain growth unless it is resolved.

Furthermore, the exchange of Jamaica-dollars for foreign ex-change takes place in a relatively thin market and the value of the Jamaican dollar has been under protracted pressure. It is also worthy of note that while the US, the eurozone, the United Kingdom and Japan issue currency that other countries are pleased to hold as their foreign reserves, the Jamaican dollar does not have that status.

The context and sequence of communication has to be as carefully managed as its content and style. On at least two occasions, statements of reassurance have been followed almost immediately by sharp monetary policy adjustments.

This creates a credibility gap that might undermine the effectiveness of what might otherwise have been an adequate policy response.

There has been a shortfall in fiscal revenue.

This has been offset by reported capital expenditure being below budget. In the context of the revenue shortfall, this begs clarification as to whether capital expenditure has been deliberately restrained by policy - for which government should take credit - or whether there have been delays in implementation or accounting. As painful as it might be, all aspects of non-debt expenditure need to be carefully scrutinised. Immediate savings should be taken where feasible.

At the same time, a process of more fundamental reform of structure, function and establishment should be initiated.

That economic circumstances are difficult only underlines the urgency of putting efficiency and revenue enhancing tax reform back on the agenda. This is a promising avenue of exploration for the mooted "social partnership".

By whatever means, there will not be a fundamental resolution of Jamaica's economic challenges until the weight of public debt and its servicing are reduced. Fiscal adjustment and reprioritisation, though difficult and emotionally unappealing, offers the best near term chance of easing the burden on monetary policy, capping and reducing interest rates, while lending credibility to foreign exchange market stabilisation. In all this, communication has to be carefully coordinated with a view to rebuilding market confidence.