In the two years since the Bruce Golding-led Jamaica Labour Party took the reins of government, Jamaica's economic fundamentals have gone awry.

The signal decline in the economic fortunes of the broad majority of the population was the more than 25 per cent devaluation of the Jamaican dollar over the period. As a result, wages, savings and other assets, such as houses, are worth less in real terms now than two years ago, even as the public is confronted by a declining economy, rising job losses, a wage freeze in the public sector and bleak economic prospects for the immediate future.

The Golding administration came to office on an election platform filled with promises to expand government spending on free tuition for secondary education, the abolition of hospital fees and massive pay increases for public sector workers, among other things.

Public debt

In the context of the persistent fiscal deficit, large and rapidly increasing public debt and burdensome debt service costs to the national budget, it was always going to be a virtually impossible task to deliver on these promises.

But the administration was determined to follow through despite these constraints and the gathering storm clouds of the downturn in the world economy.

Thus, in its first Budget in 2008 the JLP abolished tuition and hospital fees and proceeded to negotiate huge wage increases starting with the teachers, rather than tighten spending in preparation for turbulent times.

The administration clearly misread the economic signs, as did many governments and business leaders. However, within six months it was obvious that the world was sliding into a severe recession.

At first, Prime Minister Golding and his team, unlike most other governments, were in denial, expressing the view that the impact on Jamaica would be minimal. Jamaica's macroeconomic situation was sound, they said, and would not be terribly affected by what was happening in the United States and other major economies.

Both the finance and tourism ministers even suggested that the country could actually benefit by, among other things, exploiting its nearness to the US market to increase its market share of American tourists.

As the downturn escalated, the Government continued to waste time, being slow to respond - a point now confirmed by Golding.

The administration waited until as late as December 2008 to publicly acknowledge the extent of the possible fallout in Jamaica.

By that time the damage was being done, as the local foreign exchange market was already drifting with uncertainty spreading about the rising inflation and worsening fiscal numbers.

The reaction of the Bank of Jamaica (BOJ) was to hike interest rates to halt the free fall of the local currency, a move that annoyed the private sector as they had to face higher borrowing costs on top of contracting consumer demand.

Private capital markets

Also a big factor behind the pressure on the exchange rate was the uncertainty flowing from the loss of access to private capital markets, which was the first hit suffered by Jamaica as the credit crunch spread from the US to global markets.

After a slow reaction, initiatives which had begun to raise new loans from multilateral sources were speeded up to meet upcoming debt payments and to shore up the Bank of Jamaica's foreign reserves, which were being depleted by speculative demand for foreign exchange.

When 2009 began, the financial blow was quickly followed by the second and more devastating blow to the real economy. This came by way of announcements of the closure of three of the island's four alumina plants, which soon sent bauxite production and foreign exchange inflows declining by well over 50 per cent.

Still, the vacillation continued. First, the Government denied there was a need to go to the International Monetary Fund (IMF) for loans to help fill the hole in the country's foreign exchange caused by the loss of access to the foreign, private capital markets, the drop of more than 15 per cent in remittances, falling tourism inflows and the collapse of bauxite earnings.

Jamaica did not have a balance of payments problem was Golding's response to queries about a possible return to borrowing from the IMF. Then, as the decline in the local economy deepened, there was a change in posture. Jamaica was conducting exploratory talks with the IMF after all.

Yet, the Budget for 2009-2010 did not reflect the worsening position.

The contracting economy and lower oil prices have lessened inflation pressures in recent months. More important, they have also led to a slide in imports thereby lessening the demand for foreign exchange.

Stability

The expected US$1.2 billion of IMF resources have also brought immediate stability to the foreign exchange market.

As a consequence, the BOJ has reduced interest rates three times since mid-July. The prospects for short-term recovery of bauxite, remittances and other pillars of the Jamaican economy, though, are dim as the US and other major trading partners are not likely to see a quick economic turnaround.

In addition, the Government cannot postpone budgets cuts any longer if it is to reach an agreement with the IMF for the loan, which is crucial to maintaining confidence and avoiding further downgrades of Jamaica's credit rating, about which it has been warned.

Such an eventuality would put the country at great risk of default or, at least, returning it to cripplingly high interest rates that would bring steeper decline in the economy.

The administration must also resist public sector wage demands that cannot be accommodated, fulfil commitments to divest huge loss-making entities and put forward credible proposals for getting the economy on a growth path.

So far, the JLP has been enjoying a generous honeymoon but with economic hardship rising and the number of people below the poverty line going up, public patience could soon begin to wane.

It does not help that remittances, the most important social safety in recent times, are likely to keep dropping as US and UK unemployment are projected to stay high for an extended period.