Main speaker Colin Bullock (senior lecturer, Department of Economics - UWI, Mona). At right is Professor Gavin Chen during the UTech Chancellor's Forum at Terra Nova All-Suite Hotel on Thursday, November 5. - Colin Hamilton/Freelance Photographer

The following is from a presentation made at the University of Technology's Chancellor's Forum on November 5.

I am reminded of a simpler and gentler place in time. "Forty shilling words" were words that were not spoken in polite conversation, but spoken when one is offended. "Ah gwine tell him two 'forty-shilling words' and pay de judge." In later days we also did not speak openly about dollarisation because it was symptomatic of policy failure, an inability to manage one's own currency and having to adopt that of another country. The presentation is largely about forbidden words and policy failure.

From the 1970s critique of the International Monetary Fund (IMF), 'D' words became 'bad words'. We spoke then of IMF programmes being associated with devaluation, deficit reduction, deflation and debt. With all the tremendous respect due to crime in this regard, debt (public debt) is now Jamaica's major macroeconomic constraint. Over the past decade, the ratio of public debt to GDP has significantly exceeded 100 per cent and debt service has exceeded 50 per cent of public expenditure, leaving very little for essential expenditure on schools, roads , hospitals, national security and the judicial system.

Jamaica's fiscal and debt indicators were severely worsened by the financial crisis of the mid 1990s. The ratio of public debt to GDP increased from 80 per cent to over 140 per cent and since then has been coming down only very slowly. Interest expenditure and wages increased sharply, leaving limited room for other recurrent expenditure. In the presence of almost inevitable budget overruns, recurrent expenditure has been accommodated at the expense of already inadequate Government capital expenditure, effectively undermining economic growth.

From the late 1900s, Jamaica has been speaking bravely about adjustment from under its mountain of national debt. It has been doing this by running huge primary surpluses (the fiscal balance net of expenditure on interest) exceeding 10 per cent in some years and going as high as 13 per cent. These huge primary surpluses are what would have constrained the essential expenditure on social and economic infrastructure.

Jamaica has been adjusting for over a decade and yet we do not appear to have eased the burden of debt. In the present environment of international crisis, it certainly appears to have got worse. Like 'the Red Queen' in Lewis Carrol's Alice in Wonderland, we are 'running faster and faster, just to keep standing still'. In reality, the double-digit primary surpluses have not always been sustained and have declined markedly in the past few years.

The multilateral financial institutions have been quietly sceptical about Jamaica's capacity to sustain the effort to completion. Questions are raised about whether we are suffering from adjustment fatigue or whether there is political courage to undertake the necessary change.

Should Jamaica default?

This scepticism elicits another 'D' word. This used to be whispered and spoken about in clandestine tones, like 'forty-shilling words', never for open conversation in polite society. Default? What if Jamaica defaults? Should Jamaica default?

Default, like dollarisation, is the price of economic policy failure. It is the path explicitly not chosen by both sides of the political divide. It is a path not chosen because of the likelihood of dire international financial consequences and the very significant exposure of the domestic financial system to Government of Jamaica debt. In this regard, the choice to avoid default is sound.

So we avoid the 'D' word and use some 'R' words instead; 'refinancing'and 'restructuring'. There have been proposals for Government to re-negotiate the terms on which debt is held. This could involve longer maturities to ease immediate servicing costs. Unfortunately, Standard and Poor's sees these 'R' words as 'D-lite' or 'default lite, a distressed debt transaction. In what they see as increasingly limited degrees of freedom for adjustment, they have downgraded Jamaica's debt closer to a default rating.

Jamaica's debt crisis and other structural deficiencies predated the global recession. These other structural deficiencies have include: weak growth, a narrow productive structure, external dependence, periodic foreign exchange problems, vulnerability to external shocks, inflexible fiscal policy and having to use monetary policy to protect foreign exchange system.

Global recession only exposed these vulnerabilities. In that context, the exposure of the domestic financial system to "toxic" North American financial instruments, required the pledging of US$300 million (30 per cent) of official reserves as a line of credit to help domestic financial institutions meet their external obligations. There was a sharp decline in foreign exchange inflows from mining, tourism, remittances and direct foreign investment. Beyond the decline in official foreign reserves to stabilise the financial system, there were indications of a possibility of a further decline in official reserves by US$800 million .

The exchange rate depreciated by about 20 per cent in the second-half of 2009/10. In the absence of any fiscal policy response, the use of monetary policy to purchase stability for the foreign exchange market resulted in sharp increases in interest rates.

economic stagnation

This elicited protest from the private sector as the increase in interest rates was seen as facilitating the continuation of economic stagnation. By June 2009, Jamaica had experienced six consecutive quarters of negative growth, an indication of deep recession. In the year to September 2009, some 30,000 jobs were lost.

The increased interest rates added to government debt-servicing costs. In tandem with overoptimistic revenue forecasts and unsettled public sector wage issues, higher debt-servicing costs contributed to a significant increase in the fiscal deficit and major revisions were tabled in September 2010.

The continuation of fiscal slippage eventually led Jamaica back to negotiating a borrowing agreement with the IMF. While Jamaica had not initially chosen to do this, their reliance on financing from other multilaterals, along with persistent deviation from budget, would have created a need from these other multilateral financial institutions to be assured that Jamaica would be able to service its new and already significant public debt.

Talk of the "return to the IMF" has created an environment of public concern, sometimes bordering on hysteria. What is the IMF going to do to us? What conditionalities will it impose? There have been some assurances about "the new IMF". It will lend more money, and its loans will be more frontloaded and it will be less dogmatic on exchange rates and interest rates. Despite this, the IMF has the awesome responsibility to guarantee that an already heavily indebted Jamaica can take on new debt and repay. This is not an IMF problem. It is a Jamaican problem.

Given its high level of indebtedness, Jamaica has extremely limited degrees of policy freedom and an absolute absence of painless choices. Jamaica is faced with the policy challenge of eliminating its fiscal deficit while simultaneously reallocating resources in a way that facilitates economic recovery to moderate to strong economic growth. This recovery is absolutely necessary if Jamaica is to have any chance of servicing its existing and new debt.

The policy challenge to adjust and grow simultaneously has implications for restructuring and redefining Government. Much of our long night of adjustment has been spent trying to do all the same things with much less than the money required. This leads to inefficiency and lays the basis for budget overruns. At the same time consideration has to be given to costs of separation, and the social and economic costs of the economy's incapacity to reabsorb displaced workers.

In contemplating 'downsising' it is to be written in bold that big Government does not ensure development and is not or even necessarily friendly to 'poor people'. Big Government is in fact susceptible to capture by powerful interest groups and by bureaucrats. Relative to incentives and direct governmental support for specific areas of production, we must consider the immense social and economic dividend possible from public safety, a more functional and entrepreneurial educational system and had adequate primary and secondary health care?

serious problem

Jamaica has been running on the adjustment treadmill for a long time, but even now is being dragged by debt closer to "D" edge. Jamaica has been running too far behind the problem and arguably took too long to identify its seriousness. The prime minister, in his contribution to the supplementary estimates debate tried to outline the extreme seriousness of our circumstance, but we have not yet agreed (with the IMF) an appropriate policy response. Even now a sense of crisis has not fully come home to us. Jamaica has been running too long and even now may be running out of time.

We need to make a quantum leap in policy to catch and grow out of the debt problem and to avoid falling into the abyss of the 'D' word. In the face of unavoidable social costs in an already depressed economy, this will require a significant investment of political courage.

We will need to tax smarter, spend more efficiently, act faster and more decisively, communicate more openly, share the burden as equitably as possible and try to protect the most vulnerable in society.

I hope the quality of an IMF agreement will be a first step in this direction.

Colin Bullock is lecturer in the Department of Economics, UWI, Mona. Feedback may be sent to Colbul3@gmail.com or columns@gleanerjm.com.