Sunday, June 08, 2003

Jamaica’s Debt Dilemma

The main crisis facing Jamaica today is the stranglehold of the public debt. The debt ballooned from $45.8 Billion in 1991 to its present level of over $601 Billion at March 31, 2003 and now approximates 140% of GDP at current prices. At this date, the external debt was $235 Billion and the internal debt was $366 Billion or 39.1% and 60.9% respectively. The massive debt stock has been the primary cause of our economic woes, resulting in a reduced standard of living and Jamaica’s increased global uncompetitiveness. The 2003/04 budget projects that debt servicing will be $169.5 Billion or 64.8% of expenditure, up from $152 Billion and 63.6% in 2002/03. The trend has been for debt servicing to devour a greater share of the budget with each new fiscal year. It is evident that if this continues there will be a consistent reduction in the money available for government spending, which will have devastating consequences for the country.

The 2003/04 budget expects to amortize $90 Billion and add $116 Billion in debt. In 2002/03 new debt of $122 Billion was added and a similar $90 Billion amortized. This is definitely not the desired direction as this alone will add another $26 Billion in debt this year. Another consideration is the US$ denominated debt, which totaled US$5.4 Billion on March 31, 2003 when an exchange rate of 56.24 was used. Today the exchange rate is 60, adding another $20 Billion in debt. The debt increase from these two factors alone will be some $46 Billion in this fiscal year.

Assuming stability in all other factors and dead on estimates, we will achieve a debt stock of $647 Billion by March 31, 2004, or a 7.65% growth rate. The outturn will most likely be an additional $11 Billion in debt servicing in 2004 (if amortized over 10 years) before any other adjustments to expenditures. In short we must of necessity achieve growth in order to satisfy our expenditure needs next year or face massive cutbacks as it is not possible to excavate anymore tax revenues from the existing GDP levels. Growth can only come from private sector investments and an improvement of the trade deficit. Growth will of course depend on the comparative trade off between productive risky investments versus the paper non-productive paper investments we have become so well acquainted with. Productive investments will only be realized if interest rates are low enough to encourage risk at the expense of safe investments.

Of the total internal debt $189 Billion is at variable interest rates. The implication is that the recent increase in interest rates has also increased debt servicing requirements and we may well exceed the 64.8% of budget allocated for this purpose. For every 1% increase in interest rates an additional $1.89 Billion per annum is needed for debt servicing and every $1 deterioration in the exchange rate adds $5.4 Billion in debt. This means that a 35 cents movement in the exchange rate equates to a 1% movement in interest rate on the internal debt, based on our present debt structure. The government therefore finds itself delicately juggling between exchange and interest rate movements to minimize the effect.

This is the dilemma of our debt crisis. The choices we face are:
1. Do we reduce interest rates (and at what pace) causing greater devaluation, inflationary pressures and significant increases in the debt, or
2. Do we maintain a high interest rate policy to stabilize our exchange rate and further erode our productive base?

The debt maturity profile (Table 2) shows that within the next 1 – 5 years we will be faced with significant amortizations, requiring high levels of revenue. It is important to note that the majority of the US$ debt amortization will not take place until 10 years time. This means a high risk exposure to movements in the exchange rate for the next 10 years. The debt’s voracious appetite for cash over the next 5 years necessitates consistent and increased future cash inflows. This can only come from new investments, again requiring lower interest rates. It is evident that some amount of debt restructuring must be done.

The powers that be need to undertake detailed projections and properly examine the financial and social consequences. Nothing short of this type of analysis will suffice. The fact is that if we do not immediately address this problem we will face dire consequences. Our focus must be on our long term economic sustainability. Any chosen highway will carry some amount of hardship. There is no painless option and we must consider what is less painful in the long run, that is the lesser of the evils. Leadership must have the courage to look beyond the next one to five years. This is going to require serious long term planning and a factual realization of what must be done.

It is not as important where we are today as the direction we are moving in. The government needs to undertake a detailed long term financial plan for the next five to ten years and provide the details to the country in order to restore much needed confidence. The plan needs to:
1. Be credible and bought into by all. The government must include all sectors to be a part of the review process;
2. Include a plan to retire more debt each year than is added. If we continue adding greater amounts of debt than is amortized then we will be in a continuously worsening situation. Our debt will no doubt grow over the next year but we must have a plan to reverse this trend in the following years; and
3. Include the retiring of US$ debt at a faster pace to neutralize the effect of exchange rate movements when interest rates fall. In other words a restructuring of our total debt stock.

We have to accept the fact that growth can only be accompanied by productive investments, which need lower interest rates as an impetus. It will always be a more feasible option to go for lower interest rates while making a conscious effort to reduce our foreign currency exposure through overseas debt reduction and import substitution.

A country cannot close down as companies can and will always survive no matter the extent of the suffering. Many have always commented on the potential that we have as a country to move forward and I too believe so. It is time to turn that potential into reality through the involvement of state, private sector and the public at large in the pursuit of a unified objective, as we are all in this thing together.

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