Friday, November 16, 2012

Understanding the effect of an IMF agreement

IN recent months, there has been significant attention placed on the need for Jamaica to have an IMF agreement in place and its timing.

Most persons have correctly stated that it is critical for Jamaica to have an IMF agreement in place, and even more so because of the speculative effect on the US dollar, that it is essential that an IMF agreement be in place as soon as possible.

I also agree that we need an IMF agreement, as quickly as possible, so as to bring greater certainty and confidence to the markets. However, I have always maintained that it is even more important that we balance the need to have an agreement in place with ensuring that we have an agreement that will assist in the "real" development of

the country.

And I say this against the background of the last agreement, which I, along with Ralston, were the first calling for an agreement (with much criticism), but after it came we were also the first to say that it would not have been successful (again to much criticism). I don't think that we have to discuss whether it was successful or not, for the result is there for all to see.

It is against this background that I say it is very important we have an agreement that will speak to the development of the country, and not one which, like the last one, projected oil imports would move from 14 per cent to 14.5 per cent of GDP over the period of the agreement. We must have an agreement in place, that will, as the PM has said, balance people's lives while balancing the books. Because the reason for governance is not to just balance books but to ensure that the standard of living of Jamaicans improve.

With that said, however, this does not mean that timing is not important, as uncertainty surrounding the timing of an agreement will also cause much hardship on the people of Jamaica.

Uncertainty will no doubt lead to higher interest rates and inflation, primarily as a result of the depreciation of the Jamaican dollar. The timing must therefore be aligned with the level of the NIR, and the conditions we agree to.

I have always maintained that while it is certainly the most desirable state to have an agreement in place before the end of 2012, it is not necessary to bring back confidence and certainty to the market.

This is so because investors do not emphasise the current conditions in a market, as much as the future conditions. And in fact, the current condition is assessed in order to predict the future. That is because the nature of an investment is that you make a return in the future not the current.

Unless of course you invest in a Ponzi scheme. Therefore, while many are still arguing about the need to have an agreement in place now, the truth is that the holders of money have long gone passed that period and is now looking at the effects on next year. In fact I think that most investors would have already dismissed the notion that an IMF agreement is coming by the end of 2012, and would have positioned their portfolios accordingly.

What is important, in order to remove the uncertainty, and bring back confidence in the market, is communication around the timing of an IMF agreement. This also must be very transparent and said with a certain degree of certainty.

It is also very important that the agreement be in place before the NIR reach critical levels. My own view is that much of the demand for US dollar is speculative, and not based on immediate demand for business purposes. However, this is to be expected as businesses, and individuals, will seek to improve their financial position and guard against foreign exchange losses, which can have a very debilitating effect on a business or person.

It therefore is a waste of money to be running ads that seek to encourage persons not to speculate on currency else they could end up losing. This is a liberalised market economy, where money is an investment like equities or bonds.

So if an investor sees that they can make money betting on money, then let them take the risk. If they get burnt then it is just like any other investment. What will ultimately discourage persons from speculating on money is when the risk of the investment opportunity is too high for the expected return.

In terms of how much money we can expect to get from an agreement, I believe that Shaw is correct that in the ordinary course of an agreement it will be US$400 million. This is because the IMF lends to countries on a quota arrangement and the last agreement had used up our quota, as far as I remember, to the tune of the US$1.2 billion. It therefore is logical to assume that under the rules, we would only be entitled to an additional US$400 million.

However, I don't see this as a big problem. The fact is that the real immediate challenge the government faces is the fiscal account, and therefore what the government needs is budgetary support. If you cast your minds back to the last IMF agreement, in addition to the IMF loan, an additional US$1.2 billion was supposed to come in from multilaterals, which primarily would be used for budgetary support. You will also remember that in order to have access to those funds it was necessary to have an IMF agreement in place.

This is the real value of an IMF agreement, not necessarily the IMF money. And this is why the BOJ governor has indicated that the US$800 million we received from the IMF is still sitting there, as we never needed to draw down on it for balance of payments (BOP) support, which is what it was available for, as we had a strong NIR.

The declining NIR means that unless we see remittances and earnings increase or imports decrease relative to earnings; or investment funds coming in as a result of confidence being restored, then we will need to draw down on the IMF funds. If we get to that point, then we will see even further declines in the economy. An IMF agreement will lead to investment flows coming in.

Let us be very clear, however, that an IMF agreement will not solve our current economic predicament, particularly if the policy focus is similar to the last agreement. The only way to sustainably solve our economic problem is to recognise that our major challenges are the BOP, and in particular energy and food costs, and law and order. Which if both are addressed properly can add over $100 billion to the economy, with minimal pain, outside of a cultural shift, which will also see increased disposable incomes for Jamaicans.


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