COUNTRY FOCUS: JAMAICA
Despite huge strides in fixing the economy, the country still suffers from slow growth and chronic crime
BY LUCIEN CHAUVIN
Six years ago Jamaica was struggling to pay its bills. Its economy had stalled, inflation approached 10% and the unemployment rate topped 15%. Just as worrisome, it had the distinction of being among the world’s five most indebted countries, owing $15.2 billion, equivalent to roughly 150% of its GDP.
Today the Caribbean nation bears little resemblance to its former self. The economy is growing, inflation has been tamed and unemployment has sunk to a 10-year low. And after some harsh belt-tightening, Jamaica’s debt load is shrinking with the government posting a budget surplus for the past six years. As if in recognition of this reversal of fortune, the Jamaica Stock Exchange has enjoyed a sustained rally, making it among the best performers in the world.
The turnaround can be traced to the 2013 standby arrangement Jamaica negotiated with the International Monetary Fund (IMF). In exchange for a $932 million loan and a subsequent $1.6 billion credit in 2016, the IMF imposed strict requirements, such as lowering public spending, paying down debt and reforming the tax system.
Equally important to the economic advances has been a general consensus among Jamaicans that the reforms are needed. The center-left Jamaican Labor Party, which defeated the People’s National Party in 2016, continued the economic reforms. And the austerity measures have not provoked the kind of violent protests that similar programs have had elsewhere in Latin America.
Patricia Krause, chief economist for Latin America at Coface, the credit insurance subsidiary of France’s Natixis, says a commitment from political parties and Jamaicans in general has been critical to the success.
“They have important strengths as they exit the IMF program but need to be careful not to allow the desire to boost growth tempt them to loosen fiscal restraintâ€
Tiffany Grosvenor-Drakes, CIBC FirstCaribbean International Bank
“It helps that Jamaica is a small country, but they avoided politicization of the reforms and the population understood that change was required and went along. This was not the case in Argentina or Ecuador, where IMF programs were also adopted,†she says.
Still, Jamaica is hardly out of the woods. Despite sweeping reforms, S&P Global expects the economy to grow just 1.5% this year, unchanged form 2018. What’s more, violent crime remains a chronic problem. Jamaica has the third highest murder rate in the world after El Salvador and Venezuela. This not only hurts its image as a vacation get-away, but studies show that high crime rates raise the cost of doing business and affect economic growth.
Even though the standby arrangement with the IMF expired in November, few see the government wavering from its commitment to the broad outline of the agreement, provided it avoids the temptation to ignite economic growth by relaxing controls on spending
“They have important strengths as they exit the IMF program but need to be careful not to allow the desire to boost growth tempt them to loosen fiscal restraint,†says Tiffany Grosvenor-Drakes, an economist at CIBC FirstCaribbean International Bank. “They need to maintain fiscal discipline and address the structural challenges that constrain growthâ€
Finance Minister Nigel Clarke says that’s exactly what the government is doing. “Jamaica’s reduction of its debt from almost 145% of GDP to 95% of GDP in six and a half years, without debt write-offs and without debt forgiveness, does not have much precedence. In pursuing debt reduction, we have transformed our economy and achieved an economic stability Jamaica has not had in decades,†he says.
Those improvements have come with sacrifices, including caps on government spending, a reduction in the size of the state, with 38 agencies having been closed or merged with others, and a four-year agreement reached in 2018 with public sector employees to control wages and benefits. S&P forecasts the debt ratio to fall to 76% in 2021. The target is 60% by 2026.
The government is starting to implement a series of additional changes to guarantee a long-term commitment to fiscal reform. The administration of Prime Minister Andrew Holness has submitted legislation to create a fiscal council that Clarke says should be in place by April 2020. The autonomous council is charged with ensuring Jamaica meets the target of a 60% debt-GDP ratio by 2026.
The finance ministry, together with the World Bank and other international agencies, also has been working on a new framework, the National Catastrophic Disaster Reserve Fund, to set aside resources for disaster preparation and response. The IMF had recommended such an initiative given the island nation’s vulnerability to tropical storms, including hurricanes.
In 1988, Hurricane Gilbert is estimated to have caused some $3 billion in damage and set back the Jamaican economy for years. Even in the absence of such major storms, annual flooding and coastal erosion pose serious problems for tourism and transportation infrastructure.
“The natural disaster contingency fund sets money aside that is intended to be tapped only in the event of a natural disaster. They are creating resilience, which is important,†says Grosvenor-Drakes of CIBC FirstCaribbean.
The government is also taking steps to improve the business climate and attract investment.
Luckily, tourism, the economic mainstay, continues to grow, with stay-over arrivals – tourists who sleep on the island as opposed to cruise ship arrivals – up 10.9% between January and June. Jamaica had 4.3 million tourist arrivals in 2018, nearly double the country’s population. The industry generated $2 billion in revenue in the first six months of this year, according to the Tourism Ministry.
At the same time, the country has attracted new investment to the mining sector, with alumina production up 12.6% and bauxite up 18.5% through the first half of the year.
Elsewhere, the government has its work cut out. Jamaica ranks 75 out of 190 countries in the World Bank’s 2019 Doing Business report. It ranks highest in category of starting a business but falls way down the list when it comes to trade, registering property, enforcing contracts and paying taxes.
“They are working to improve the business climate, making it easier to set up a business. It has gotten better, but they have to continue with tax reform and making it easier for small and medium-size businesses,†says Sean Newman, a senior portfolio manager at Atlanta-based Invesco.
Coface’s Krause says the government needs to improve regulations to guarantee contract enforcement and eliminate red tape to make trade easier. “Low ratings in points like enforcing contracts and trade across borders affect FDI (foreign direct investment). The cost of exporting and importing is high for an open economy,†she says.
As for crime, the government completed a security audit in June, and the Tourism Ministry has been implementing a new strategy, working with hotel and tourism operators, and appointing a team to implement measures to ensure that crimes doesn’t creep into beach resorts and other vacation spots.
More globally, Prime Minister Holness and principal opposition leader, Peter Phillips, have been talking to develop an anti-crime strategy both parties agree on. They met in October to discuss an approach, but a strategy has yet to emerge.
