Lessons from Jamaica for small countries with big debts

By Nigel Clarke

 Reform of monetary policy and iron fiscal discipline have been the keys to recovery.

Jamaica, a small island-nation better known for its white sand beaches, reggae music and sprinters, holds some lessons for the world at a time of growing concerns about rising debt and increased political polarization. It is one of only a few countries that have successfully cut public debt by the equivalent of half its gross domestic product (GDP) in a short timeframe without handouts, debt relief or bilateral debt support from “friends”.

My country has a robust and competitive, liberal democratic tradition. Not only are we ranked 6th in the world for press freedoms, we have been able to continue transforming our economy through competing political administrations and electoral cycles.

This maturity is relatively new. Jamaica has spent 32 of its 57 independent years in successive International Monetary Fund (IMF) “adjustment programs” that were mostly unsuccessful. Over much of this period, policy implementation was poor, with results to match. Tribal politics and policy inconsistency helped drive economic uncertainty.

In the past 6 years, Jamaica has changed its course, defying expectations and providing an example for other emerging market countries that find themselves heavily in debt.

How did we get here? A catastrophic banking crisis in the mid-1990s coupled with the failure of several large state-owned enterprises and lax policy choices plunged Jamaica into a debt spiral. By March 2009, debt was 124 percent of GDP and interest costs consumed 50.2 percent of tax revenues. The global financial crisis compounded an already impossible economic situation. Bauxite earnings evaporated, tourism earnings nosedived and 9 percent of private sector jobs were lost.

In 2010, Jamaica again turned to the IMF. However, despite a local debt exchange, fiscal restraint could not be delivered and the agreement with the fund collapsed.

By 2013, Jamaica’s debt had reached approximately 147 percent of GDP, making Jamaica one of the most indebted countries in the world. Another IMF agreement was brokered. However, there was deep scepticism of Jamaica’s commitment to the programme goals, so other international partners would provide only limited financing. Jamaica was virtually on its own.

This was a wake-up call. Our adjustment would have to be funded internally, which meant another local debt exchange and we had to rewrite our budget to produce a primary surplus of 7.5 percent of GDP, the highest in the world.

With most of the debt held by investors, rather than governments or multilateral organisations, and any outright default deemed unconstitutional, once again, only local debt held by local entities could be restructured.

Waning public trust was replaced with anger. Enough was enough. Civil society demanded fidelity to the reform program in return for enduring new sacrifices.

Government, business, unions, media, academia and the political opposition embraced the reforms. Building on a pre-existing social partnership foundation, an economic program oversight committee (EPOC) was formed with all stakeholders – a first in the world – to closely monitor every target and communicate the progress to the broader public. What began as an “IMF program” became “Jamaica’s program” with IMF support.

The program has now spanned two opposing political administrations and delivered strong results. We have had 6 consecutive years of primary surpluses in excess of 7 percent. Reforms of tax and monetary policy, the financial sector and the public sector, across administrations, have restored government finances and entrenched macroeconomic stability.

Debt is projected to fall to 96 percent of GDP by March 2019 for the first time in nearly 2 decades. Inflation has been low and stable for 4 years. Unemployment has fallen from 16 percent in 2013 to 8.4 percent in 2018, the lowest ever in Jamaica’s history. The incidence of poverty has declined by 19 percent.

Reallocation of spending has allowed social spending to increase by 50 percent and for capital expenditure to double. In addition, central bank reserves have never been higher.

We are not out of the woods. Economic growth has been lower than expected. While the 2 percent GDP growth for the first half of 2018/19 is 4 times the average annual growth for the past 20 years, it is less than the 2.5 percent originally forecasted.

Structural reforms that will sustainably raise growth are required. Reducing the cost of doing business, combating crime and corruption, and boosting domestic industries that add value require more work.

As for debt, we are proud to be on track to achieve our target of 60 percent of GDP by March 2026.

A bill currently before parliament will make inflation targeting the cornerstone of monetary policy. We continue to strive for greater public sector efficiency and improved disaster resilience.

Amid a period of profound uncertainty, Jamaica’s experience offers an example to other small countries. Our unprecedented fiscal discipline, maintained through strong bipartisan leadership, citizen ownership of reforms and close civil society scrutiny of the commitments, is an example worth sharing with others looking to transform their economies.

Nigel Clarke is the current Minister of Finance and the Public Service of Jamaica.

Copyright The Financial Times Limited 2019. All rights reserved.