Three Point Four Per Cent: The Year Jamaica’s Economy Hit Rock Bottom and Struck a Deal

• Economy contracts 3.4 per cent — worst performance in a generation
• Bank of Jamaica Governor Latibeaudiere resigns amid loan scandal in October
• Brian Wynter takes office December 1 into the eye of the fiscal storm
• IMF and Jamaica reach staff-level agreement on US$1.27 billion programme
• Jamaica Debt Exchange designed to cut bond coupons by an average 650 basis points
• Public debt reaches 135 per cent of GDP as the year closes

It was not how anyone had expected the year to end. On the morning of October 30, 2009, the Bank of Jamaica’s board formally accepted the resignation of Governor Derick Latibeaudiere — the institution’s longest-serving governor, a man who had navigated the FINSAC financial crisis of the late 1990s and helped steer Jamaica’s monetary policy through the turbulence of the early 2000s. The circumstances of his departure were neither heroic nor tidy. A loan of J$51 million, taken from the central bank he governed for residential construction, had been found to lack proper collateral. The scandal had simmered since August 2008. It could not simmer indefinitely.

The timing was exquisite in its cruelty. Jamaica’s economy was contracting at its fastest rate in a generation. The fiscal deficit had mushroomed. The government was in the middle of the most consequential negotiation with the International Monetary Fund in decades. And the Bank of Jamaica — the institution on which the IMF programme would depend for balance-of-payments stability and monetary credibility — had just lost its governor under a cloud.

The Worst Year in Memory

By the time the fourth quarter of 2009 arrived, Jamaica’s economic statistics had taken on a quality of grim repetition. The Bank of Jamaica‘s monthly digests recorded the same story in different columns: falling revenues, rising deficits, declining remittances, weak trade. What the quarterly GDP data would eventually confirm was that 2009 had produced a contraction of 3.4 percent — the sharpest decline in real output in a generation. The country had contracted in 2008 as well, shedding 0.8 percent, but that had felt like the edge of a storm. The 2009 figure was the storm itself.

The contraction was broad-based. Mining and quarrying — already devastated by the closure of three of Jamaica’s four alumina refineries — continued to operate far below capacity. Manufacturing, commerce, and construction all weakened. Tourism had been a relative bright spot in stopover arrivals, but even that offered cold comfort in a year when every other pillar of the economy had buckled simultaneously.

By December, public debt had climbed to 135 percent of GDP — a figure that placed Jamaica among the most indebted nations in the Western Hemisphere as a share of national income. Interest payments were consuming more than half of every dollar of government revenue. In fiscal year 2009/10, the overall deficit was heading toward levels not seen in living memory, driven primarily by a revenue collapse that the government’s earlier spending cuts had not been able to offset.

A Governor’s Departure, a Governor’s Arrival

Brian Wynter was not an unknown quantity when his appointment was announced. A Deputy Governor at the Bank of Jamaica, he held degrees from the London School of Economics and Columbia University, and had served in regulatory roles spanning both the central bank and the Financial Services Commission. He was not, in the conventional sense, a politician’s pick. He was a technocrat with the credentials that the moment demanded.

When Wynter took office on December 1, 2009, he inherited an institution under pressure from multiple directions simultaneously. The domestic interest rate environment — above twenty percent in the aftermath of the 2008 currency crisis — was crushing borrowers and distorting incentives across the financial system. Reserves, while not at emergency levels, were being carefully managed. And the negotiations underway with the IMF, whose successful conclusion Wynter’s own credibility would help ensure, had become the defining test of Jamaica’s institutional seriousness.

The Agreement That Took Months to Forge

The announcement arrived on December 17, 2009. IMF staff and Jamaica had reached broad agreement on the key elements of a US$1.27 billion loan. The programme — a 27-month Stand-By Arrangement, the Fund’s standard instrument for balance-of-payments support — had been under negotiation since the summer, when Finance Minister Audley Shaw had publicly confirmed Jamaica’s intent to seek external assistance.

The talks had been, by any account, difficult. The IMF and Jamaica had negotiated not only the headline numbers but the structural conditions that would accompany the financing. Jamaica had resisted initial proposals that would have required more drastic measures. What emerged was a programme built around primary surplus targets, public sector restructuring, and — critically — a voluntary domestic debt exchange that would need to succeed before the arrangement could be formally approved by the Fund’s Executive Board.

Four days earlier, on December 13, Prime Minister Bruce Golding had taken pains to lower expectations in a statement that was remarkable for its candour. The US$1.27 billion, he told Jamaicans, would not flow into the budget. It would be held at the Bank of Jamaica as balance-of-payments support — protection for the reserves that ensured the economy could import oil, medicines, and raw materials. This was not a rescue. This was a foundation.

“Let no one be misled into thinking,” Golding said, “that this is some panacea, that this will solve the problem, that there will be a lot of money flowing in.” The bauxite losses and remittance decline had together stripped more than US$800 million from Jamaica’s annual foreign exchange earnings. The IMF programme addressed the consequence — the reserve pressure — but not the cause.

The Debt Exchange Taking Shape

Alongside the IMF negotiations, the Finance Ministry and the Bank of Jamaica had been designing a companion operation that was, in some respects, the more consequential of the two instruments. The Jamaica Debt Exchange — a voluntary programme by which domestic bondholders would be invited to surrender their existing securities for new bonds with lower interest rates and longer maturities — was the mechanism through which Jamaica’s unsustainable domestic debt service costs would be addressed.

The arithmetic that made the JDX necessary was stark. Nearly forty percent of Jamaica’s domestic debt — equivalent to twenty-seven percent of GDP — was due to mature within two years, creating a refinancing cliff that the government could not navigate while also meeting its fiscal consolidation targets. The interest rates on existing bonds, above twenty percent in many cases, were consuming resources that had no alternative use in a country trying simultaneously to shrink its deficit and invest in Vision 2030. The exchange aimed to cut average coupons by 650 basis points, extending the weighted average maturity of the domestic debt stock from 4.7 years to 8.3 years and saving an estimated 3.5 percent of GDP in annual interest costs.

The programme, scheduled for launch in January 2010 as a prior action requirement for the IMF arrangement, was voluntary in its legal structure but effectively mandatory in its logic. The success of the IMF programme, and access to an additional US$1.1 billion in concessional financing from the World Bank and Inter-American Development Bank, depended on its completion. The government’s task in the final weeks of 2009 was to ensure that Jamaica’s domestic creditors — pension funds, insurance companies, commercial banks — understood this clearly enough to participate.

The Housing Gap and the Planning Year’s End

Even in a year defined by fiscal emergency, the institutional machinery of Vision 2030 had continued to operate. The first Medium-Term Socioeconomic Framework — the three-year operational plan that would guide Vision 2030’s implementation through 2012 — had been presented to Parliament alongside the National Development Plan in May and was now the formal governing document for cross-ministerial development priorities.

What the year had made unmistakably clear was the scale of the challenge. Jamaica was attempting, simultaneously, to stabilise its finances under IMF conditionality and to implement an ambitious development plan that required, among other things, building fifteen thousand housing units per year against a backdrop of fiscal contraction. In 2008, actual housing starts had been fewer than four thousand. The National Housing Trust’s mortgage programme, which had issued 5,546 mortgages that year, was the primary bridge between aspiration and reality for most Jamaicans seeking to own their homes.

The Planning Institute of Jamaica was under no illusions about the difficulty. The fiscal consolidation that the IMF programme would require — tighter primary surpluses, compressed capital spending — would inevitably squeeze the public investment envelope that development planning required. Managing the tension between short-term fiscal adjustment and long-term development investment would define the politics of the years ahead.

What This Means

The staff-level agreement of December 17, 2009 represents the end of the beginning of Jamaica’s fiscal reckoning. The country has acknowledged, formally and to the international community, that it cannot continue on the path it has been following. The IMF programme is not a solution — as Prime Minister Golding took care to emphasise — but it is a structure within which solutions might become possible.

The significance of that distinction cannot be overstated. Jamaica has been to the IMF before, many times, and each previous programme has generated its own cycle of adjustment, partial compliance, growth disappointment, and eventual return. What is different this time — or what the government and the Fund are insisting must be different — is the depth of the accompanying structural reform. The Jamaica Debt Exchange, if it succeeds, will do something no previous programme achieved: reduce the domestic debt service burden sufficiently to create real fiscal space. Whether that space is used for development or consumed by political pressures is the question 2010 will begin to answer.

Outlook

The immediate challenge is the Jamaica Debt Exchange, scheduled for January 2010. The programme’s success is not guaranteed. Voluntary debt operations have failed elsewhere in the Caribbean and further afield, and Jamaica’s domestic creditors — many of them pension funds and life insurance companies with fiduciary obligations to their own beneficiaries — will need to conclude that the exchange serves their interests as well as the government’s. The government’s argument is straightforward: a Jamaica that stabilises its debt is a better credit risk than a Jamaica that does not, and the exchange is the first step toward that stability.

Beyond the JDX, the formal approval of the Stand-By Arrangement by the IMF Executive Board — expected in early 2010 — will unlock the wider multilateral financing package and signal to markets that Jamaica’s adjustment programme has credible international backing. What it will not do is reverse a 3.4 percent contraction, restore the alumina refineries to operation, or rebuild the remittance flows that sustained so many households through the preceding decade. Those losses are real and structural, and they will take years to address. The programme that begins here creates the conditions for that recovery. It is not, itself, the recovery.

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