Sandy, Debt, and the Deal: The Quarter Jamaica Touched Its Economic Nadir and Began to Turn

In the last three months of 2012, Jamaica’s economic story reached its most difficult chapter. Hurricane Sandy battered the island in October, the annual GDP figure confirmed a second year of contraction, and the public debt touched a historical peak of nearly one hundred and forty-four per cent of output. And yet, in the technical rooms where government officials and IMF staff were at last closing in on an agreement, the foundations of a different future were being laid.

• Hurricane Sandy strikes Jamaica on October 24 causing widespread infrastructure damage
• GDP for 2012 confirmed at negative 0.5%, a second consecutive year of contraction
• Public debt approaches its historical peak of 144 per cent of GDP
• EFF negotiations with the IMF enter critical final phase toward year’s end
• Partnership for Jamaica agreement developed with unions and private sector
• Peter Phillips holds fiscal discipline despite hurricane repair costs

Hurricane Sandy arrived on October 24, 2012, making landfall on Jamaica’s southern coast before tracking northeast toward Haiti and Cuba and on to its eventual, devastating encounter with the United States eastern seaboard. For Jamaica, Sandy was a Category One storm — significant but not catastrophic by the island’s historical standards. It left behind flooded communities in the parishes of St. Catherine, Clarendon, and St. Elizabeth, damaged agricultural land, disrupted road networks, and added an unwelcome layer of emergency expenditure to a government already managing its accounts with extraordinary care. The storm was a reminder of what every Jamaican administration knew but could rarely plan around: that the climate, as much as the credit markets, would always be part of the island’s fiscal equation.

The economic data being compiled through the quarter confirmed what had already been widely anticipated. Jamaica’s GDP had contracted by an estimated zero point five per cent for the year as a whole — a second consecutive annual decline, and the fourth in five years since the onset of the global financial crisis. Domestic demand remained subdued. The construction sector, historically an engine of economic activity in Jamaica, had not recovered its pre-crisis momentum. Private investment continued to wait for the signal that an IMF agreement would provide. The tourism sector had grown, but not enough to offset the weakness elsewhere. Bank of Jamaica data showed that the external accounts remained under pressure, with the current account deficit still at historically elevated levels despite the improvement in the trade balance.

The debt picture was equally stark. Jamaica’s public debt, measured as a share of gross domestic product, was approaching its historical peak — a figure that most analysts placed in the range of one hundred and forty-three to one hundred and forty-four per cent of GDP. The interest burden continued to consume a disproportionate share of government revenues, leaving the finance ministry with little room for anything beyond the essentials. Debt service alone was constraining the government’s ability to invest in the infrastructure, education, and health spending that would, over time, be necessary to generate the growth that might reduce the debt burden. It was a trap — and getting out of it would require years of fiscal surpluses that Jamaica had historically struggled to maintain.

Against this backdrop, the pace of the IMF negotiations accelerated. Both sides understood that the longer the gap between programmes, the greater the risk that fiscal discipline would erode and the country’s hard-won credibility with multilateral creditors would fray. By the final weeks of 2012, the broad contours of the Extended Fund Facility were emerging. The programme would run for four years, require a primary surplus target of seven and a half per cent of GDP — a level that had never been sustained in Jamaica’s history — and include structural benchmarks on tax reform, public sector modernisation, and the legislative framework governing debt. To give the programme social and political legitimacy, the government was also developing what it called the Partnership for Jamaica Agreement — a social compact between the government, the private sector, and the trade unions that would share the burden and, it was hoped, sustain the political will to complete the programme where its predecessors had failed.

What This Means

The significance of what was happening in the final quarter of 2012 was, in one sense, easy to state: Jamaica was about to commit to the most ambitious fiscal programme in its independent history. The primary surplus target of seven and a half per cent of GDP was not a number drawn from the range of what was comfortable. It was a number drawn from the range of what was mathematically necessary to stabilise and eventually reduce a debt burden that had become a structural drag on everything the government wanted to do. If it could be maintained, the debt-to-GDP ratio would begin to fall. If it could not — as had happened with every previous programme — the country would be back in the same room, having the same conversation, in another few years.

The Partnership for Jamaica Agreement was a recognition that previous programmes had failed partly because the social compact around them had been too narrow. Austerity, when it fell disproportionately on public servants or on the poorest households, generated the political pressure that eventually broke conditionality. By bringing the trade unions and the private sector into the agreement from the beginning, the government was attempting to create a broader constituency for the adjustment — one that might hold together across political cycles in a way that bilateral government-IMF commitments had not.

The Road Ahead

As 2012 closed, Jamaica had reached its low point. The debt was near its peak. The economy had contracted. A hurricane had added to the damage. And yet the government had kept the fiscal accounts in order, maintained a primary surplus without the support of an active programme, and was within sight of an agreement that would reset the country’s fiscal trajectory. The EFF would not be signed until May 2013 — but the quarter that ended at midnight on December 31, 2012 was, in retrospect, the moment the tide began to turn.

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