• GDP contracts 0.5% — a brief return to negative growth that interrupts the fragile 2011 recovery
• Public debt rises to 143.9% of GDP, the highest since the 2009 peak, as fiscal pressures intensify
• Portia Simpson Miller’s new government negotiates the framework for a second IMF programme
• The National Debt Exchange — a third round of domestic debt restructuring — is announced for early 2013
• Tourism reaches 1.99 million visitors and US$2,069 million in receipts, approaching the 2 million arrival threshold
• Inflation moderates further to 6.9% as the exchange rate holds near J$89 to the US dollar

The Threshold Year: Jamaica in 2012

The brief return to growth in 2011 proved not to be the turning point that optimists had hoped for. Jamaica’s GDP dipped back into negative territory in 2012 — a reminder that the structural conditions sustaining the island’s long economic stagnation had not been resolved by a single year of modest expansion. The new PNP government, led by Portia Simpson Miller with a commanding parliamentary majority, spent much of the year in negotiations with the International Monetary Fund — preparing the ground for the comprehensive programme that would, in 2013, attempt what no previous intervention had fully achieved: a durable exit from Jamaica’s decades-long debt trap.

GDP at −0.5 Per Cent: The Recovery Stalls

Jamaica’s GDP contracted by 0.5 per cent in 2012 — a setback to the recovery that had seemed, tentatively, to begin in 2011. The contraction was modest by the standards of 2009, but its significance lay in what it revealed about the fragility of Jamaica’s growth trajectory. The economy remained structurally constrained in ways that a single year of positive growth could not undo: the debt overhang was still consuming a disproportionate share of government revenues; the bauxite sector was still operating well below capacity; the manufacturing base was still contracting under competitive pressure; and the domestic demand needed to sustain growth was still being compressed by the fiscal adjustment programme.

The construction sector, which had contributed to the 2011 recovery through post-Tivoli rebuilding and renewed private investment, showed signs of fatigue. New private sector projects were few and the government’s own capital spending was constrained by the need to maintain primary surpluses. The agricultural sector was affected by adverse weather in several key crop parishes. Tourism continued to grow, but its contribution to GDP growth — real as it was — could not compensate for weakness across the broader economy.

The unemployment rate, which had edged down slightly in 2011, stabilised at approximately 13.7 per cent in 2012. This figure reflected not only the slack in the formal labour market but the structural transformation underway in the Jamaican economy: an agricultural sector employing fewer people than a generation before; a manufacturing sector that had shed tens of thousands of jobs since the 1980s; and a services sector that was growing but unevenly, concentrating gains in tourism and financial services while leaving workers in less skill-intensive occupations with limited alternatives. The informal economy continued to absorb much of the labour force surplus, but at incomes too low to sustain the household consumption that formal sector employment might have generated.

An economy that contracts when the external environment is moderately favourable is telling you something about its internal structure that no macroeconomic adjustment programme alone can fix.

Debt Rises to 143.9 Per Cent: A New Peak

Jamaica’s public debt rose to 143.9 per cent of GDP in 2012 — surpassing the previous peak of 141.9 per cent in 2009 and establishing a new high-water mark. The rise reflected the interaction of two forces: the negative GDP growth that reduced the denominator of the debt ratio, and the continued fiscal deficit that added to the numerator. Despite the primary surpluses that the government maintained, the total fiscal deficit — including interest payments — meant that the absolute stock of debt was still growing. The Jamaica Debt Exchange of 2010 had reduced the interest rate burden but not eliminated the deficit financing that kept adding to the principal.

The new debt peak concentrated minds in Kingston and Washington simultaneously. For the IMF, the rising ratio was evidence that the 2009 Stand-By Arrangement’s adjustment path had not been sufficient — that Jamaica needed a more ambitious and more comprehensive programme to put debt on a genuinely declining trajectory. For the Simpson Miller government, the rising debt was both a constraint and a political reality: the 42-seat majority that had swept the PNP to power created an expectation of delivery, but the debt mathematics left very little space for the spending expansion that the government’s traditional voter base might have expected.

The implications for the housing sector were direct and painful. The NHT continued to operate independently — its contribution-based model insulating it from the worst of the fiscal constraint — but the government’s own capacity to invest in housing-enabling infrastructure remained severely limited. The Portia Simpson Miller administration had campaigned, in part, on a commitment to expand affordable housing provision and to address the land tenure insecurity that left hundreds of thousands of Jamaicans without formal title to the homes they occupied. The debt mathematics made those commitments extremely difficult to honour within the constraints of a fiscal adjustment programme that would, for the foreseeable future, require primary surpluses rather than public investment expansion.

Negotiating the New IMF Programme

The most consequential work of the Simpson Miller government’s first full year in office was the negotiation of a new arrangement with the International Monetary Fund. The 2009 Stand-By Arrangement had run its course; a new framework was needed, and both parties understood that it needed to be considerably more ambitious than its predecessor. The programme that would eventually be agreed in early 2013 — an Extended Fund Facility with a four-year horizon — was taking shape through 2012 in a series of intensive technical discussions between the Ministry of Finance, the Bank of Jamaica and IMF staff.

The centrepiece of the emerging programme was a fiscal consolidation target of unprecedented ambition: a primary surplus of 7.5 per cent of GDP — one of the highest such targets in IMF programme history anywhere in the world. This was not a number arrived at accidentally. It was the arithmetic result of the debt dynamics: given Jamaica’s debt level, its growth trajectory, and the interest rate on its obligations, only a very large and very sustained primary surplus could put the debt ratio on a declining path without a further debt restructuring that would damage market access and investor confidence.

The National Debt Exchange — a voluntary exchange of existing domestic government securities for new instruments at lower interest rates, similar in design to the Jamaica Debt Exchange of 2010 — was announced in late 2012 as a precondition for the IMF programme. Creditor institutions once again faced the choice of accepting lower returns in the near term or risking a more disorderly outcome. Once again, participation would be near-universal. The exercise of collective economic rationality was becoming a Jamaican specialty.

A primary surplus target of 7.5 per cent of GDP does not leave room for expansionary social policy. It leaves room, if maintained, for the slow mathematical reduction of a debt that has been accumulating for thirty years.

Tourism Approaches Two Million: 1.99 Million Arrivals

Jamaica’s tourism sector continued its steady expansion in 2012, recording 1.99 million visitor arrivals and receipts of US$2,069 million. The figure was notable for what it approached as much as for what it achieved: the 2 million arrival threshold, which had been a long-term target for the sector, was now within reach. The growth reflected the continued strength of Jamaica’s core North American market, improved airlift to the island, and the incremental expansion of resort capacity through new hotel construction and refurbishment of existing properties.

The tourism sector’s consistent performance through the turbulent years from 2008 to 2012 had strengthened the case for the industry’s structural importance to the Jamaican economy. It was now the dominant source of foreign exchange, the largest single employer in the formal sector, and a significant driver of activity in construction, agriculture, transport and retail. The sector’s critics — those who argued that its all-inclusive model extracted value from the Jamaican economy by concentrating spending within resort boundaries and minimising leakages to domestic suppliers — were not wrong, but they were making the argument in a context where the alternatives were harder to identify than they had ever been.

Efforts to strengthen linkages between the resort economy and domestic agriculture were gaining institutional support in 2012. The Jamaica Agricultural Society and the Tourism Product Development Company were working with individual hotel chains on supply chain programmes that could increase the proportion of food served in resorts that was sourced from Jamaican farms. Progress was slow — the scale, consistency and quality requirements of large resort operations were difficult for smallholder agriculture to meet without significant investment in aggregation, processing and cold chain logistics — but the direction of travel was productive.

Inflation at 6.9 Per Cent: Approaching Normal

Inflation fell to 6.9 per cent in 2012 — the lowest rate since before the 2008 oil shock, and approaching the range that economists considered consistent with a functioning, growing economy. The moderation reflected continued stability in global commodity prices, the exchange rate holding near J$89 to the US dollar, and the subdued domestic demand that was itself a consequence of the fiscal adjustment. An economy that is not growing fast enough to generate inflation pressure is not, by that token, a healthy economy: the low inflation of 2012 was as much a symptom of weakness as it was a sign of successful monetary management.

For the Bank of Jamaica, the inflation environment of 2012 created some room to reduce interest rates — a tool that the central bank used to try to stimulate credit growth and domestic demand within the constraints of the IMF programme. The transmission from lower policy rates to lower lending rates in the commercial banking system was, however, imperfect: banks remained cautious in their lending, and the private sector remained cautious in its borrowing, in an economy that had contracted more often than it had grown in the preceding five years. Monetary policy is a weak instrument for stimulating growth when the fiscal stance is tightening simultaneously and the private sector’s animal spirits have been comprehensively chilled by a decade of disappointment.

Housing Policy Under Fiscal Constraint

The National Housing Trust continued its core operations in 2012 — collecting contributions, processing mortgage applications, developing housing schemes — but in an environment of fiscal constraint that limited the government’s ability to augment the Trust’s work with complementary public investment. The NHT’s own financial position remained sound: the contribution base, drawn from the payroll of the formal sector, was sufficient to fund ongoing mortgage lending at moderate volume. But the gap between what the Trust could deliver and what Jamaica’s housing need required was measured in tens of thousands of units, and it was not narrowing.

The land titling issue — the absence of formal title among hundreds of thousands of Jamaican families who occupied land and buildings without legal documentation of their ownership — received increased policy attention in 2012. The Simpson Miller government had campaigned on a commitment to accelerate land titling through the Systematic Regularisation Programme, which had been processing applications since the 1990s but had never succeeded in clearing the backlog. The scale of the problem — concentrated in the informal settlements of Kingston, the peri-urban communities of the major towns, and rural communities where customary occupation had never been converted to legal title — was such that no single government term could resolve it. But the political commitment to accelerate progress was at least explicit.

In the diaspora, remittance flows continued their recovery from the 2009 trough. Remittances to Jamaica in 2012 were running at approximately US$2 billion annually — roughly equivalent to tourism receipts, and representing a critical source of household income and housing investment capital. The recovery of remittances was partly cyclical — the US economy was growing, if slowly, creating employment in the sectors where Jamaican diaspora workers were concentrated — and partly structural: the emotional and familial bonds that sustained remittance flows across economic cycles were not dissolved by recession. Diaspora Jamaicans continued to build, to invest, and to plan for an eventual return that for many would never materialise but whose possibility sustained the remittance habit year after year.

The Legacy Lives On

Marcus Garvey’s political economy was, at its core, a theory of self-sufficiency: a people that depended on the economic decisions of others for its prosperity was not truly free, however formally independent its political institutions might be. The Jamaica of 2012 was negotiating, once again, the terms of its engagement with an external institution — the IMF — whose conditions would shape domestic policy for the next four years at least. This was not a failure of Garveyite principle; it was the mathematical reality of an economy that had borrowed more than it could service without external support. The negotiation was necessary. The challenge was to ensure that what came out of it was genuine stabilisation rather than a new cycle of adjustment followed by the next crisis.

The extended fiscal adjustment now being planned would, if it succeeded, do something that no previous Jamaican government had managed: put the debt on a genuinely declining trajectory, create fiscal space that could over time be reinvested in the productive capacity of the island, and establish the conditions for growth that was not merely cyclical but structural. The NHT schemes, the land titling programmes, the diaspora remittances, the incremental construction that was adding rooms and floors and roofs to homes across the island’s communities — all of this work was happening within the margins left by the debt overhang. If those margins could be widened, the work could accelerate. Whether the programme now being designed would succeed in widening them was the central question of Jamaican economic life in 2012 — and of the several years that would follow.

---

Series note: This is Edition 15 of Marcus Garvey & The Making of Modern Jamaica — an ongoing editorial series examining Jamaica’s social, economic and built environment through an annual lens, from the birth of Marcus Garvey in 1887 to the present day. Edition 1 (1887–1998), Edition 2 (1999), Edition 3 (2000), Edition 4 (2001), Edition 5 (2002), Edition 6 (2003), Edition 7 (2004), Edition 8 (2005), Edition 9 (2006), Edition 10 (2007), Edition 11 (2008), Edition 12 (2009), Edition 13 (2010) and Edition 14 (2011) are available on Jamaica Homes News.