Is the IMF a Bad Prescription for Jamaica?

When the International Monetary Fund first started in December 1945 it was aimed at building a framework that would help countries to have a stable economy and correct macroeconomic imbalances so as to prevent a repeat of the great depression of the 1930s. The IMF lists as its core function to ‘ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth,  increasing living standards, and alleviating poverty.’ (IMF website, 2010) Eighty three years later one has to question if the Fund is serving its main purpose.

                         Minister of Finance and Planning, Dr. Peter Phillips (left) 

             Head of the International Monetary Fund (IMF) Mission to Jamaica, Jan Kees Martin (center) 

                              Bank of Jamaica Governor, Brian Wynter

The Mexican crises in the early 90s along with the East Asian crisis in 1997 are two vivid examples of the IMF’s failure.  The Mexican government had a lot of creditors and they had to pay back in full in a short time.  The government was forced to spend all their reserves to honour its obligation.  The IMF along with the US government created a plan to turn some of the short term debt into long term debt.  As such the IMF and Mexico entered into a stand by arrangement which provided immediate and well needed cash.  One of the conditions of the loan was for the government to have high interest rates.  There was large interest payment along with cheap imports which forced a number of businesses to close.  This caused a ripple effect on the country’s economy.  The Asian crisis began in the mid-1997 and affected the market, stocks, and currencies on several Southeast Asian economies. It was mainly caused by the Mexican crisis which created a domino effect; investors lost confidence in securities in East Asia and began to pull their money.  As the crisis deepened the IMF decided to lend assistance.  The IMF offered a rescue package which like in the case of Jamaica would prevent a default.  The support came with conditions which included the government cutting spending and raising interest rates.

The aim was to restore confidence and protect currency values.  However, economists have argued that the opposite should have been done; interest rates should have been lowered and more opportunities available for businesses to grow and hence developing the productive sector.  The IMF policies caused a reduction in the value of the currencies and stock market and people falling below the poverty line. Thailand, South Korea and Indonesia were the countries most affected by the crisis.

A Wall Street Journal article states that the IMF intervention has been roundly criticized as the role of the International Monetary Fund was so controversial during the crisis that many locals called the financial crisis the "IMF crisis".   

The Fund in 2009, realizing the problems, stated that they overhauled the general lending framework to make it better suited to the country’s needs and streamlined conditions attached to loans.

The fund has been wrong so many times with its prescription for countries that it leaves us to wonder if its plans for Jamaica will be successful.  Just recently the IMF admitted that their austerity measure for Greece was wrong.  An excerpt from the report states:

Market confidence was not restored, the banking system lost 30 percent of its deposits, and the economy encountered a much deeper-than-expected recession with exceptionally high unemployment.  Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession.

How does one know that the prescription given by the IMF to Jamaica is right? Based on my checks, Jamaica had a facility with approximately 11 times.  Jamaica received its first draw down from the fund in 1979 under an Extended Fund Facility, a deal which ended shortly after it was signed.  Since then we have had other arrangements and to date the only one that was successful was the Extended Fund Facility signed in 1992.  The success would be short-lived because Jamaica shortly after ending that programme started to see negative growth.  The IMF’s rationale is that they had instructed the country to stay on for an additional two years. 

Based on this track record how do we know that the deal will be successful this time.  Whose interest will the arrangements serve?  Certainly the country must adjust its modus operandi in order to move forward on a solid economic path.  Recently Jamaica’s Education Minister indicated that they cannot employ any more teachers. Some persons were shocked at his announcement but it is clearly outlined in the Letter of Intent to the fund.  An excerpt from point twenty of the IMF country report states that

‘Together with a planned net hiring freeze and pension reform, this effort is critical for sustaining wage bill moderation, beyond the relief provided by the wage agreement. The authorities plan to improve the efficiency, quality, and cost effectiveness of the public sector and have adopted a timetable for finalizing the review of the Public Sector Master Rationalization Plan’. 

The section of the report that is most interesting is the part that speaks to the exchange rate.  It states that ‘The recent nominal exchange rate depreciation has been useful, by reversing part of the overvaluation of the real exchange rate that has emerged in recent years, thus supporting price competitiveness’  Let us face the facts, when the dollar depreciates it will likely to cause inflation.  Imports become more expensive and as such our oil bill will increase.  The off spins of an oil increase is very wide, the purchasing power of the people reduces.  However, exports will be cheaper but this serves to benefit the person buying the exports and not those who are selling. But what is the alternative to this problem?  Do we get the dollar at its true value and create an environment that is friendly to investment? Who determines the true value of the dollar?  One thing that must agree to is that it is impossible for the government to enter the market to constantly defend the dollar.  What we need is a boost in the productivity sector which will increase exports.  The government must also create avenues that will assist our dependency on oil and force us as a people to utilize another source of energy.

At the end of the day countries must play their role in ensuring that they have successes on the economic front.  This iron fist approach adopted by the Fund will not serve the interest of the countries. The principles surrounding the formation of the IMF are sound but the action of its operatives is left wanting.  It is full time they clean shop, re-brand and as Jamaicans would say ‘wheel and come back again’. Like many of the other deals brokered with the IMF it places very little emphasis on developing the local productive sector. What is important is that the IMF must give countries the flexibility to invest in the development of local productive sector.   Majority of polices crafted are focused at reducing government spending, increase taxation while creating a free market.  While this will benefit a country in the short term, over time the country will not build its independence.   One thing for sure is that this current IMF deal even if we pass every target will not serve the interest of the people in Jamaica and may have adverse effect on generation to come.