MONITORING POLITICAL, ECONOMIC AND DIPLOMATIC
ISSUES AFFECTING THE WESTERN HEMISPHERE
Wednesday, September 6th, 2006
Press Releases, Jamaica, Economic Report
Jamaica: Debt, Economic Performance and Labour Productivity
• The Jamaican economy suffers from serious debt, high inflation and uneven growth rates
• Current economic policies, such as exchange rate devaluation and debt-servicing, only exacerbate Jamaica’s
economic downslide
• To resolve this crisis, the government must implement measures aimed at sustainable growth, such as improving
the quality of education and facilitating credit access for small borrowers
• Ultimately, Jamaica may be forced to walk the Argentine road of debt renunciation in order to keep from going
under
Jamaica Faces a Somber Future
The Jamaican economy has suffered numerous challenges and setbacks in the increasingly competitive global environment.
Ultimately, if Jamaica cannot solve its problems by conventional means, it may be persuaded to take the Argentine road
of debt renunciation.
Since the 1960s, when the country enjoyed growth rates ranging from 2 percent to 8 percent per annum, the island has
been unable to sustain high growth rates over an extended period of time. Jamaica continues to be vulnerable to falling
prices and worldwide economic shocks, which have contributed to the pronounced fluctuating nature of its economy. The
primary economic problems currently facing the Caribbean nation include high internal debt, a large trade deficit,
swollen interest and inflation rates, chronically elevated unemployment levels, as well as low worker productivity, all
of which fuel political unrest and escalating gang violence.
Traditionally, the Jamaican populace has blamed its political elites for the country’s poor economic performance.
However, the position of the economy is attributable to more than just poor policy implementation on the part of
national leaders. External factors also play a large role in its present parlous position. The oil crises of 1973-1974
and again in 1978-1979 significantly damaged the heavily petroleum-dependent state. During the 1970s and 1980s, both the
Manley and Seaga administrations, in an attempt to revamp the economy and with the aid of international financial
institutions, embarked on a programme of macroeconomic and structural reform, which focused on liberalizing the economy.
Since the 1980s, the government has undertaken the responsibility of limiting the state’s role in the economy, promoting
the development of export driven production, reducing the fiscal and current account deficit, as well as eliminating
poverty and inequality. Thus far, these objectives mostly have been met with limited success. The debt situation is
alarming and continues to hamper economic growth by drawing heavily upon resources that could be put to more productive
uses. The debt overhang also limits the extension of credit to the weaker margins of the private sector, particularly
towards medium and small borrowers. In order to improve the economic situation, policies aimed at sustainable growth,
such as a greater investment in education, have to be implemented to increase human capital and the labour force’s
productivity.
The Economic Situation in Brief
Currently, the Jamaican economy is service-oriented and accounts for 60 percent of the island’s GDP (US $12.17 billion
for fiscal year 2005). The primary sources of foreign exchange include remittances, tourism and bauxite mining. The
worldwide economic recession in the wake of the September 11 terrorist attacks had adverse economic implications for
Jamaica. Even though the economy recovered partially between 2003 and 2004, the country still faces a number of
long-term problems. The current debt-to-GDP ratio is 135 percent, pointing to a serious budget deficit which only
expanded in the wake of Hurricane Ivan because of the expenditures necessary to repair the damage incurred by the
natural disaster.
During the 1990s, there was a reduction in the inflation rate, which had been in the double digits for much of the 1970s
and 1980s. The benefit of controlling inflation, coupled with an increase in remittances from overseas, brought much of
the population above the poverty line, which had declined from a peak of 44.6% in 1991 to 16.7 % in 2001. The control of
inflation, however, was achieved by increasing net foreign currency reserves, which was partly financed by borrowing.
This eventually sank the country even deeper into debt. In the long run, this borrowing led to more debt financing as
more money was allocated towards the payment of loans. This capital could have been far better applied to other sectors
of the economy, generating much needed revenue and therefore improving socioeconomic conditions and reducing the
alarming incidence of crime. Unfortunately, the inflation rate, which was in single digits since 1997, once again
entered double figures in 2003. While the inflation rate is still in double figures as of 2005 (12.9 percent), it has
been exhibiting a declining trend from a high of 14.1 percent in fiscal year 2003.
The Debt Crisis
The crisis currently affecting the Jamaican economy with respect to high debts, interest rates and burgeoning trade
deficits, is grounded in the severe economic setbacks of the 1990s. This decade was characterized by negative or
otherwise abysmal economic growth and high levels of unemployment. After realizing economic growth rates of 5.5 percent
in 1990, the next highest growth rate for the Jamaican economy was only 2 percent in 1993. Furthermore, Jamaica
experienced negative growth rates in GDP during the 1996-1999 period, when unemployment rates averaged over 18 percent.
The Jamaican government absorbed debts amounting to 44 percent of GDP in the wake of the financial sector crisis of
1995-96, one of the most crushing economic catastrophes in the world in terms of its effects on GDP. This crash was due
to the poor regulation and management of the Jamaican financial sector. Since the crisis, monitoring and regulation has
substantially improved. It was this financial crash that primarily contributed to the island’s currently high
debt-to-GDP ratio. Most of this debt is held by local creditors (90 percent), with the financial sector preferring to
extend credit to the government rather than to the private sector.
Lending to private institutions has been considered “risky business” since the banking crisis, when non-performing
private-sector loans led many financial institutions to declare bankruptcy. Also, the interest rates on government loans
are higher than that of private loans, making government borrowing more attractive. Therefore, this limits the
accessibility of capital to the private sector, particularly for borrowers who lack significant collateral (which is
security for loans, such as land). With regards to government loans, domestic interest repayments are four times greater
than foreign interest repayments. This played no small part in causing domestic debt to amount to approximately 37
percent of expenditures and 54 percent of tax revenues, in part because of the high as well as fluctuating interest
rates on government treasury bills (monetary instruments used by the government to borrow money from the public).
External debt now amounts to 60 percent of Jamaica’s GDP, and is governed by the floating exchange rate. Clearly, the
current debt situation is very bleak. Economic growth has been stifled by crowding out private loans as a result of
heavy debt-servicing obligations.
Policy Evaluation
The government’s policy of maintaining an unfavourable exchange rate is a double-edged sword. Along with reducing
tariffs and eliminating duties on raw materials and other imports necessary for production, exchange rate depreciation
continues to be one of the primary tools employed by the government to improve Jamaica’s competitiveness in the world
market. It has been argued that a weakening currency improves trade deficits because one’s exports become cheaper
relative to other goods on the market and therefore improves the competitiveness of one’s products in the global trading
arena. Conversely, a declining exchange rate increases the cost of imported goods within one’s country. However, while
such economic reasoning might be sound on the surface, other factors have to be taken into account. Jamaica is heavily
dependent on imported raw materials, particularly oil, which is necessary for electricity generation, transportation and
production. This is especially true in the bauxite sector, a heavily energy-intensive industry.
Since Jamaica is not an oil producer, this essential resource has to be imported. Moreover, the cost of oil is
denominated in U.S. dollars, which has been appreciating steadily in value against the Jamaican dollar, therefore making
this resource increasingly expensive on the domestic market. Currently, the exchange rate is roughly US $1.00: J$ 65.00,
which not only increases the price of oil and its dependent processes, but also inflates the cost of production overall,
making the final price of goods and services uncompetitive. This is one of the contributing factors to the escalating
inflation rate. The free-floating exchange rate is also highly volatile, subject to sharp declines, therefore dampening
investor confidence and stifling economic growth. In this light, the declining exchange rate seems to hamper rather than
improve Jamaica’s economic competitiveness.
Another very serious trade off in devaluing the Jamaican currency is that, since the majority of debt is in American
dollars, it is determined by the exchange rate. Thus, as the exchange rate continues to decline, the level of debt
continues to escalate as a percentage of GDP, as increasing amounts of money have to be allocated towards
debt-servicing. In the end, the debt overhang and interest payments will continue to increase, taxing the economy by
using funds that could be put to more productive use.
A Better Approach
There may be more practical ways to improve Jamaica’s competitiveness in the global market. More could be done to boost
labour force productivity. Education increases the human capital of any given society, leading to greater worker
productivity and therefore economic advancement. Furthermore, the incidence of the young engaging in risky behaviour,
including violence, is much lower (70 percent) for both sexes who possess a solid educational background. This is
particularly important for Jamaica, which needs to increase labour productivity and reduce its crime rate. The high
crime rate profoundly hurts economic development because it burdens the business environment with additional security
costs. It also creates an environment of instability, producing reluctance on the part of both local businessmen and
foreigners to invest in the island’s economy.
Improving the educational system, however, will prove to be an expensive venture. One way to raise the amount of funding
allocated for education is to use savings created by reducing the roster of the government bureaucracy and its
functions, in particular the ever-increasing public sector wage bill. Currently, the salaries of public sector employees
account for about one-third of government spending. The cost savings to be realized by controlling salary increases can
instead be invested in improving the quality of the educational framework. At the same time, the purpose of a society is
that it is there to serve the needs of its people, which means that social justice measures need to be advanced, not
retarded.
Jamaica’s large informal sector should also be taxed in order to improve the educational system, but one should not
ignore the limited funds at play here. The informal sector in this instance refers to street peddlers, known in common
parlance as “higglers,” along with other petty traders who currently do not pay taxes in order to operate their
businesses. Taxation in the form of licenses and permits could be employed to achieve this objective. In addition, in
order to retain the country’s trained professionals, more needs to be done to stem the “brain drain” afflicting the
island. This can be achieved by producing incentives to entice young, trained professionals to remain on the island,
through expanding industry, increasing investment and most importantly, by addressing the crime situation, which drives
many to emigrate.
The Outlook
It is imperative that the debt overhang be eliminated and that policies are geared towards boosting the human capital of
the country in order to improve Jamaica’s economic competitiveness. The current debt crisis is limiting potential
private sector loans, particularly amongst small and medium borrowers who find it virtually impossible to secure credit.
In turn, this makes it difficult for individuals to invest within the economy, again stymieing economic growth. Credit
bureaus should be established to access credit reports in order to distinguish between those who will repay their loans
from those who will not. This would encourage domestic investment in the Jamaican economy, be an essential source of
additional tax revenue, as well as a credible means for employment. Also, the mechanisms for tax collection need to
become more efficient to address the pressing problem of the country’s debt, and at the same time, provide the necessary
funding to improve the educational system. Already, the current tax rates are high and burdensome. Therefore, raising
taxes would only incite serious political and social unrest. Improvements in labour productivity would also enhance
economic growth and international competitiveness, despite Jamaica’s comparatively high cost of labour in the region.
Thus, it is imperative for the government to reduce the country’s debt burden and invest in education so as to increase
Jamaica’s human capital. This would be perhaps the most obvious way to facilitate the island’s emergence from the
chronic problem of poor and uneven economic growth.
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This analysis was prepared by Michale Sheckleford, Jamaican national and COHA Research Associate
September 6th, 2006
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