Jamaica meets its Waterloo

Ralph Thomas, Contributor

It all began out of sibling rivalry. Owen loved his little sister Thelia dearly, the brightest most loveable child one could imagine. He wondered if his parents still loved him though, as the darling child claimed all the attention once his. As they approached the fork in the dirt track that they followed in the rugged terrain of deep rural Clarendon, he impulsively misdirected his sister to follow the route that did not lead home on the pretext that this was a race, while he took the usual track home.

Owen didn't really think about the consequences, just the fact that he'd be number one again and have the undivided attention of his parents. Thelia was quite confident of her direction for a while because she was following big brother's instructions; but innocently stopped to ask a large bull tethered across the track for directions home. Since the bull only nodded his head and it was unclear what that meant, she continued and reached the meeting spot where all trails converged. This was a historic place called 'British', an open marketplace where for generations since slavery, farmers gather and trade produce and animals in a largely non-monetised economy.

She asked an old man for directions. He first asked for clarification of where she would really like to go. Her reply was that she's just like to get away from this noisy smelly place. His directions came quickly and precisely; since she only wanted to get away from her present location and did not specify a final destination; then she should take any one of the many paths ahead of her and she would get to wherever she wanted, since all paths led directly to British.

After a round of 'eenie-meeny-miney-mo', she chose a direction and pondered that answer as she set out on her way. The wise man's answer was insightful. It would have made Sun Tzu, the renowned Chinese general of 500 BC who wrote The Art of Strategy, the Art of War, a text used in the study of business strategy, quite proud as it reflected the essence of strategy.

As we read reports of a rating agency's downgrade of Jamaica's debt rating, we hear rippling concerns that the Jamaican economy is faltering and poverty and joblessness are increasing. Despite the once positive prognostications following the JDX, the signing of the IMF programme and the resultant unlocking of access to even more credit from multilateral agencies, it is easy to conclude, based on the evidence provided by these agencies and personal observations, that Jamaica has moved backwards and the social and income disparities are widening.

Finding acceptable strategy

Debt default and restructuring questions are being raised worldwide with the impending Greek default and uncertainties in the Eurozone. Many pundits have begun to consider Jamaican debt repudiation and restructuring as an acceptable debt strategy; as an alternative to austerity, disciplined economic management and continued sovereign commitment to repaying debt obligations assumed by the State. In a vacuum, it may seem an attractive proposition to just renege on the debt and create a clean balance sheet and start all over again, as some countries such as Ecuador have successfully done.

The issue of trust arises, as Jamaica's international reputation in the credit markets will be tarnished forever and for some period it will present difficulties for Jamaican companies doing business abroad. Foreign investors would find Jamaica unattractive, as risk ratings would be elevated, investment capital scarce and commercial and political investment risk insurance or guarantees for foreign direct investment (FDI) difficult to obtain. Notably, Jamaica's level of FDI, although faltering recently, had reached as high as 33 per cent, one of the world's highest.

In this scenario, what is problematic is the very high proportion of Jamaica's foreign and local debt that is held by local financial institutions and not by foreign creditors or multilateral agencies. In the first debt-restructuring exercise of the JDX, the Government tackled the debt problem from a liquidity perspective, not by adjusting principal. The amount of interest payments was reduced, and maturities of the instruments lengthened without forcing the institutions to take a 'haircut' or loss of principal.

Breathing room

This gave the Government breathing room and allowed the Jamaican institutions to avoid significant write-downs of their investment portfolios to reflect impairment of the bonds. Banks have heartily bounced back from this exercise by reducing bank overhead costs, while hammering consumers and borrowers with increased fees and charges, raising their profitability to unprecedented heights.

A total default on Jamaica's debt obligations may significantly reduce the high proportion of GDP committed to debt service and free up needed resources for other expenditure. But it would rip through the profitability and solvency of the local banks like a hot knife through butter, and should not even be contemplated without risk analysis, stress-testing and determining the outcomes for our local financial and business sector. Relief to the debt-service burden can come from negotiating a 'voluntary haircut' on the portion of the debt held by local financial institutions, probably of a magnitude of 20 per cent, compared to 50 per cent in the case of Greek restructuring, since banks cannot expect to continue to thrive and prosper in an economy that is collapsing or where the Government is forced to renege on its debt by inability to provide debt service.

In the context of the deteriorating fortunes of the wider majority of Jamaicans and seething resentment, should our financial institutions take notice of the massive demonstrations against banks and corporate greed taking place on Wall Street and almost everywhere else across the globe, before it's too late and the chickens come home to roost?

So, is JDX II on the agenda of the administration led by the new PM, Andrew Holness, and what form is it likely to take? Will it include the foreign portion of the debt? How can we correct the intractable problem faced by Jamaica, which is that we are hooked on new borrowing and refinancing to even support the present level of debt? This has accelerated alarmingly in recent years and is becoming unsustainable.

Our debt strategy is a subset of our national strategy for development. Other critical dimensions must be addressed simultaneously and contextualised within the goals and objectives of Vision 2030, which is to improve the lives of all our people. How are we tactically and strategically positioned to achieve these national goals and objectives, and what structural adjustments to our economy are now required? In defining strategy, do we have clear national consensus of our destination or where we would like the country to be, and by when, and what sacrifices we are prepared to make as a nation? Can we focus Government on the broad strategic thrusts that would take us to our destination most optimally and within our required time frames?

Short-term initiatives, implementation mechanisms and technical efficiency are key focal areas for quickly putting the economy back on track. These must be fully anchored within a workable strategic development plan. Well-implemented but wrong choices often result in a wider drift from the country's strategic goals and objectives, which are currently poorly defined.

IMF no panacea

IMF programmes are no panacea for our social and economic problems and cannot resolve for us critical areas of national strategy best left to our decision-makers, the political elite. Strategic focus cannot come from merely meeting quantified targets such as the ratio of debt to GDP, or the ratio of public-service costs to GDP. If you fire 20,000 civil servants, will the economy rebound?

A better approach would be to focus on defining the role and magnitude of the State and its relationship in delivering service to the citizens and reprioritising resources. Don't blame the IMF; it does what it does. IMF indicators are useful but meaningless when considered in a vacuum.

Against the backdrop of his signalling of early elections, I, therefore, call on the new prime minister to boldly articulate to Jamaica a new and clear developmental strategy to achieve the aspirations of the Jamaican people that were well set out in the seemingly forgotten Vision 2030 plan, in order to better demonstrate his youthful or orthodox vision.

To articulate this new strategy, one would expect that he would be forced to critically examine the actions and decisions taken by his administration during his tenure as a Cabinet minister, as well as those of prior administrations, and accept the diagnosis that the people of Jamaica have inadvertently been misdirected on a path of hoped-for prosperity that is now a dead end. In taking counsel, he must avoid the bulls tethered across the pathway, who will nod in agreement without real under-standing. He may also be mindful of the sage's advice on strategy in order to choose the right path.

A new and reshaped direction for Jamaica's development strategy must form the centre of national debate by the leadership of both political parties as a basis of moving Jamaica forward to become the place of choice to live, work, raise families and do business.

Ralph S. Thomas is a senior teaching fellow and joint appointee of the Mona School of Business and the Department of Management Studies, UWI. He is a financial consultant and was a vice-president of the Bank of New York-Mellon. Email feedback to columns@gleanerjm.com and ralphthomas003@yahoo.com.