EDITORIAL - Dr Phillips must hold his nerve

The news was mostly bad on the economic front last week. The central bank, for instance, estimated that output contracted 1.3 per cent in the June quarter, meaning that the Jamaican economy is yet to emerge from the depression in which it has been trapped since the onset of the global financial crisis more than five years ago.

Then, the Statistical Institute of Jamaica reported that unemployment had in April jumped to 16.3 per cent, the worst rate of joblessness in over a decade. Inflation, at 4.4 per cent for the first seven months of the year, was significantly higher than in Jamaica's major trading partners.

Despite this gloom, the picture was not all bad for Jamaica. In fact, there are even hints of an upside if the finance minister, Peter Phillips, can hold his nerve and encourage the rest of the Government to follow suit.

The positive to which we allude is the confirmation by technical staff from the International Monetary Fund (IMF) that Jamaica passed the first quarterly test under its programme with the Fund.

"All quantitative performance targets and indicative targets for the end of June were met," reported Jan Kees Martijn, the IMF official with responsibility for the Jamaica programme.

This good outcome, paradoxically, is partly responsible for some of the stress on the Jamaican economy. Notwithstanding, it is important for the Government to appreciate the larger picture and stay the course.

CAUSE OF ECONOMIC CRISIS

The fundamental cause of Jamaica's economic crisis is its debt of $1.8 trillion, whose servicing consumes over 40 per cent of the Government's budget. More than half of this comes from taxes and grants - and that is after the administration squeezed improved terms out of its domestic creditors. When debt payments and public-sector wages are combined, they account for nearly 90 per cent of the Government's projected non-borrowing income.

That is unsustainable and its correction underpins the IMF programme. Fiscal discipline is being forced on the Government. It has to borrow and spend less, in order to meet a targeted primary surplus of 7.5 per cent of GDP this fiscal year.

For the first IMF review, the Government did better on its primary surplus target by 24 per cent, but achieved that, largely, by an aggressive cut in spending. The obvious downside of this retrenchment in government spending is its contribution to the contraction in the economy. The danger now is that the administration will get cold feet, retreat and resort to populist policies. That would be bad for Jamaica in the longer term.

There will be a potential gain, though, if the Government has the courage to maintain the discipline and continue to a deeper and broader reform of the economy, including creating an efficient tax system, fixing the public sector and requiring its employees to contribute to their pension plans.

Less government borrowing frees capital for the private sector, once it is convinced of the Government's commitment to stay the course, to invest, create jobs and grow the economy.

The fact is that passing the first IMF test is the easy bit. There is still much heavy lifting to be done.

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