Forex shortfall after IMF plan?

Edward Seaga

There are two accounts that are especially fundamental to the economy:

The fiscal account, which deals with the domestic economy;

The foreign exchange account, which deals with the flow of funds between Jamaica and the external world.

The present IMF agreement with the Government of Jamaica deals with both accounts, endeavouring to reverse their persistent deficits to surplus, or tolerable positions. The emphasis has been on the fiscal account in which the reforms and measures introduced are designed to create at least a balanced financial outcome.

A wide range of reforms are being introduced to deal with the domestic (fiscal) financing of the economy through a series of comprehensive reforms in taxation, banking, incentives, pensions and the labour force. So as to ensure sustainability of the reforms, performance-based benchmarks, called fiscal rules, will be imposed and locked in by legislation. This will be critical to the success of the programme in order to ensure that the macroeconomic performance achieved will not slip back due to relaxation or abandonment of the reforms after the programme has been concluded.

I cannot but believe that in imposing a system of agreed fiscal targets that are designed to be sustainable, the IMF is ensuring that the current agreement is the last time Jamaica will have to be subordinated to IMF recovery programmes, after so many previous times.

FOREX IMPORTAnt

But dealing with the fiscal programmes will not suffice to ensure this. At least one other programme must be introduced to ensure that this will be the last effort to have to fix the Jamaican economy.

Domestic resources alone will not be able to build the economy. Foreign exchange will be required to obtain imports for goods and services and to pay the massive foreign debt. Without sufficient foreign-exchange earnings, debt would have to be used to keep the economy on its feet once it has been lifted off its knees. Failure to service debt would mean a recurrence of the heavy indebtedness that must be avoided at all costs, since this is the route of the present downfall of the Jamaican economy, which has one of the worst levels of indebtedness across the globe.

The concern must be widened to include measures to bring the deficit in the foreign exchange account to a tolerable level. Unfortunately, this side of the overall problem is being tackled by an oblique approach. For instance, it is hoped that some of the tax reforms will provide foreign-exchange earnings. This cannot be sufficient, bearing in mind the magnitude of the gap in the balance of payments account where imports over the past many years outstripped exports by a margin of up to three to one.

It is only because the economy is still subject to recessionary forces why imports have been reduced somewhat to close some of the gap. But when the economy begins to show growth, imports will increase as this is the historic pattern, reopening the gap further. Fresh borrowings of foreign exchange would then be required to provide stability, and this would be counter to the direction of the IMF programme, which is to narrow the gap decisively.

no calculated effort

The only way to avoid this disastrous reversal is to develop a programme of earning or to obtain additional foreign exchange to complement the fiscal reform. But there is no calculated effort at present to create a major task force to assemble all the possibilities for earnings, or other means of transfer, to be assessed as to what is required for activation.

The equivalent of a separate IMF-type approach is necessary now to ensure that when the IMF, which is now providing the foreign exchange which the Government requires for operations, has completed its present programme the country will not be faced with a highly developed fiscal programme to be matched only by weak foreign exchange-earning operations, making it necessary to return to heavy borrowings to make up the difference. That would be typical of the one-step-forward, one-step-backward syndrome which has been cancelling positives with negatives for decades, leaving us going nowhere.

forex fix

In the 1980s when faced with the same conundrum of an IMF programme that was creating fiscal stability to recover from the foreign-exchange position that had been intensely weakened by the near-collapse of the bauxite industry, Government set out to build a new foreign exchange-earning sector meantime to enable the economy to have the resources necessary to work with the reformed fiscal sector so that matching resources could be available for progress.

That initiative created a massive influx of foreign-exchange earnings through the export garment scheme working in tandem with Far Eastern producers. In fact, the export garment sector became the top foreign-exchange earner in the economy before it started to slip away in the 1990s when most of the operations closed suddenly and left the country.

It is possible, of course, that the logistics hub will be the massive foreign-exchange earner that is needed to reduce the gap in foreign exchange in the balance-of-payment account. If so, someone should say so to set our minds at ease.

Or perhaps, there is a challenging third solution which is embodied in the story of a captain leading his southern rebels up a slope to attack a position being held by northern 'Yankee' troops in the US Civil War. They proceeded until they were confronted by a tall wall that appeared insurmountable. The captain halted his troops, looked at the wall, scratched his head, then gave his command: "Men, assemble on the other side." It is to be hoped that this "mission impossible" is not the solution of choice.

Edward Seaga is a former prime minister. He is now chancellor of UTech and a distinguished fellow at the UWI. Email feedback to columns@gleanerjm.com and odf@uwimona.edu.jm.