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The IMF in the Caribbean

Saturday, November 25, 2017

The newspapers reported that Ms Christine Lagarde, the IMF Director, lavished praises on Jamaica for the remarkable job that they have done to turn around the economy. The crux of the turnaround is that some 50,000 jobs have been created in construction, but more importantly, in business process outsourcing, an industry which earns foreign exchange but is threatened by artificial intelligence.

Jamaica is at present under the dictates of the IMF, a four-year Extended Fund Facility signed in 2013. Surely the IMF should be pleased but we should not forget that Jamaica has been under the IMF tutelage over a period of 30 years, since independence, and has seen its currency devalued from J$1 to US$1 to J$131 to US$1 with no sustainable improvement in the economy of the country.

Jamaica is testimony to the IMF’s colossal failure in the Caribbean, also testimony to the claim of DeLisle Worrell that the IMF does not understand that small open economies are different from those of the developed world and should be treated differently.

Hence we should view with caution the recent recommendations of the IMF with respect to our current recession. One of the recent IMF recommendations to the T&T Government is that the T&T dollar is overvalued and this is slowing the country’s pace of economic recovery. How? “… a significant exchange rate adjustment (23.6 to 48.5%) would help restore competitiveness, external and foreign exchange market balance and help counteract the adverse consolidation on growth and allow higher consumption and national welfare in the long run.”

The track record of the IMF in Jamaica as to the impact of significant exchange rate adjustments lends no credibility to its recommendation to the government of T&T.

The T&T’s recession is due primarily to the reduction in foreign exchange rents that are predominantly earned by the energy sector. The on-shore exporters contribute minimally to this and even so their activity depends in general on the import of materials etc. Also, the rents paid on-shore by the foreign energy sector investors are the major contributions to the foreign exchange earned, which a devaluation will reduce in the short term.

Further, the major characteristic of the local economy is that it cannot increase exports or replace imports by local production in the short to medium term. Hence the task of the government is to contract the economy, reduce aggregate demand on-shore at a rate at which the population can tolerate via the use of our reserves, savings (HSF), sale of assets, borrowing, while imposing import and tariff constraints (under the WTO balance of payments provision), increased taxation both on- and off-shore and reducing its spending and subsidies.

The IMF, as normal, focuses on the impact of government’s activity in the short term on debt increase, reduction in savings and reserves, demand for foreign exchange in the market by the import, markup, sell businesses. Hence the IMF congratulates the government on its attempt to contract the economy but says more should be done.

Still, the IMF in the far reaches of its collective minds, recognises the problem is the drop in export earnings and suggests very superficially that the country has to turn to non-energy exports to return to growth and that the minuscule on-shore exports remain uncompetitive because of the overvalued dollar. Productivity on-shore is abysmally low and devaluation, which triggers its own dynamics as we saw in Jamaica, is not the solution to low productivity—see Michael Porter in his “Competitive advantage of Nations”.

However the IMF talks about structural reforms that are necessary for enhancing growth and diversification to take us out of the recession. However, these IMF recommendations are improvements in the domestic business climate, reforms to government “make-work” programmes, improvement in the procurement practices and achieving greater efficiency and cost savings.

Further, the IMF says that data-shortcomings will continue to hinder policy making and surveillance, ie the implementation of the National Statistical Institute is imperative. The IMF has repeated the hope that the improvement in natural gas supply in the energy sector will improve the sector’s income and hence both government’s revenue and the inflow of foreign exchange.

What is missing from the IMF’s narrative is the simple appreciation that in our small open economy when the energy sector rents fail the economy has to be contracted and the only hope of recovery in the short term is a resurgence of the energy sector, and, in the medium to long term, the production of new export goods and services that are globally competitive.

The IMF is singularly concerned with the impact of the measures to contract the economy on debt, reserves, availability of foreign exchange etc. Though the IMF talks about structural adjustment, about the business climate in the country—encouraging local and foreign investors—it is silent on how does this economy go about building new globally competitive exporting companies, it is silent on how to build a national innovation system. This is obvious from their activity in Jamaica where the accent on the support was on debt, reserves, inflation, interest rates, balance of payments, etc.

Hence, we have to support the efforts of Dr Terrence Farrell in the Economic Development Advisory Board and hope that the government listens—the way ahead is to build these export companies, which will need some investments of scarce foreign exchange, which can come particularly from our HSF savings. You do not build a heritage by not investing in our future.

St Augustine


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