Financial Resource

When the International Monetary Fund (IMF) finally confirmed in February that a US.27-billion loan for Jamaica had been approved, it put to rest several months of speculation about the agency’s return to our country. Although there have been several debates in the media about the impact that the IMF agreement may have on our economy, many people are still not very clear about what these policies will mean to them.

Recently, the Jamaica Co-operative Credit Union League (JCCUL) hosted a public forum in St Ann, where topical financial issues were discussed. Denise Garfield, JCCUL’s corporate planner, delivered an insightful presentation outlining the role of the IMF and what the agreement will signify for Jamaica.

What is the IMF?

Garfield demystified the IMF by explaining that it was an organisation made up of 186 member countries, which have the ability to borrow from the fund when necessary. The purpose of the IMF, Garfield noted, was to foster global growth and economic stability by providing policy advice and financing to members facing financial difficulties.

Using a simple analogy, the IMF is like a financial coach who will give you a loan when you’re in money problems and design a strategy to help you get back on a solid financial footing. However, before you can actually receive the money, you will have to follow all the coach’s strict guidelines.

Why did we need to borrow from the IMF?

Jamaica’s economy has been severely impacted by the global recession, Garfield explained, which has caused reductions in earnings from key export industries such as bauxite mining. Foreign exchange inflows have also decreased from overseas remittances. In addition, due to the drying up of credit sources on the international capital market, Jamaica had not been able to access enough financing to meet its budgetary needs.

Garfield pointed out that in order to access the loan facility, the IMF will require Jamaica to operate its finances more efficiently and implement reforms to establish a path for economic progress. Some of the required strategies are to:

1. Streamline expenditure and reform the public sector

2. Reduce and manage debt

3. Strengthen the financial system

What policies have been implemented in response to the IMF?

The government has already started to execute some policies that are designed to meet the IMF requirements. Garfield indicated that in order to boost income, the Government has raised existing taxes such as the General Consumption Tax (GCT) up to 17 1/2 per cent, and increased property taxes and taxes on cigarettes and some luxury items.

New taxes such as the Special Consumption Tax (SCT) on fuel, and GCT of 10 per cent on residential and commercial electricity consumption over 200kwh have also been instituted. Other methods of raising funds include the 60 per cent increase in JUTC bus fares, and a progressive rate of income tax.

On the expenditure side, the Government has mandated a wage and salaries freeze for government employees; and started the process of reforming the public sector to reduce and merge organisations and determine the optimal level of staff needed.

To address the need to reduce the country’s debt, Garfield continued, the Jamaica Debt Exchange (JDX) was established in January 2010. This programme invited holders of domestic government bonds to exchange them for new bonds with lower interest rates and longer maturity dates. The JDX has successfully helped to reduce the amount that has to be spent on interest payments.

Garfield added that the reform process to strengthen the financial system will include increasing the amount of capital held by financial institutions, amending the Bank of Jamaica Act, and instituting a new bank law that will allow for greater regulation and supervision of financial institutions.

How will the IMF agreement affect us?

Although these measures are intended to bring progress in the long term, Garfield indicated that they can lead to short-term financial challenges for most Jamaicans. Increased taxes will reduce disposable spending and money available for savings or debt servicing. Higher rates of inflation will stem from the increase in the cost of food, transportation and other bills.

Added to these problems will be the impact of hundreds of employees being made redundant. Garfield also noted that financial institutions will have to increase fees to their customers to offset losses from the JDX. The IMF has ensured that these institutions will have access to a special fund to provide cash support in case the JDX has a negative impact on their liquidity positions.

The Government has promised to increase spending on some social programmes to address the anticipated hardships. According to the IMF website, “A school-feeding programme… will benefit from this increase; and the Government will also increase the number of cash transfers to lower-income groups through the Programme of Advancement Through Health and Education (PATH).

The IMF confidently predicts that its measures will help Jamaica’s economic growth rate “to increase from -3 1/2 per cent in 2009 to 1/2 per cent by late 2010, and to rise to two per cent in 2011.”

Copyright © 2010 Cherryl Hanson Simpson

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