The International Monetary Fund (IMF) says that its decision to allow US$90 million from Jamaica’s immediate access to some US$207 million from the new Extended Fund Facility (EFF) to be used for budget support, is unusual but not unique.
“All IMF loans are for balance of payment support, however, there are circumstances under which you can interpret certain exigencies as supportive of balance of payment, and that was the case with Jamaica,” says Gene Leon, the IMF’s senior resident representative in Jamaica.
Concern has been raised in financial local circles recently over Minister of Finance and Planning, Dr. Peter Phillips’ announcement in Parliament that US$90 million from the first drawdown would represent direct budget support for the government.
“Under normal circumstances Fund resources are only available for balance of payment support,” Phillips admitted. But, he said that he was happy that the IMF agreed to allow money to be directed to budgetary support.
“We are happy that the Fund has agreed to break with custom, though not in an unprecedented way, and devote a portion of the resources to direct budget support, particularly because the support pledged by the other multilaterals will not begin to flow until after this first quarter of the fiscal year,” Dr. Phillips said.
He pointed out that the alternative would have been to approach the domestic market in the interim, with concerns about “crowding out” the private sector and putting “upward pressure” on interest rates, which the administration did not favor.
“It is not that we are making a direct budget (intervention) in the ordinary sense of financing for the government. It was to facilitate the balance of payment support function. That is the only function the Fund can actually lend under,” Leon pointed out.
Explaining the exigencies in Jamaica’s case, Leon said that the support fund, first created by the previous government as insurance for local businesses from the effects of its Jamaica Debt Exchange (JDX) in 2010 and now been copied by the current government with a name change to the National Debt Exchange (NDX), will benefit from the concession.
Bank of Jamaica (BOJ) Governor, Bryan Wynter, while insisting that the impact on the financial institutions affected by the NDX will be manageable, believes the fund is necessary to ensure stability.
“Our technical team has reviewed the debt exchange offer in detail and has run various stress tests that assure us that the temporary impact on financial institutions’ profitability and capital adequacy will be manageable,” Wynter said.
“Nonetheless, in order to ensure financial stability, the Government has revived the Financial System Support Fund (FSSF), which will be administered by the Financial Regulatory Council on behalf of the minister of finance,” he said.
The initial rescue fund amounting to US$950 million was unused under the JDX. The proceeds were subsequently transferred to the BOJ to boost the country’s reserves.
Under the NDX, the Government aims to save J$17 billion in annual payments from cutting interest on domestic bonds. But, external global bonds mainly held by foreign institutions remain untouched. However, experts agreed with the government’s decision to focus on domestic debt as a positive that will reassure foreign creditors. “The Government is basically saying that the external debt is senior to the domestic debt,” says Dr Carl Ross managing director of investments at US-based Oppenheimer & Company.
The IMF says that the main objective of the program is to put public debt on a firm downward trajectory, and thereby create a virtuous cycle of debt sustainability and higher economic growth. ∅