R. Anne Shirley, Business Writer

The Bruce Golding administration has demonstrated an unwillingness to level with the Jamaican public as to the severity of the current financial situation and the prospects for the future.

We have a problem with spiralling inflation. And, even with announcements that we should expect to see lower electricity bills and lower food and gas prices, this will be tempered by the fairly swift devaluation of the Jamaican dollar against the United States currency.

But when will the slide in the dollar end? And what impact will the continued slide of the dollar have on rising prices?

Last week, the Ministry of Finance floated a two-year 11.5 per cent US-dollar-denominated bond and variable-rate bond on the local markets.

Just last month, there was great consternation among major players in the local financial markets because the authorities had issued a similar fixed-rate USD-indexed bond at a coupon rate of eight per cent per annum, as well as a similar variable-rate bond.

In one month, the interest rate offered had moved by 3.5 percentage points.

The governor of the Bank of Jamaica (BOJ) has defended the pricing of the new bonds as indicative of the range in which investors expect to get a return in the current environment.

If USD-denominated bonds are attracting a fixed return of 11.5 per cent per annum for two years, what will investors expect to get on Jamaican-dollar instruments over a similar time horizon, and what impact will this have on interest rates generally, and on debt servicing in the budget?

Interest payments

According to the Inter-American Development Bank, each one per cent decline in the exchange rate will likely raise the debt stock by 0.5 per cent of GDP and interest costs by 0.1 per cent.

Each one per cent increase in average interest rates would increase interest payments and the fiscal deficit by around 0.5 per cent of GDP.

A simple math calculation would indicate, therefore, that: (a) if the Jamaican dollar has depreciated approximately eight per cent against the US$ (b) since most of our foreign debt is USD-linked and/or is in US dollars, and further (c) that overall, around 49 per cent of total debt carries foreign-currency risk, then it is logical to conclude that the significant jump in the interest rate offered on the USD-indexed bonds last week will have negative implications for debt servicing and the debt to GDP ratio.

The picture is compounded by the fact that the prevalence of variable-rate bonds in the debt mix means that roughly 37 per cent of the debt carries floating interest rates.

Economic framework

As a result, as interest rates increase, the interest rates on the variable-rate bonds will also increase.

The medium-term economic framework on which the 2008-09 Budget was formulated called for the maintenance of constant real effective rate in terms of the exchange rate (J$/US$ average).

We were told that the exchange rate fiscal year 2007-08 was $69-$70.

Therefore, if one accepts the projections offered by the BOJ, supported last week by Senator Don Wehby, that inflation of the current fiscal year will be around 15 per cent, then this would suggest that with the maintenance of a constant real effective forex rate we should expect this to end up in the region close to 80:1

Debt servicing for the current fiscal year was projected at $263.93 billion, or 54 per cent of the budget. This was a 25 per cent increase over the FY 2007-08 outturn.

The Ministry of Finance indicated in the memorandum to the 2008-09 Budget that this increase was due primarily to "higher interest rates, depreciation of the Jamaican dollar and the central government's assumption of contingent liabilities".

The debt-servicing estimates were based on an inflation rate turnout of 10 per cent and GDP growth projections of three per cent for the current fiscal year.

All of these projections have been shot and the situation is grim.

Let us try to deal with this issue with a sense of urgency so that the entire nation can understand the gravity of the situation and the limited options available.

Good track record

Perhaps the most interesting statement made on the economy this week was a comment by the governor of the central bank that he would not recommend to the Government that it try to access the IMF short-term liquidity facility (SLF), because it is only available for three months.

The reality is that not every country can access this facility. It is available only to those countries with "strong policies and a good track record" who have the seal of approval from the IMF based on their Article IV consultations.

Also, any borrowings from the IMF under the SLF facility is such that a country can borrow up to five times its quota and the three-month facility can be rolled over three times during any 12-month period.

rashir0@hotmail.com