The Editor, Sir:

I agree with Dennis Morrison's assessment (The Sunday Gleaner, September 27) of the Government of Jamaica's current position with regard to the International Monetary Fund (IMF). There is no choice, but to have an agreement and any such will involve conditions to enhance revenue and cut expenditures. If it doesn't, things will only get worse.

The real tragedy is that the Government is approaching the IMF after the unfolding of the global financial crisis, and seemingly reluctantly rather than proactively.

Debt servicing consumes over 40 per cent of the Government's budget. This is a consequence of the stock of debt and the cost of the debt. Assuming default not to be an option, the only way that this can be reduced is by lowering the cost of it. This means being able to reduce the interest cost.

Multilateral debt

Under the previous administration's policy, the breaking of ties with the IMF resulted in much multilateral debt being replaced by money raised from private capital markets, including a massive expansion of locally issued instruments. While this may have freed the Government of the conditionalities of the IMF and other multilateral institutions, it resulted in a massive increase in real interest costs.

The market has required the GoJ to pay a risk premium (for US dollar-denominated debt) equivalent to four to six per cent over US base rates. Under an IMF-supervised programme (and with a policy decision to replace as much "market debt" with multilateral debt as possible) this might be reduced to two to three per cent - with a corresponding reduction in the cost of debt service.

As Morrison pointed out, whatever the eventual agreement, economic growth is the only sure way out of the problem. Shuffling the cards can only do so much. Foreign direct investment is welcome and necessary for a (relatively) capital poor country. However, the local private sector must take the lead.

I think that perhaps the greatest harm of the debt (and the high-interest regime which has existed) is the way it has affected the private sector's will to invest. Normally, this is blamed on the cost of borrowing. This is a fact. I know from personal experience of many projects that have been passed up - normally not because of interest costs alone, but because elevated "hurdle rates" cannot be met.

Major beneficiaries

However, what the "private sector" spokesmen do not say is that, collectively they have been among the major beneficiaries of the high-interest payments to holders of GOJ bonds.

The simple fact is that many of the "business community/owners of capital/private sector" have had the easiest ride of their lives for the past decade and more. The banking system is largely supported by the profits from this paper chase. I do not think the private sector is as fit as it should be after so many years of easy living. The investment by many well-placed business people, professionals and companies in foreign-exchange trading schemes (in an attempt to achieve high returns at a time when real interest rates had started to decline?) is a symptom of this.

The point is that reducing real returns to investors in GOJ bonds might also be the best way of forcing Jamaica's private capital to get back to work.

I am, etc.,

STILL OPTIMISTIC JAMAICAN