The amount of money the government expects to get from the International Monetary Fund (IMF) and the other multilateral agencies will not be enough to deal with the country’s cash-flow problems.
The US$1.1 billion, which the government expects to get from the multilateral agencies will not be able to meet the US$400 million needed to repay a maturing bond during the next fiscal year; provide the US$600 million needed to pay interest on the external debt; nor the US$400 million needed to support the financial sector if the debt exchange leads to liquidity problems in the sector.
The money would also not be enough to repay the US$400 million printed by the central bank, although Finance Minister Audley Shaw stressed that that the bank would be repaid from these multilateral flows.
Meanwhile, from the standpoint of the external account, approximately US$1.0 billion from the IMF money would be needed to fund the current account deficit this year, leaving only US$250.0 million to be added to the reserves, which currently stands at about US$1.5 billion.
This means that the reserves could fall to approximately US$1.0 billion, if the government draws down on the reserves to pay the US$700.0 million, which would remain outstanding after the multilateral money is exhausted.
This could lead to severe foreign pressures on the foreign exchange market during the period September to December of this year, as importers and speculators demand US dollars to fund imports, as well as to hold it for its own sake.
This could lead to a serious unwinding of the exchange rate, given that the government has given up the interest rate tool as means stabilizing the exchange rate. An unwinding of the exchange rate could lead to a big increase in debt service charges, negating the net gains from the Jamaica debt exchange programme (JDX) programme, which is projected at $30.5 billion next year.
One percent devaluation of the Jamaican dollar leads to a $5.0 billion jump in debt service charges, therefore a the normal 5.0 per cent annual devaluation of the Jamaican dollar in relation its US counterpart leads to a $25.0 billion spike in debt service charges.
The level of devaluation of the Jamaican dollar in relation to its US counterpart is determined by the difference Jamaica’s inflation rate, which is projected at between 11.5 per cent and 13.5 per cent this year and between 7.5 and 9.5 per cent next year, while America’s rate is projected at 2.0 per cent this year and next year.
This therefore means that there would have to be an 11.5 per cent devaluation of the Jamaican dollar in relation to its US counterpart in order to gain parity, if the inflation rate pans out at 13.5 per cent and 9.5 per cent if it comes out at 11.5 per cent.
This could cost the country between $57.5 and $47.5 billion in additional interest charges, wiping out all the gains from the debt exchange. The government will therefore have to find a way to pull in an extra US$1.0 billion during the next fiscal year in order to avoid this scenario from unfolding, given the weaknesses in its foreign exchange earning sectors, bauxite/alumina, remittances and tourism.
@ SDM
Stating the problems is very easy and just about anyone can do that, this that I have asked and you have also, is ok, “where is the solution”.
Well one cn well argue that’s what we paid our elected officials for and I really could not argue with that point.
The fact is they (the analysis) is just as clueless as our elected officials, so what we get is what we now have in Jamaica.
The result is a direct result of lack of knowledge and foresight in addressing our problems.
We should have someone and NCB or Scotia or even Grace Kennedy running the country along with other like minded business officials.
These guys are simply there to “eat a food”, for the next 3 years (5 when they started).
Yeah. It’s not negativity, it’s reality and it’s economics. The sort of detailed analysis that this country and the current administration is lacking. Economics is largely about projections and predicting our financial future on certain conditions. Nothing is wrong with educating the public albeit pointing out the negative side of the reality. It’s better than telling us that the Global Recession will not affect us… What the same minds must do, however, is to offer solutions. Where do we go from here? But in order to move, there must be a clear and precise assessment of the current situation and it’s projected impact… Good article. Sounds like Ralston wrote it…
There is so much negativity in Jamaica, its no wonder this country have a hell of a time moving forward.
Its take will of steel to run any type of business in Jamaica as there is nothing but doom and gloom from so many people.
As one reads this article its like the skies are falling in.
Good thing we put negative aside and focus on the positives, as that’s what going to get us out of the rut that we find ourselves.
Many can point out the problem, it take persons with a positive attitude however to identify and put in place solutions to solve the various problems.
What are we therefore to do with all this wonderful analysis that has been provided.
How can we turn this into some sort of an action?
Anyone?