Nov 2010 Financial News

JDX successful beyond expectations — World Bank

Nov 07, 2010

THE implementation of the Jamaica Debt Exchange (JDX) as a means of reducing interest payments on the country's huge debt burden has proven successful beyond expectations said the World Bank Group's Vice-President for Latin America and the Caribbean, Pamela Cox.

Speaking with Sunday Finance in an interview last month in Washington DC at the IMF/World Bank Annual Meetings, she said: "The JDX has been successful beyond our expectations. To have a buy-in of over 99 per cent is incredible. Most countries struggle to get the required 80 per cent. The JDX has almost halved the interest rate the government is paying. However, this is not the solution to everything. The government still needs to follow the strict macroeconomic policies. Just because we have the JDX doesn't mean it is time to go have a party, that's our message.

"One of the things the government has been doing is meeting its IMF targets even though the last target was during Tropical Storm Nicole. We want the government to keep on the straight and narrow and we do not want it to go back into high debt again because we do not think there can be another debt exchange. We gave extraordinary financing for this,so did the Inter-American Development Bank (IDB) and the IMF. If Jamaica gets highly indebted again, there won't be the resources to cope with it."

Pamela Cox visited the island last week to see the damage done by Tropical Storm Nicole. Coincidentally, her arrival came on the very day that Tropical Storm Tomas was due to impact Jamaica.

At the annual meetings last month she met with Minister of Finance Audley Shaw and his team, the Governor of the Bank of Jamaica Brian Wynter and the Financial Secretary Wesley Hughes. They all gave an update on the performance of the economy and its current challenges. She said it was a very good meeting and that the JDX has created fiscal space allowing the government to use its money on things other than debt payments.

Cox further added that one of the things on Shaw's mind was the damage done to the country's infrastructure by Tropical Storm Nicole and the cost to repair the country. Cox said that they also talked about ways in which the World Bank could help in this area within its existing and future programmes.

Shaw could have no idea that Tomas was following on the heels of Nicole and the level of destruction that it would cause. Only last week, the IMF loaned Jamaica US$80 million to help with its rehabilitation effort in the aftermath of Tropical Storm Nicole.

At this point in time consumption has gone down, the economy has contracted, unemployment is on the rise and the recent Don Anderson poll reveals that 58 per cent of the sample survey shows that the economy is heading in the wrong direction. Adding to that, union leaders are calling for the JDX to be re-evaluated and that wage demands be met. What does Cox make of all this?

" This is a time for the people of Jamaica to pull together and make sure the country is set to get on a growth path. I have heard that the banks as a result of the JDX have increased their fees and charges. Well there has also been a big debate in the US about that. Banks do need to make money, that is what they are in business for. I think the answer here is to look to regulatory reform. Banks can certainly charge fees but the point is, are they open about those fees and are they reasonable fees."

Last month it was reported that some banks had raised their fees by as much as 400 per cent. Cox says, this is not about the JDX but rather how people in Jamaica want banks to be regulated. She added that Jamaica is not alone in this."I think we ought to put pressure on the banks to see how they can make money within a relatively reasonable regulatory framework," said the World Bank vice-president.

To date Jamaica has not seen civil unrest as witnessed in some parts of Europe as a result of austerity measures to reduce huge deficits. Some say particular care must be taken in communicating to the people why the government has taken its particular course of action. Cox believes that it is important for Jamaicans to understand the medium-term objectives.

"I know it is difficult particularly for people living on limited salaries having to make ends meet. But here we are talking about the national good. What does it take for Jamaica to take off? If everybody is loading down the plane with a lot of demands it will not take off. We put a lot of fuel in the plane (JDX) and that was meant to really supercharge the take-off. So let's make sure the take-off happens.

"Many groups probably have made demands of the minister and he needs to balance those. There also needs to be a sense of buy-in. The question has to be asked, what is the future of the country? I was once talking to someone in Chile and asked what is one of the secrets of Chile's success? The person replied, well no one wanted to go back to what the country was before. So they started a national consensus on the way forward. That's the challenge for Jamaica. It has weathered the global crisis and many other countries did much worse. People need to come together and make sure when there is more growth that will be the time to talk about wage increases," explained the senior World Bank official.

The World Bank's chief economist for Latin America and the Caribbean, Augusto del a Torre, believes that one of the reasons many Latin American countries have done well is that they have formed new trading relationships with emerging economies like China and India whereas many Caribbean countries are inextricably linked to the United States, Canada and the UK. As these First World economies founder so-to-do Caribbean countries whose fate is tied to those in the north.

"That's one reason why Mexico got hit so hard because its economy is closely tied to the United States. What we have seen in South America is much greater diversification of trading partners, not only with the United States but Europe, Asia and the Middle East. The challenge for the Caribbean is to diversify its trading partners and diversify its sectors where it is going to have growth. The Caribbean has great natural resources and it also has a great location and the question is bringing these advantages together and making it work for the Caribbean.

"There are also challenges because Caribbean countries are by and large small. We know that small countries have more problems. All the more reason why many of these countries should co-operate with each other and form a bigger economic space. Europe is the example of this although Europe's co-operation started because of conflict. It takes time, after all European union has been going on for almost sixty years. Certainly there is strength in numbers for the Caribbean. Creating that co-operation allows you to work to scale, after all some countries have come together with a common central bank. The more you can co-operate to get greater efficiency then those resources can be used for other things to help growth. I think that's the conundrum of small countries.

Jamaica continues to be beset by natural disasters. In the space of weeks it has had to contend with Tropical Storm Nicole and Tropical Storm Tomas. It seems every year brings some sort of occurrence. That being the case shouldn't there be a serious contingency in the budget to address this? Shouldn't the government be saying in case, we get hit, we can draw down on some funds of our own to help rehabilitate the country?

Cox said: "Many countries do that. Unfortunately, many countries in the Caribbean and Latin America are prone to these disasters. We at the World Bank recommend a policy that has several elements. One is insurance, that is why we did the CCRIF. The CRIFF is still small but can grow; however, countries have to pay for it. Some countries like Chile have employed a savings fund. Chile has put some of its copper revenues in such a fund to assist it when times get rough. It operates rather like a savings account. The third thing we look at is prevention. Things like building codes, straps, special roofing helps to cut down on damage. We also have a financing instrument which is a development drawdown option. We make the loan but do not disburse it unless there is a natural disaster and the minister says he needs funds immediately. We have done this in Costa Rica, Guatamala and Peru. I certainly think having some sort of national savings account for disasters can help."


Source:
BY AL EDWARDS
Jamaica Observer
Sunday November 7, 2010

http://www.jamaicaobserver.com/business/JDX-successful-beyond-expectations---Pamela-Cox_8122590