Sep 2006 Financial News

IDB loan freeze - Jamaica

Sep 01, 2006

The Inter-American Development Bank (IDB), Jamaica's largest source of multilateral funding, has put a hold on new capital loans for the next three years, saying the country has not invested promised resources in projects already underway.

The lending agency has signalled, however, in its Country Strategy Report for Jamaica looking ahead to the year 2009, that private sector, disaster recovery and policy development programmes would not be affected.

Of the $5 billion government should have invested in 2004/05 on IDB-financed jobs, it only put up $1.25 billion, the bank said.

"Moreover only 46 per cent of the approved budget was actually released in expenditure 'warrants'," said the IDB.

The report dated August 3, 2006 did not state declaratively that the IDB was pulling back funding, but its tone was clear.

"Since the projected budgetary allocation for IDB-supported projects during the period from 2006/07 to 2007/08 is lower than the amount required to finish the existing projects within a reasonable time frame," it said, "there is no budgetary space for further investment loans."

"This implies that the Bank's programme for 2006-2009 will have little public sector investment lending and rather focus on policy-based lending, grant modalities for catalytic actions, and private sector lending."

But not so clear was whether the decision would affect projected loan approvals of US$120 million to 2009.

Finance Minister Dr. Omar Davies did not immediately respond to a request for comment on the implications of the report for his programmes.

Up to March, Jamaica owed the IDB $38 billion on the 97 projects/ loans it currently finances here, according to finance ministry figures, a figure that runs close to the IDB's US$626.1 million (over $40 billion) projection for 2006.

The development bank said Jamaica, a country of some 2.7 million people, was not getting value for money from projects on the ground, whose execution was limited by constrained government expenditure in the economy.

"The reduction in the govern-ment's investment programme caused budgetary allocations to IDB-supported projects to fall far short of that needed for a normal pace of implementation," said the bank.

"This has contributed to slow project execution and extended project lifetimes, delayed or prevented the achievement of development objectives, and increased the ratio of project administration and financial costs to disbursements."

From four per cent in the 1990s, capital spending is now at two-three per cent of budget, the lending agency said.

Already government has cut more than $1.7 billion off the $6.15 billion that was programmed for spending over the April-June quarter. Total budget for the year is $28 billion.

Government spending is a key component of GDP, and a limit on public sector investment in infrastructure and services is seen as a constraint on growth in the economy.

But with a heavy $858.6 billion debt as at April, and limited revenue flows, Davies has opted to prioritise his expenses.

"Over time, growing current expenditures - particularly on interest payments and wages and salaries - combined with the GOJ's desire to reduce the budget deficit, have crowded out capital expenditures," said the IDB.

"Consequently, because govern-ment investment is small, financing required for investment is small. General financing that can be used to roll over debt or finance recurrent budget deficits is more useful for the GoJ," said the report.

Bank's competitor

The IDB, having noted an 'increased reliance' on commercially raised domestic and external debt, also seemed peeved that Finance Minister Dr Omar Davies had opted to borrow from the market - which essentially would be the bank's competitor - instead of tapping its cheaper development funds.

Making reference to its support of Jamaica "at critical junctures", through disasters and the financial sector meltdown of the 1990s, the bank signalled it would put new limits on its lending programme over the medium term.

"The GoJ's experience with the speed and flexibility of international capital markets in recent years has given rise to dissatisfaction with the operational pace and rules and procedures of the development banks," it said.

"These factors, and more fundamentally, the GoJ's growing need for general financing rather than investment project-specific financing, suggest that the IDB-Jamaica relationship needs modifications and that the Bank's programme in the short-to-medium term will be more limited - and more focused than in the recent past."

The strategy report said as at December 31, 2005, the bank's Jamaica portfolio had 13 investment loans valued at US$258 million, US$96 million of which had already been disbursed.

Largest supplier

The IDB has been the largest supplier of multilateral loans to Jamaica, accounting this fiscal year for $1.42 billion, plus a portion of the $597 million for programmes it co-sponsors here with the World Bank - which together top 40 per cent of the total $4.51 billion lending agency funding programmed in the budget.

Those external funds pale in comparison to the near $120 billion that Davies has to raise on the capital market to close the gap in his $358 billion budget, with the IDB referring to its loan contribution as "modest".

The bank has not totally shut the door on loans to Jamaica, saying "should the fiscal situation improve sufficiently to allow for further investment borrowing during this Strategy period", it would "leave open the possibility of preparing new investment loans, if requested by Government."

Lavern Clarke
The Jamaica Gleaner
Friday, September 01, 2006.
http://www.jamaica-gleaner.com/gleaner/20060901/business/business1.html