Commentary Jamaica Magazine

Why our economic growth matters more than debt?

Written by Brian Richardson

Why our economic growth matters more than debt?

The real worry is not how will all of us Jamaicans repay foreign creditors but rather what will maintain our creditors desire to keep buying GOJ interest-bearing securities from us?

Our national debt recently eclipsed J$1.6 trillion, and is still climbing, with nearly 50% of that debt being added in the first 11 months of 2011. This has generated many headlines and raised many questions. Has the debt burden become unsustainable? How will our children and grandchildren ever pay off the debt we have been accumulating across both political parties?  The answers may have some surprises.

Who Owns our Debt?

The pie chart below is a simple way of showing how our debt is broken down by owner.  This was constructed from the November 2011 data from the Ministry of Finance.

Most, if not all of our internal debt is owned by Jamaicans, while just over half (53%) of our external debt is owned by private creditors – long thought to be Jamaicans living overseas.  What does the pie chart tell us? That the persons most eager to exchange their Jamaican dollars and US dollars for interest-bearing  GOJ debt is likely to be Jamaicans based inside Jamaica and possibly externally.

How will we pay those Jamaicans back?

That is a confusing question, because every time one of their GOJ securities comes up for payment, we really do “try” and pay them back with (non-interest bearing) JA dollars (or JA dollars converted to US dollars for U$ debt).  We are duty-bound by our constitution to redeem their maturing bonds with JA dollars; otherwise, we would be in default – a scenario that we should never consider.  But because our GOJ interest rates have been so high, our debt holders have been turning right around and exchanging their cash, in the open market, for brand new GOJ-backed securities.  In sum, we keep trying to pay them back, but they’d rather hold interest-bearing bonds than non-interest bearing Jamaican dollars. However, not rolling their maturing bonds over into new GOJ-bonds, would put tremendous pressure on our exchange rate as these creditors seek a safer haven for non-interest bearing Jamaican dollars (this protects them from inflationary effects).

So the proper question is not how will we repay local Jamaicans and possibly overseas Jamaicans back, but rather how do we propose to maintain their desire to buy interest –bearing bonds from us?  The answer: A healthy, robust, growing economy is the only way to maintain their confidence in the long run.  For, god-forbid, if they ever started losing faith in our economy’s prospects, their desire for holding GOJ bonds would wane, creating upward pressure on our interest rates (and we know how that is like) and pressure on the exchange rate (read higher inflation); and none of that would help our “debt burden” – which is explained below.

Our priority should not be how to pay them back; it must be on how to get our economy growing again and creating the jobs our country so badly needs.

How much of a burden is the debt really?

Because of our small and historically weak economy, the demand for GOJ bonds has been driven largely by high-interest on our GOJ bonds.  Because the debt has almost always been rolled over, the debt principal (the initial amount borrowed) has not been much of a burden to us taxpayers.  The “burden” we taxpayers have borne has always been the interest on those GOJ bonds – not the principal.

The debt “burden” is directly indicated by the “interest bite”; this is the portion of tax collected required to cover the interest on our debt.  When the interest bite is increasing as it is today, the debt becomes less sustainable; conversely, when the interest bite is decreasing, the debt is becoming more sustainable.

What makes the interest bite grow or shrink? Our total debt level is just one of three major factors.  The second factor is the interest rate demanded by the Jamaicans purchasing our GOJ-bonds; for example, when they demand only a hypothetical 1% interest, the “burden” of any given level of debt is 80% less than it would have been had they demanded a 5% interest rate. 

The third factor affecting interest bite is the level of tax collected. For any given tax-rate structure, the stronger the economy and the more people who are working and paying taxes, the larger the government’s tax collection – and happily, the lower the debt burden, i.e. the interest bite.  So for our small economy, the low numbers of people working and paying taxes, and the large informal economy that does not pay taxes, the interest bite is significant.  In 2009/2010 our local debt ALONE accounted for an interest bite of about 96 cents of every dollar earned in taxes collected – a whopping 96%!

In sum, there is greater pressure on the “debt burden” when interest rate rise, or the debt level increases, or tax receipts fall.  On the other hand, there is less pressure when interest rate falls, or the debt level decreases or tax receipts increase.  In our current situation our interest rates have fallen, but our debt has increased significantly in a short period of time and tax income has fallen precipitously during that same period.   And this latter scenario, regardless of your political affiliation, is critically harmful to Jamaica.

And with that, it is time to answer the question, how big is our debt burden today? The graphic below shows the answer.  This is taken from GOJ Ministry Paper “Debt Management Strategy” dated April 28, 2011.

The chart above shows how the interest bite has tracked for the last 20 years, through to December 2010. This spans both JLP and PNP administrations. Why is this important? Because as Jamaicans we need to realise that this political football called who-racked-up-the-debt, is threatening the very survival of those that have no other home but this Rock.  

So why is today’s debt burden – as measured by “interest bite” – such a concern? Our interest rate might be lower and inflation stable – that is good news –  but it carries with it an menacing condition: with the debt level is skyrocketing, as it has been over the past 12 months, any increase in interest rate will quickly cause the interest bite to skyrocket sharply as well – unless it is counterbalance by additional tax income generated by either more taxes on the already over-taxed PAYE workers or by a rapidly growing economy where more persons are employed and paying taxes.

In short, today’s relatively stable environment, caused largely by depressed demand due to a contracting economy and depressed global demand for our services and goods, is merely indicating we have at least some runway left before it starts rapidly changing; we would be well advised to use the runway for getting the private sector economy back to robust growth rates.  And the private sector has to commit to using those non-interest bearing Jamaicans dollars in encouraging new business ventures inside of Jamaica, similar to the “Mogul in the Making” start-up bolstering project.  

‘It’s the economy stupid’

Everything about keeping the debt burden at an acceptable level ultimately depends on the health of our economy.  Can we continue to count on our largely wealthier Jamaicans to continue rolling their maturing GOJ-bonds? Can we count on continued low interest rates?  We can if the economy gets back on track and every Jamaican that is able to be productive become productive and we replace a lot of our imports with locally produced goods and services. If we do this, then we can expect the debt burden – the “interest bite” – to reduce into the “good-to-go zone”; below 40% of our tax collected.

Once more, all of those factors depend on the size, health and growth of our economy; and that depends directly on each and every one of us Jamaicans: politicians of all stripes, civil servants, “up-towners”, “down-towners”, the poor, the wealthy, and the middle class, – frankly, you and me.  The bond market’s judgment as to the GOJ’s creditworthiness depends on it, and the bond market “knows” that growing the Jamaican economy is far more essential than reducing or “paying down” our national debt. In sum, what is important for the sustainability of our country is not the debt level; instead, what’s far more vital is to keep the debt burden – the “interest bite” – inside the guardrails –  i.e., inside the Caution Zone, or preferably inside the Good-to-Go Zone.

How the next five years pans out will be directly related to what each of us Jamaicans chooses to do…it’s not just up to our politicians, it’s really up to each and every one of us – you and me!

References:  All data and charts used were obtained from Ministry of Finance’s Debt Management Unit dated April 28, 2011 and available at www.mof.gov.jm .

  The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Jamaicans.com

About the author

Brian Richardson