It should be obvious that discussions about the Jamaican Government's management strategy for the ballooning public sector debt have once again taken centre stage in the current negotiations with the International Monetary Fund (IMF).
The composition of the team of technocrats from the Ministry of Finance and the Bank of Jamaica (BOJ) that left the island this week to continue discussions with the IMF suggests that they will be concentrating on issues such as:
1. A review of the country's public-sector debt management strategy over the medium term.
2. Given the current shortfall in government revenues, the impact that this will have on debt repayment and interest rates.
3. The impact of the recent downgrade of Jamaica's debt by Standard and Poor's (S&P) with a negative outlook and the resulting drop in GOJ bond prices which has led to margin calls by foreign brokers holding these bonds.
4. The impact that any debt refinancing and/or debt restructuring by the GOJ could have on financial stability in the domestic financial markets.
The Jamaican team is being led by Darlene Morrison, deputy financial secretary with responsibility for economic management, along with Pamella McLaren, senior director for the Ministry of Finance's Debt Management Unit.
These are two of the most senior and respected technocrats in the finance ministry in relation to the management of the Government's public-sector debt.
They are joined by Dr Brian Langrin, director of financial stability at the Bank of Jamaica (BOJ), and Maurene Simms, deputy division chief, Financial Institutions Supervision Division at the central bank.
Stress tests
The latter two are relatively junior in the BOJ pecking order. However, Dr Langrin is considered a math whiz and will be extremely useful in performing stress tests and modelling various scenarios of the impact of certain decision on the Jamaican financial system, while Simms has hands-on knowledge of the financial stability of the key financial institutions and their subsidiaries.
Neither individual would be expected to make decisions concerning monetary policy. This is clearly in keeping with the impression that has been given by persons close to the long, drawn-out IMF negotiations that there are no substantive issues outstanding with the fund regarding monetary policy.
Rather, the continued sticking point in the negotiations is with the development of the macro-economic framework that incorporates a drastic cut in the fiscal deficit to around 5.0 per cent of GDP for the next fiscal year and further reductions in March 2012 and 2013.
To achieve such a dramatic cut in government expenditure over the next two years will involve a significant reduction in public-sector debt as well as a drastic cut in the public-sector wage bill.
During the first six months of the current financial year, the Government borrowed approximately $131 billion, or $9.2 billion more than it originally projected.
At the same time, there was a massive revenue shortfall during the same period of $15.7 billion, leading to deterioration in the fiscal deficit to $65.8 billion, or 5.9 per cent of GDP as at the end of September 2009.
In other words, the original Budget estimates in April called for a fiscal deficit target for the entire fiscal year in the region of six per cent - this was accomplished in just the first half of the financial year.
And given the continued shortfall in revenue collection and the slowdown in the productive sectors, it is quite possible that the revised deficit projections of 8.7 per cent of GDP at the end of March 2010 will be significantly overshot.
Given, therefore, that the IMF is pushing for a drastic reduction in government expenditure and the PM's indication that the Government now intends to eliminate the fiscal deficit by 2015, lowering of interest rates precipitously cannot be the ultimate solution.
It is hoped that the IMF is insisting that the Government bring on board all of the outstanding contingent liabilities that are currently outside the of books of central government.
Unsecured overdraft
These include guaranteed loans and budgetary support for ailing public bodies such as the Jamaica Urban Transit Company, Air Jamaica and the Sugar Company of Jamaica, but there are other looming debts that have been contracted by so-called 'profitable' public bodies that need to be checked.
Certainly, an analysis needs to be done on the use of the various dedicated funds, among them the PetroCaribe Fund and the Tourism Enhancement Fund.
Then there are the unsecured overdraft facilities and build-up of arrears in the public sector. All of these need to be quantified and brought into the central government budgetary process.
In terms of debt management, players in the local financial institutions are flexing their muscles, suggesting that they will not accept any debt management solutions that are not net present value neutral.
But it should be obvious to all concerned, as the IMF talks drag out, that there are no easy solutions, and pain and losses will have to be suffered by all sectors of the Jamaican economy, including the financial sector.
The time for blustering is over. The November deadline will not be met and the IMF talks will now quite likely drag on into the New Year.
renee.shirley@yahoo.com