Ebook Evaluating Jamaica’s Fiscal Sustainability Using Co-Integration And Primary Gap Indicators
Over the last decade the sustainability of public debt has emerged as a major economic issue for Jamaica because it has been ranked among the most indebted countries in the world. The country’s high public debt burden has severely impaired the capacity of the economy to achieve sustained growth and development as a significant portion of available fiscal resources has to be channeled to the servicing of debt obligations (Blavy, 2006).
Arguably, fiscal indebtedness is not only about causing exchange rate fluctuations, exerting pressure on domestic interest rate but, also, about the inability of government to fund expenditures on critical infrastructural and social programmes, including the development of human capital, that would promote, foster and stimulate growth opportunities (World Bank, 2008).
Caribbean Policy Research Institute (CaPri) reported in its working paper of 2008 that “This enormous debt burdens the economy with debt service that is the equivalent of 15 percent GDP, siphons off the largest portion of tax revenue, and severely constrains the country’s development options”.
Published data by the Bank of Jamaica showed that the country’s public debt to GDP ratio, although declining in recent years was 130% in 2007 and the levels of primary surplus increasing significantly over the last 5 years. Over the same period, total external debt service obligations which have been trending upwards, jumped from US$523 million to US$911 million while interest payments more than doubled, increasing from US$178 million to US$427 (Bank of Jamaica, 2008). According to the World Bank in 2005, 49% of the country’s internal and 25% of the external debts were exposed to variable interest rates, thus suggesting that a 400 basis points rise in interest rates is expected to amplify interest payment commitment by about 25%.
Mounting public debt has retarded the country’s performance as supported by some of the leading economic indicators. Over the last decade GDP growth averaged a meager 1% per annum, annualized inflation rate consistently remained in double digits, interest rate continued to linger in the low 20% region while the government was confronted with a persistent and growing budget deficit that leaped from J$19 billion in 1998/99 to J$42 billion in 2007/08. Given the persistently high levels of fiscal deficits and the soaring public debt to GDP ratio the critical issue is whether the debt is sustainable in the short, medium and long term.
The main purpose of this paper is to test empirically Jamaica’s fiscal position in order to assess whether the country’s debt standing is sustainable. This study differs from previous investigations (Holland, 2006, Sheckleford, 2006) undertaken for Jamaica in several ways. One, instead of only employing the traditional sustainability tests the paper uses co-integration analysis and complements these results with primary gap indicators to determine the sustainability of Jamaica’s debt position over time. And, two, the paper focuses on the more recent period of 1999 – 2008, in contrast to the 1990s period (Lewis, 2004).
The reminder of the paper is organized as follows. Section 2 presents the two debt sustainability instruments that will be used, as well as, providing a brief review of the empirical evidence of Jamaica’s fiscal position. In Section 3 the co-integration methodology, data and empirical results are discussed along with the primary gap indicators. Section 4 concludes and outlines policy recommendations.
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