Multilateral Debt Cancellation Would Provide Jamaica with More Resources than New Loans, Paper Finds

A new issue brief from the Center for Economic and Policy Research (CEPR) finds that multilateral lenders the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB) could provide greater assistance to Jamaica through cancelling existing debt than through making new loans. The brief, "The Multilateral Debt Trap in Jamaica," finds that compared to a net cash flow of $350 million from the loans, such debt cancellation would free up $1.6 billion from 2013-2017, providing important resources as Jamaica is being forced to cut spending under its IMF agreement.

"If the IMF and other multilateral lenders truly want to help Jamaica, they would do better by canceling existing debt," the paper's author, CEPR Research Associate Jake Johnston said. "Right now, Jamaica has the highest debt interest burden in the world, yet it is being forced into a program of budget cuts and other austerity under its agreement with the IMF."

The brief notes that even after new loans from the IMF, World Bank and IDB, Jamaica will actually have a net outflow of $100 million to those institutions in 2013 due to debt service payments.

The brief notes that previous debt exchanges did not affect external debt, nor did they reduce the principal of the domestic debt. Jamaica's IMF-backed economic program aims to achieve a debt/GDP ratio of 126.5 percent by 2017, and that while such "debt/GDP ratios can be a misleading target, if this is truly the goal, it could be achieved virtually overnight" through debt cancellation. The paper estimates that "With multilateral debt cancellation, Jamaica's debt/GDP ratio would shrink from 146.9 percent of GDP to 123.4 percent."

The brief also notes that such debt cancellation would reduce the share of Jamaica's debt denominated in dollars. This would be positive, since as the Jamaican currency depreciates the burden of the dollar-denominated debt increases. The paper notes that "Jamaica might have to depreciate its currency in order to have a sustainable current account deficit, thus placing the health of public finances at odds with Jamaica's long-term economic development."

"If Jamaica wants to escape its current cycle of debt, budget cuts, more debt, and more cuts, than Jamaica and its lenders are going to need to try something different," Johnston said. "Debt cancellation would be a step in the right direction."

Jamaica has owed these multilaterals large sums for many years, but this debt has increased significantly since Jamaica signed an IMF agreement in 2010, and stood at $3.26 billion (39.5 percent of its total external debt) in December 2012. Loans from multilaterals accounted for 70 percent of the total increase in Jamaica's external debt from 2006 to 2012.