Jamaica has a bad-debt team

What the new South African government can learn from the land of bauxite and beaches

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‘Debt-service costs’, said Minister Enoch Godonwana during his 2024 Budget Speech, ‘will absorb more than 20 per cent of revenue’. To put this into perspective, spending on debt-service costs is greater than the respective budgets for social protection, health, or peace and security. We’re paying interest through our noses.

The reason is that South Africa’s debt is disconcertingly high, and climbing. ‘Debt will now peak at 75.3 per cent of GDP in 2025/26,’ the Minister announced, partly due to a windfall from the Gold and Foreign Exchange Contingency Reserve Account. This is almost two percentage points higher than what he announced in last year’s Budget Speech: ‘Government debt will stabilise at a higher level of 73.6 per cent of GDP in 2025/26’.

Or go back even earlier, to Minister Gigaba’s 2018 speech, when we were promised that the main budget primary deficit would close over the medium term, ‘helping to stabilise the gross debt-to-GDP ratio at 56.2 per cent of GDP in 2022/23, and declining thereafter’.

It would be unfair to only blame Ministers of Finance for their poor predictive powers. Many things, from global pandemics to internal politics, may thwart their best attempts to balance the books. An easy scapegoat for a high debt and interest burden, though, is often the International Monetary Fund and its policies of structural adjustment for countries that suffer from high levels of indebtedness.

Take Jamaica, for example. In ‘Life and Debt’, a widely acclaimed 2001 documentary, the director offers a scathing critique of the conditions attached to the IMF loans, such as relaxing capital constraints and trade liberalisation, arguing that these were the cause of Jamaica’s severe debt-to-GDP levels. The documentary features an interview with former Prime Minister Michael Manley, who argued that the loans undermine the sovereignty of previously colonised nations and compares the IMF policies to imperialism.

Make no mistake, at the time of the documentary, Jamaica was in serious trouble. Its debt-to-GDP ratio in 2001 was 108%. It spiralled to 142% during the financial crisis in 2009. It remained at this high level until, around 2015, debt levels began to plummet.

Contrast South Africa. In 2001, our debt-to-GDP ratio was at 38%. Because of the macroeconomic prudence and economic growth we experienced during the early 2000s, our debt ratio came down to 24% of GDP, a remarkable achievement. Even the global financial crisis did not immediately cause harm: when Jamaica had a debt-to-GDP ratio of 142% in 2009, ours was a meagre 27%.

Fast-forward fifteen years. In 2023, Jaimca’s ratio fell to 72%, one percentage point below South Africa. The graph below illustrates this remarkable convergence vividly.

Source: IMF, World Economic Outlook Database, October 2023

Here’s the surprising thing: Jamaica cut its debt from 144% of GDP in 2012 to 72% in 2023 despite averaging annual real growth of only 0.75% over the period. It did so despite a Covid-19 pandemic that disrupted tourism and mandated exceptional increases in public spending. And, as a new Brookings report by Serkan Arslanalp, Barry Eichengreen and Peter Henry explain, Jamaica did so ‘despite did so despite vulnerability to hurricanes, floods, droughts, earthquakes, storm surges and landslides: Jamaica is ranked as the third most disaster-prone country in the world according to the Global Facility for Disaster Reduction and Recovery’.

To understand how Jamaica achieved this remarkable turnaround, it helps to go back in time. After independence in 1962, Jamaica achieved rapid growth off ‘bauxite and beaches’ – mining and tourism. But by the early 1970s, with the collapse of Bretton Woods and rising oil prices, capital-intensive growth had not translated into employment. Voters were unhappy and elected a more populist government into power, under the charismatic leadership of none other than Michael Manley.

Manley nationalised companies, raised import barriers and imposed exchange controls; spending on schooling, food subsidies and public housing exploded. Says Arslanalp et al: ‘Public employment rose by two-thirds between 1972 and 1977, while public spending as a share of GDP doubled from 23 percent to 45 percent. The budget deficit averaged 15 percent of GDP. The government financed what it could by borrowing, mainly abroad, and the Bank of Jamaica financed the rest.’

As a result, the debt-to-GDP ratio increased from 24% in 1972 to 124% in 1980, which resulted from both higher spending and a slump in GDP. Manley’s populist policies ‘were economically disastrous’. His rhetoric discouraged investment. Labour productivity and real wages slumped, and unemployment rose to 30%. He needed help, and he found it in the IMF.

This helps to explain why, two decades later, Michael Manley was so keen to attribute Jamaica’s high debt levels to IMF policies: he needed a scapegoat for his own failed populist policies.

Now let’s fast-forward another 15 years, to the mid-2010s, when the decline in debt levels began. What enabled this exceptional achievement?

There are two ways to think about it. First, in a technical sense, debt fell by ensuring sustained primary budget surpluses. Despite increasing noninterest spending from 19% to 23% of GDP between 2014 and 2019, the government kept up surpluses by raising tax revenues, achieved by broadening the tax base and enhancing tax administration. This included removing tax exemptions, raising the general consumption tax, and hiking high earners’ personal income tax rate from 25% to 30%. This is a different approach from the usual fiscal consolidation stories that focus on moving from deficit to surplus through spending cuts.

But how did they manage to secure the political will to achieve primary budget surpluses? The answer? Consensus-building. Jamaica capitalised on its tradition of social partnerships to form consultative bodies like the National Partnership Council in 2009. This council, comprising government, opposition, business, trade unions, and civil society groups, fostered a social consensus for fiscal adjustment and monitored the government’s adherence to fiscal rules. It also created independent consultative bodies like the Economic Programme Oversight Committee (EPOC) in 2013, a body that had substantial financial sector representation. By engaging in open dialogue, EPOC ensured that all parties had a say in the fiscal reforms and understood the importance of shared sacrifices, making it easier to implement tough financial decisions.

According to IMF predictions, Jamaica is on track to reduce its debt to 55% of GDP in 2028. By contrast, the IMF predicts South Africa’s debt to increase to 84%. Perhaps a new South African government can learn from Jamaica’s bad-debt team and build a pan-political consensus to reduce our high and growing debt levels. The alternative – a populist spending spree in an attempt to tackle our economic woes – can only end in fiscal crisis, IMF intervention and, several years from now, our own Michael Manley blaming these imperialistic bodies for his own failures.

An edited version of this article was published on News24. Support more such writing by signing up for a paid subscription. The image was created with Midjourney v6.