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Caribbean Islands Table of Contents

Caribbean Islands

Balance of Payments and Debt

Jamaica has displayed a negative balance on its current account each year since 1963, primarily the result of large trade deficits. Capital account surpluses were generally not large enough to offset current account deficits, thus producing overall negative balance of payments. In the 1970s and 1980s, balance-of-payments shortfalls were financed increasingly through very large capital inflows in the form of concessional loans from multilateral and bilateral lending agencies. The IMF was the largest source of balance of payments support.

In the 1980s, the greatest source of payment deficits appeared in the merchandise trade portion of the current account (see table __, Jamaican Balance of Payments 1981-85, Appendix A). As trade was liberalized and export prices depressed, unprecedented trade deficits appeared during the first five years of the 1980s. The terms of trade for Jamaica quickly declined, with large shortfalls in expected bauxite exports causing the greatest damage to the merchandise trade deficit and the economy as a whole. Jamaica's service balance progressively became positive as increased tourist receipts steadily bolstered invisible exports. The largest portion of the service account lowering surpluses was the considerable amount of investment income, or profits, repatriated abroad. Net transfers were generally positive, as funds received from regional and international organizations were greater than contributions. Surpluses on the capital account in the 1980s were generally the result of official capital flows, in the form of balance-of- payments support, rather than private investment capital. Although new foreign capital was invested in Jamaica, significant foreign investment left the island, especially in 1983. As a result, official capital movements accounted for over 90 percent of the surplus on the capital account in the first five years of the 1980s. Net international reserves, with the exception of 1984, continued to decline in the first half of the decade after a previous decline from 1974 to 1979.

Jamaica's rapidly growing debt dated back to the oil price increases and expansionary fiscal policies of the 1970s. The balance of payments crisis experienced in the mid-1970s, however, was only the start of a spiraling debt crisis. From 1980 to 1986, Jamaica's total debt doubled, making the island one of the most indebted countries in the world on a per capita basis. Jamaica's debt peaked in the mid-1980s at US$3.5 billion and was not expected to exceed that level into the 1990s. Seaga's 1987 debt rescheduling negotiations with the IMF and the Paris Club (see Glossary) resulted in generous grace periods and at least a short-term easing of the crisis. Nonetheless, Jamaica's debt loomed large and unmanageable; by 1983, the total debt surpassed 150 percent of GDP. As noted above, debt servicing accounted for over 40 percent of government spending by 1985. Similarly, debt servicing as a ratio of exports reached levels higher than those in virtually any other Latin American nation.

Jamaica's strategy for managing its indebtedness primarily involved rescheduling and export-led growth (see Glossary). Although the rescheduling goal was generally achieved by the late 1980s, the export-led growth strategy, as outlined in the structural adjustment policies, had not been successful. Exports showed little dynamism in the 1980s, suffering from unfavorable terms of trade. Modest growth in nontraditional exports, at least by 1987, was unlikely to reduce significantly the huge national debt. In May 1987 Jamaica initiated another strategy of selling government equity shares in tourism and manufacturing for the private purchase of a portion of the country's foreign debt. Debt to equity swaps, as they are called, were not perceived to relieve a significant percentage of the debt, however. No definitive strategies to overcome the debt crisis had been devised by the late 1980s.

Data as of November 1987