Jamaica’s high debt-to-GDP ratio has been recognized as a serious issue for a long time. Several Budget Speeches outline the measures proposed to drastically reduce debt. However, despite recognizing this objective, Jamaica today continues to face a challenging fiscal path; the country has failed to significantly reduce its high debt-to-GDP ratio, which is estimated at around 140 percent as at the end of November 2013.
On the surface, the debt-reduction mechanics is simple in that the debt evolution depends only on a few major factors. The debt-to-GDP ratio at any given time is the result of the previous year’s debt stock; the fiscal balance; and possible effects of exchange rate movements on debt denominated in external currency, changes in GDP, and inflation. GDP growth decreases the debt ratio as it increases the denominator; similarly, inflation decreases the debt ratio as it increases nominal GDP. Given that interest payments depend on the debt stock, the fiscal balance is often represented as the primary surplus minus interest payments.
Figures 1a and 1b present the evolution of the debt drivers over the past 8 years (for a
similar analysis including earlier years, see King and Kiddoe 2010). Direct central government debt stood at 110 percent of GDP in 2005, almost double the level in the mid-1990s. According to King and Kiddoe (2010), the increase in that period was strongly driven because of assumptions by the government of liabilities contracted outside the central government. From 2005 to 2007, debt-to-GDP decreased as the primary surplus, GDP growth, and inflation were more than sufficient to compensate for the effects of the exchange rate and the interest payments.
However, since 2008, debt-to-GDP has been increasing as exchange rate movements, contraction in GDP, and interest payments have not compensated by sufficient increases in the primary balance and inflation. more
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