IMF Loan's Negative Effect: Jamaica and Grenada in Unfortunate Situations

Topics: Tax, International Monetary Fund, Monetary policy Pages: 10 (3916 words) Published: October 2, 2010
International Political Economy
IMF Agreements: Jamaica and Grenada

Part I: Introduction
The mere mention of a loan from the International Monetary Fund (IMF) brings great distress and concerns to the citizens of many developing countries. In spite of the fact that the IMF is perhaps the easiest international lending agency to borrow from, with significantly low interest rates and long term payment plans, governments and peoples of third world countries, even those in desperate situations, seem to dread the idea of approaching the Fund for a loan agreement. This fear is heavily based on the developing world’s previous experiences with the Fund in terms of the conditionalities that come along with an IMF loan. As stated by Rourke and Boyer (2001), the IMF has been accused of imposing “unfair and unwise conditions” that tend to usually worsen a country’s economic and social problems. Anthony Hill (2009) on the other hand argues that the conditions for loans from the Fund are not as “onerous” as they were before. For this reason countries are more inclined than they might have been before to borrow from the Fund especially in the current economic crisis. Such is the case of Jamaica and Grenada. Both Caribbean countries have experienced a round of unfortunate situations in recent times, which have negatively affected their economies, leading to a decision to engage in loan agreements with the IMF. Terms of the Jamaican Agreement

Jamaica, as stated in the letter of intent, has been experiencing significantly low levels of economic growth and high levels of public debt. The global economic meltdown has worsened the situation of the country, and according to Prime Minister Bruce Golding, left the government with not much alternative but to return to the IMF. The government had outlined a tax package in December 2009 which Prime Minister Bruce Golding refers to as a necessary source of revenue as without the additional revenue there will be no IMF agreement. He further states that without the IMF agreement the economy would continue to spiral downward as a result of the decreased earnings in bauxite, remittances, tourism and other inflows (“New Taxes,” 2009). This tax package includes an increase in GCT from 16.5 per cent to 17.5 per cent, an additional 20 to 25 per cent increase for certain luxury goods as well as a 2.5 per cent increase in income tax for persons earning more than J$5 million annually and a 10 per cent increase in income tax for persons earning more than J$10 million effective January 1, 2010 to March 31, 2011. There are three main adjustments to be made to the economy as a result of the agreement. The government needs to amend its fiscal policies, its monetary policies and engage in a divestment process. In terms of fiscal policies, the government has decided to decrease government spending by placing a freeze on tuition subsidies as well as reducing subsidies on external examination subsidies. The government’s decision to freeze tuition subsidies is anticipated to have a negative impact on the education system in terms of a reduction in the number of students attending university. The argument for this is that a freeze in subsidies will cause a drastic increase in tuition fees when inflation and other economical factors are taken into consideration. Education Minister Andrew Holness has however assured the public that the government is expecting tuition fees to remain at their current levels with adjustments only to the rate of inflation (“Tertiary Subsidies,” 2010). He says however that there will be a severe decrease in the subsidies for secondary school examinations. A number of parents are now concerned with this as they question how they will fund these fees without the government’s help as even with the help, these fees were very costly. In terms of taxes, and there will a 40 per cent increase in fares charged by the government owned transportation entity, Jamaica Urban Transit Company (JUTC)....

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Central Intelligence Agency. (2009). Inflation Rate (Consumer Prices). Washington, D.C.: The World Fact Book.
Grenada: Opposition legislator criticises IMF. (2010). Caribbean Daily News. Retrieved on March 11, 2010 from http://www.caribbeandailynews.com/?p=4830
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Hill, A. (2009, August 26). IMF Agreement: Decision Time Past [Electronic version]. The Gleaner. Retrieved on March 10, 2010 from http://www.jamaica-gleaner.com/gleaner/20090826/cleisure/cleisure2.html
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International Monetary Fund. (2009). IMF Lending. Washington, D.C.: Author.
Maunder, P., Myers, D., Wall, N., & Miller, R. (2000). Economics Explained (3rd Ed.). Hammersmith, London: HarperCollins Publishers.
New taxes for Jamaica immediately after IMF deal. (2009). Antillean. Retrieved on March 9, 2010 from http://www.antillean.org/2009/12/17/new-taxes-for-jamaica-immediately-after-imf-deal/
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Richards, P. (2009). Caribbean: Returning to the IMF, on Their Own Terms. Global Analyst Online. Retrieved March 10, 2010 from http://www.globalnewsblog.com/wp/2009/08/04/caribbean-returning-to-the-imf-on-their-own-terms/
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