Jamaica will need an extra two years to bring the country’s debt to sustainable levels, all because of the COVID-19 pandemic. Why is it so important to bring our debt down and what’s in it for me? Dian Black, Acting Deputy Financial Secretary in the Economic Management Division of the Ministry of Finance and the Public Service helped us to understand why debt reduction is so important for Jamaica.

Before COVID-19, Jamaica was on its way to meeting its target of reducing debt to 60% of GDP. However, because of the pandemic, the government has been collecting less and spending more on healthcare and social protection programs.  As a result, the Ministry of Finance has had to extend the timeline for this target to the 2027/2028 financial year. 

Debt to GDP

The Debt to GDP ratio is a metric used to track a country’s debt levels. As Ms. Black explained, it is determined by the country’s nominal debt and its Gross Domestic Product (GDP).  The nominal debt is the debt stock or dollar amount of money owed by the country, while the GDP is the total value of all goods and services produced in the country. 

“The nominal debt may increase a little or it may stay just about the same but one of the problems is the GDP,” Black indicated.

The Planning Institute of Jamaica (PIOJ) predicts that GDP will shrink by 8% – 10%. However, because the debt remains the same, the debt ratio to GDP will get higher.

“We do expect the debt to GDP to increase this year over last year, and expect to get back on track over the medium term, to get back on the trajectory to 60% by 2027/2028,” stated Black.  

At the end of October 2020, Jamaica had J$2.1 trillion in debt.

“The Debt to GDP [ratio] is an indicator of a country’s capacity to service its debt based on what it produces, so the higher the debt to GDP, the capacity of the country to service its debt is lower,” Black explained.  “A high ratio is not sustainable, and it means that less funds are available to spend on other areas such as social protection and infrastructure.”

Primary Surplus 

In the reading of the second supplementary estimates, Minister of Finance, Dr. Nigel Clarke announced that the primary surplus was being reduced from 3.5% to 3.1%.  The primary surplus is the portion of the government’s revenue that is set aside to service the country’s debt.  The reduction in the primary surplus “is a contributing reason to the debt to GDP going up,” according to Black.

She also added that the Ministry of Finance may have to raise the primary surplus to as high as 8.3% in 2022/2023 to meet the target of a debt to GDP ratio of 60% by 2027/2028. This fiscal discipline is nothing new to Jamaica, but 8.3% is higher than Jamaica has ever gone. Under the IMF program, Jamaica at one point had a primary surplus of 7.5%. A high primary surplus means that there will be less money for capital expenditure. 

The higher primary surplus that will come in 2022/2023 is necessary to reduce Jamaica’s debt so that in the future, there will be more money available for social protection programs and capital projects. A reduction in the debt levels will also improve Jamaica’s credit ratings so that the country can borrow at lower interest rates which will lower its debt service, freeing up money for investment in capital projects and social protection programs.