Foreign Currency Borrowing and Foreign Debt Sustainability

Abstract

This chapter explores Jamaica’s borrowing relationship with multilateral institutions including the International Monetary Fund (IMF), Inter-American Development Bank (IDB) and the PetroCaribe arrangement with Venezuela. A Debt Sustainability Analysis (DSA) shows that increases in imports and the Treasury bill rate reduce the sustainability of Jamaica’s foreign currency debt, while improved by growth in real GDP. A larger foreign currency debt stock reduces debt sustainability. Jamaica’s debt servicing requirements increase by US $56 million on average per annum as a result of currency depreciation. Approximately 18 percent of the variation in foreign currency debt is explained by the country’s imports. Emerging from this chapter is the notion that foreign currency debt can decrease if interest rates fall, fewer goods are imported and the exchange rate becomes more predictable.

Appendix

Fig. 2.9

Impulse response function of the foreign debt to CPI shocks

Fig. 2.10

Impulse response function of the foreign debt to real interest rate (R) shocks

Fig. 2.11

Impulse response function of the foreign debt to exchange rate (FX) shocks

Fig. 2.12

Jamaica debt servicing and the nominal exchange rate: Bank of Jamaica

Fig. 2.13

Impulse response function of the foreign debt to shocks to imports

Fig. 2.14

Impulse response function of the foreign debt to shocks to real GDP

Fig. 2.15

Total Government foreign currency debt owed to international institutions

Fig. 2.16

Government foreign currency debt owed to international government

Fig. 2.17

Government foreign currency debt owed to private institutions