Sunday, June 15, 2003

Economic Impact of Gambling

The debate on gambling in Jamaica is one that will not go away, as gambling is inter-woven into our economy. Many are still not aware of the current and potential benefits of gambling. I, for one, was not aware of this until my involvement in the industry between 1998 and 2002, when I served on the Betting, Gaming and Lotteries Commission (BGLC).

Many argue that gambling is immoral and that it increases crime. While I agree that gambling does have some negative impact, I do not believe that the activity of gambling itself creates crime. Crime is driven by deviant behaviour, referred to repeatedly by the Prime Minister as ones “values and attitudes”. Furthermore, if we examine the impact of gambling in Jamaica and cite examples from other countries, we would see that gambling creates much greater benefits than disadvantages. In fact, the National Gambling Impact Study Commission (NGISC) report shows that in the United States alchohol and drug dependence and abuse are significantly higher than pathological gambling. The findings are that over a lifetime the percentage of the adult population susceptible to alcohol abuse was 23.5% , as against 11.9% for drug abuse and 5.4% for problem gambling.

In 2002, estimated earning from legal gambling in Jamaica was $17 Billion, of which lotteries accounted for $12.4 Billion and horse racing $4.6 Billion. In 2001, the figure was $9.4 Billion. The increase resulted primarily from the games introduced by Supreme Ventures Limited (SVL).

There is the view that Jamaicans are spending a significantly greater amount of their incomes on gambling to their detriment. This is not necessarily so as increased earnings from gambling result from what is known as the churn. In other words, SVL games are played twice per day, six days a week. This means that someone who bets $100 on Monday and wins in the morning will bet the winnings in the afternoon and so on for the week. With the lottery played twice per week that $100 would be bet on Wednesday and any winnings could only be bet on Saturday when it might have been spent otherwise. This is similar to the economist’s explanation of the multiplier effect of money.

The increased earnings create a positive economic impact as it results in increased contributions to taxes, good causes (charities) and increases in direct and indirect employment levels. GDP currently approximates $370 Billion, which means that earnings of the gambling industry approach 5% of GDP. This is not an insignificant contribution and shows that many depend on the industry for their livelihood. A recent BGLC release estimates that over 20,000 jobs are directly or indirectly generated by the gambling industry. Add to this the multiplier effect, and we could be approximating at least 60,000 persons.

Caymanas Track itself is a small town with bustling daily activities leading up to the race day anticlimax. There are 67 Off Track betting stations and 560 betting shops owned by the 15 bookmakers. In gaming there are two large companies, SVL and Jamaica Lottery Company (JLC), providing employment for hundreds of persons either directly or indirectly through their 1,300 sales outlets and administrative offices. The industry has the unique privilege of employing labour island-wide. Additionally, there are many service and product providers doing business with the industry. An economic impact gambling study undertaken in South Africa shows the GDP multiplier effect at 3 times, that is, every $100 generated by the sector produces another $200 through indirect and induced effects. The employment multiplier was found to be 3.15. Jamaica has no official numbers on this but I have no doubt that it could be similar.

In addition to the employment benefits, there is the tax and good cause contributions. Good cause contributions include education, health and sports development. In the area of sports development, one of the most significant contributions has been made to the Sports Development Foundation and ultimately the Reggae Boyz campaign to France 98. Many curse gambling but enjoy and boast about the benefits. In fact, the lottery games contribute approximately 7% to good causes, which in 2002 amounted to some $870 Million. Additionally, between lotteries and racing an average of 7 – 8% was contributed to government taxes, resulting in $1.2 to $1.4 Billion in direct tax contributions. In addition to all of this, these companies pay statutory contributions and profits tax.

A recent Sunday Observer (June 8, 2003) article revealed that in first quarter of 2003 Government earned $18.75 Million in gaming machines fees, and estimated that if all machines were brought into the net, earnings would be $150 Million annually.

There have been many references to the extent of illegal gambling in Jamaica, which seems to persist without any control or revenue benefit and carries with it uncontrolled levels of problem gambling. It is my opinion that proper regulation will not only serve the interests of Government but that it will also improve the lot of illegal operators as they will have the ability to properly market and expand their operations.

Two recent international racing events gave us an insight into the contribution we could expect from a well developed and regulated industry. The first is the recent Belmont Stakes in New York, where a horse called Funny Cide was making its bid to be the first horse in 22 years to win the Triple Crown. Funny Cide did not win, but this single race attracted some 125,000 spectators at the track alone. It was also televised and bet on internationally. At the same time, the English derby attracted some 20 Million Pounds in bets on the race alone. Seven percent of this (representing contribution to Government taxes) would be 1.4 Million pounds (J$134.4 Million). This could significantly benefit the health and education sector as well as the sports industry.

We must get serious about developing a well regulated and first class gambling industry in order to realize the full potential. Internationally, gambling is no longer seen as a scourge on society and is today an integral part of the entertainment industry. In particular, casino gambling is an important part of tourism worldwide. The official statistics shows that our tourism arrivals have increased over the years but per capita tourist spending reduces each year. In the Bahamas, on the other hand, the number has been increasing. The Bahamas, despite having a well developed casino market, has a much lower reported crime rate. Casinos can potentially increase foreign exchange by increasing the take from tourism.

In true Jamaican style, we never take on any one industry and become the world leaders. We created reggae music but have allowed other countries to exploit it financially, to a great degree of success. Similarly, why are we not the regional, if not world, leaders in tourism with our indigenous culture, natural beauty and people resources ? We must realize that our competitive advantage is mainly in the entertainment and tourism industry of which the gambling industry is a critical part of that. An expanded and well regulated gambling industry can only serve to increase economic activity and benefit Jamaica as a whole.

Sunday, June 08, 2003

Jamaica’s Debt Dilemma

The main crisis facing Jamaica today is the stranglehold of the public debt. The debt ballooned from $45.8 Billion in 1991 to its present level of over $601 Billion at March 31, 2003 and now approximates 140% of GDP at current prices. At this date, the external debt was $235 Billion and the internal debt was $366 Billion or 39.1% and 60.9% respectively. The massive debt stock has been the primary cause of our economic woes, resulting in a reduced standard of living and Jamaica’s increased global uncompetitiveness. The 2003/04 budget projects that debt servicing will be $169.5 Billion or 64.8% of expenditure, up from $152 Billion and 63.6% in 2002/03. The trend has been for debt servicing to devour a greater share of the budget with each new fiscal year. It is evident that if this continues there will be a consistent reduction in the money available for government spending, which will have devastating consequences for the country.

The 2003/04 budget expects to amortize $90 Billion and add $116 Billion in debt. In 2002/03 new debt of $122 Billion was added and a similar $90 Billion amortized. This is definitely not the desired direction as this alone will add another $26 Billion in debt this year. Another consideration is the US$ denominated debt, which totaled US$5.4 Billion on March 31, 2003 when an exchange rate of 56.24 was used. Today the exchange rate is 60, adding another $20 Billion in debt. The debt increase from these two factors alone will be some $46 Billion in this fiscal year.

Assuming stability in all other factors and dead on estimates, we will achieve a debt stock of $647 Billion by March 31, 2004, or a 7.65% growth rate. The outturn will most likely be an additional $11 Billion in debt servicing in 2004 (if amortized over 10 years) before any other adjustments to expenditures. In short we must of necessity achieve growth in order to satisfy our expenditure needs next year or face massive cutbacks as it is not possible to excavate anymore tax revenues from the existing GDP levels. Growth can only come from private sector investments and an improvement of the trade deficit. Growth will of course depend on the comparative trade off between productive risky investments versus the paper non-productive paper investments we have become so well acquainted with. Productive investments will only be realized if interest rates are low enough to encourage risk at the expense of safe investments.

Of the total internal debt $189 Billion is at variable interest rates. The implication is that the recent increase in interest rates has also increased debt servicing requirements and we may well exceed the 64.8% of budget allocated for this purpose. For every 1% increase in interest rates an additional $1.89 Billion per annum is needed for debt servicing and every $1 deterioration in the exchange rate adds $5.4 Billion in debt. This means that a 35 cents movement in the exchange rate equates to a 1% movement in interest rate on the internal debt, based on our present debt structure. The government therefore finds itself delicately juggling between exchange and interest rate movements to minimize the effect.

This is the dilemma of our debt crisis. The choices we face are:
1. Do we reduce interest rates (and at what pace) causing greater devaluation, inflationary pressures and significant increases in the debt, or
2. Do we maintain a high interest rate policy to stabilize our exchange rate and further erode our productive base?

The debt maturity profile (Table 2) shows that within the next 1 – 5 years we will be faced with significant amortizations, requiring high levels of revenue. It is important to note that the majority of the US$ debt amortization will not take place until 10 years time. This means a high risk exposure to movements in the exchange rate for the next 10 years. The debt’s voracious appetite for cash over the next 5 years necessitates consistent and increased future cash inflows. This can only come from new investments, again requiring lower interest rates. It is evident that some amount of debt restructuring must be done.

The powers that be need to undertake detailed projections and properly examine the financial and social consequences. Nothing short of this type of analysis will suffice. The fact is that if we do not immediately address this problem we will face dire consequences. Our focus must be on our long term economic sustainability. Any chosen highway will carry some amount of hardship. There is no painless option and we must consider what is less painful in the long run, that is the lesser of the evils. Leadership must have the courage to look beyond the next one to five years. This is going to require serious long term planning and a factual realization of what must be done.

It is not as important where we are today as the direction we are moving in. The government needs to undertake a detailed long term financial plan for the next five to ten years and provide the details to the country in order to restore much needed confidence. The plan needs to:
1. Be credible and bought into by all. The government must include all sectors to be a part of the review process;
2. Include a plan to retire more debt each year than is added. If we continue adding greater amounts of debt than is amortized then we will be in a continuously worsening situation. Our debt will no doubt grow over the next year but we must have a plan to reverse this trend in the following years; and
3. Include the retiring of US$ debt at a faster pace to neutralize the effect of exchange rate movements when interest rates fall. In other words a restructuring of our total debt stock.

We have to accept the fact that growth can only be accompanied by productive investments, which need lower interest rates as an impetus. It will always be a more feasible option to go for lower interest rates while making a conscious effort to reduce our foreign currency exposure through overseas debt reduction and import substitution.

A country cannot close down as companies can and will always survive no matter the extent of the suffering. Many have always commented on the potential that we have as a country to move forward and I too believe so. It is time to turn that potential into reality through the involvement of state, private sector and the public at large in the pursuit of a unified objective, as we are all in this thing together.