Friday, October 23, 2009

BETWEEN A ROCK AND A HARDER PLACE

n July 2008, I wrote an article entitled "A perfect economic storm", where I indicated that 2009 would be the worst economic time since independence.

Since then the winds preceding the storm have been blowing but have not made landfall yet because of the slowing economies, which resulted in the significant fall-off in oil prices. If oil prices had remained even at current prices then I think we would have felt the effects earlier.

That storm is now about to make landfall in Jamaica, and those who were thinking would have started to make preparations from last year. This, particularly since this storm is going to be for a protracted period and a new thinking is needed in business and nationally to deal with it.

Signs of the times
The signs are showing every day that the storm is coming onto our shores. The Government first announced the need to go back to the IMF, and this was followed by reports of a private sector proposed liability management programme. Then came the downgrade by S&P, the very upfront speech by the prime minister, the presentations by Professor Harris and Mr Livshits, and finally the report from the Economist Intelligence Unit (EIU).

All these revelations come as no surprise to us locals who have been saying for a while (some from in the 1990s) that Jamaica has a very serious fiscal situation and that the only thing that has been holding the pieces together was the fact that we were willing to mortgage away the wealth of not only our children, but even further generations by borrowing money to satisfy a lifestyle we cannot afford.

It could very well reach a stage where pregnancy terms in Jamaica move to twelve months as babies may not want to be born to face the approximately $482,000 debt they are saddled with at birth. But the fact that these reports are coming from foreigners makes it more real to many of us who have not been ardent followers of Bob Marley and managed to "emancipate ourselves from mental slavery", always hanging on to the word when delivered with an accent other than Jamaican.

So here we are in October 2009, looking helplessly at the oncoming economic tsunami, as it starts to ravage our shores. Our only hope being that it will not stay with us for long but deliver a swift blow and destroy what it must quickly, so that the excruciating pain will not last. We are indeed caught between a rock and the harder choices we have to make with each passing day.

In Jamaica, I have come to realise that it is not only death and taxes that are certain but also prolonged economic hardship. And because of this many people have said to me that Jamaicans are used to suffering and so this will be no different. This time, though, it will be different as there is no capital market to freely access, foreign-exchange earnings are significantly down, oil prices are trending back up, crime continues to destroy the country's stability, and the workforce has been decimated by the failed education policies over the decades, which is responsible for over 50 per cent of secondary school leavers not attaining even one subject at CSEC level. I wonder if these people were not listening to the presentation made by the Prime Minister re the state of the country's fiscal accounts, or maybe they did not understand what he was saying.

Short-term fiscal challenge
So while Jamaica faces a fundamental economic challenge (which can be seen as the Balance of Payments issue), this is preceded in urgency by the short-term fiscal problem, which must of necessity be addressed. If we do not adequately address the short-term fiscal challenge then any economic policies we put in place will be useless from my perspective.

The next three to six months should be challenging for the fiscal accounts, as the economic challenges start to set in even further. And we see indications of these. In an article, carried in last Wednesday's Business Observer, it reports that retail merchants have been seeing a fall in sales and are hoping that the Observer's Fashion Night Out will improve sales. On the same day another article correctly states that rising oil prices will reverse the trade gap.

Both these articles point to what is on the economic horizon, and dare I say that the merchants will be sorely disappointed, as even if they were to see some improvement in sales over that night, the probability is that sales are going to fall back right after, leading into a very blue Christmas. Even the banks are reporting a fall-off in automobile loans year over year.

The fact is that real incomes and aggregate demand is much lower than it was one year ago. We have seen where there has been a freeze on public sector wages, and even in the private sector wages have been frozen.

Faced with an increasing fiscal challenge, the Government had no immediate alternative but to increase taxes a total of $24 billion for the fiscal year, reducing GDP (after considering the multiplier effect albeit some of finds its way back into the economy but the majority will not). In addition to this, the $18-billion expenditure cut by the government will negatively impact GDP by approximately $72 billion. To deal with the short-term fiscal challenge, the Government did not have much alternative.

We also see where over 30,000 jobs have been lost, with more to come. And if all of that was not enough, the country will have to grapple with higher oil prices in 2010, which I expect to be at least US$90 per barrel by the middle of 2010. At the very least also the global economy is going to see very sluggish growth, even while the risks to another decline is possible with the debt crisis that countries such as the US and Japan face, as they rack up significant fiscal deficits.

Jamaican-made challenges
The greatest concerns I have for the Jamaican economy, however, are things that we have created ourselves. Firstly, the situation with crime still continues to be a noose around our necks. Even if the economy were to attempt to make an acceptable adjustment, the crime situation would hamper its progress, as the report from the EIU correctly states. The second situation is the low literacy level of our
working population. Recent data suggests that over 50 per cent of school leavers have not achieved proficiency in even one subject. The problem we face therefore is that compounded by the Government's inability to provide a suitable social safety net; the labour force does not possess the skills necessary to fend for themselves during this difficult period. So the only thing they know how to do is find employment, which is decreasing, as many of the businesses they were working with depends on imports to survive.

But the problem is that with less expenditure in the economy (measured by a reducing GDP) and the limited ability of the government to access debt, then some of them will be forced to close down, or at best scale back their operations, leaving many without any immediate job prospects.

The prime minister indicated that Jamaica could be successful in obtaining some budgetary support from the IMF, and that would be welcome as it means that there would be monies available to support social safety and capital expenditure programmes, which are necessary to keep the economy buoyant.

Two-phased solutions
But the solutions must be seen in two phases. First, we must of necessity address the GDP situation, and this must be done through increased expenditure provided by fiscal initiatives. This can be done by either reduced taxes or increased targeted expenditure. This is what has worked to keep the developed economies afloat. The problem is where Jamaica gets the money to do so, as this sort of initiative is needed to resolve the challenges of the next three to six months if we want to maintain some buoyancy in the economy.

There are only two areas of fiscal expenditure that have enough critical mass to provide that sort of boost. The first is debt expenditure, but the Government has rejected any notion of a liability management programme, and wages and salaries. But based on what needs to be done to assess the wages and salaries situation, the redundancy payments that would have to be made, and the fact that most of the civil servants are teachers, nurses or police, then there is not much short-term benefit here.

I don't see increased taxes as an option as this will only serve to further reduce the GDP value and negatively affect businesses and jobs.

The only real short-term option we face is to borrow more money. And there is nothing wrong with that if the borrowed money is going to be surgically implanted in the economy to ensure the best return from those funds. If, on the other hand, the increased debt is spent on consumption then we fall back into the vicious debt cycle we have become so accustomed to.

What is needed is creating jobs through specifically targeting SMEs engaged in export-driven activities and also in the area of capital spending that will enhance foreign exchange-earning industries such as tourism and agro-processing.
In the medium to longer term, fundamental economic policy shifts will be needed to address Jamaica's development challenge and ensure that the increased debt to GDP ratio can be worked down. The economy will have to decline before it can start to develop. But the right policies are going to be necessary to ensure that when it declines it does in fact start to develop again.

As we are today caught between a rock and a harder place, as every day that passes the tsunami comes ashore the choices will get harder.

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