Friday, June 26, 2009

The IMF is a necessary stop gap

Much debate has taken place on whether or not Jamaica should approach the IMF for some facility to support the Balance of Payments challenge we face. Some have gone as far as to document their feeling for and against the IMF, including emotional responses to the past record of the IMF.

Being an accountant, my vision is dominated by numbers, and so I fail to see how any reference to the IMF's past indiscretions affects (1) its current situation; and (2) the fact that there is really no other source of funds. The fact is that Jamaica is even in a needier situation than other countries that were growing at better rates, but still needed to go to the IMF. Let us be clear about that. It makes no sense to die for lack of treatment because you don't like the doctor.

The choices we make

This emotional response to such matters is one reason why we are now being asked to write off US$4.2 million (J$374 million) in Cricket World Cup (CWC) losses. In fact, I remember the lack of foresight my friends used to say I had because I did not see the benefit that CWC would have to Jamaica. Based on their arguments it was supposed to have had monetary benefits for years to come and in fact the Trelawny multi-purpose stadium was going to be the launching pad of sports tourism.

In an article, I wrote in March 2007, titled "Cricket, aeroplanes, and poverty", I stated."On the day of the opening ceremony, at the expensive Trelawny multi-purpose stadium... In true Jamaican style, we showed the world that we know how to party. Two stories later, I saw an elderly teary-eyed lady saying that she fell down carrying water in a bucket to her home, because there was no running water. Still another report showed a man saying that his car had been damaged by the police whom he had to lend to chase thieves on many occasions, as they had no vehicle, and he was having difficulty being compensated."

What this indicates is that it is the choices that we make that determine what lies in our future. The probability is that if that lady is still alive she still may not have running water and the police force still has less than adequate capital equipment to fight crime. But we had a great party for two weeks.
Maybe if we had even gone with the stringent measures imposed by the IMF up to the 1990s we would have been better off today, as the truth is that we have really made a mess of our country without the IMF to blame anyway.

So we are at a decision point again and for some persons reason gives way to emotions, as it is easy for those who are not really feeling the economic pinch yet to say "let's suffer through it together".

What they need to understand is that some are already suffering badly, as illustrated by the thousands that converged for the 100 jobs offered by the fire services. And we shouldn't fool ourselves that the economic recovery is around the corner, as we were reminded by the recent World Bank report, which stated that the world economy will decline by 2.9 per cent instead of 1.7 per cent. That is 100 per cent worse than previously estimated, and really comes as no surprise to me as I had indicated that the recent hopeful signs we were seeing was probably nothing more than a short pause in a downward trend. I am not convinced, for example, that the US equity markets is in a longer-term up trend until the Dow Jones closes above 9,000.

But while we may go to the IMF, let us also not move from the emotion of extreme hate to extreme love, as we need to understand that the IMF is nothing more than a stop gap on our path of economic stagnation and decline. Borrowing money has never on its own, and never will, fix our economy.

It seemed as if this was the answer to all our problems because in the 1990s to 2007 we could have got money to borrow. So as long as one is able to borrow money at a faster rate than you have to pay it back then you will always be able to increase your consumption.

Debt's hypnotic quality

And this is the hypnotic quality of debt, until the reality of not being able to borrow anymore hits us.

Just as participants in the various unregulated investment schemes (UFOs), or even the regulated ones like Madoff, were in the heavenly bliss of high returns and chose to increase their consumption of luxury items rather than save the additional income they were so fortunate to have. I myself was hoping that the Jamaican schemes would have complied with the FSC and we would have created an investment edge just as we do with our athletics and music. This was not to be, and in the end the IMF estimates that they took some 12.5 per cent to 25 per cent of GDP out of the economy.

Just like that money from the UFOs, the IMF funds will only be a stop gap measure and will not address the fundamental problem of the inadequate economic structure - in simple terms, we spend way more than we earn. While we are benefiting from the IMF flows, it is necessary to continue the fundamental reform of our economic structure, as failure to do this will only see us in a more desperate situation at the end of the three to five-year period that we may get the IMF facility for. Unless we make a paradigm shift in our fundamental production and consumption relationships, we will face more suffering at the end of the IMF facility, and then the emotional ones amongst us will say, "see, I told you the IMF was the wrong way to go", not fully understanding that it would have been our own actions (or inactions) that would continue to cause our suffering.

As we go forward and the decision of the government unfolds about the IMF, we need to debate the issues in a very practical manner, and need to understand that the IMF will be nothing more than a stop gap measure and by itself will not be a solution to our problems.

The only things that can make a difference are the fiscal policies that are implemented, as without these we will only delay the onslaught of the infection of economic stagnation that has plagued this country since 1990.

We need to make a determination as to how we measure development. Do we measure development by the number of cars, phones, or foreign goods on the shelves? Or do we measure development by trade surpluses, higher literacy rates, lower crime levels, and improved productivity? The decisions we take will determine the path we set for ourselves and the outcome we eventually achieve.

And if, as persons have commented to me, we hang our hopes on the desired improvement in the global economy, that would be a mistake. The fact is that job losses continue in the developed economies we depend on, and even if the situation starts to stabilise, the road to recovery is going to be very long, implying much reduced consumer expenditure. It could be a five-year recovery period for the developed world.

I do believe, however, that a country like Jamaica has the capacity to significantly lessen the effect of the global crisis, as I have always maintained. But this depends on our fiscal policy actions, not new debt, whether through the IMF or capital markets. And it depends on all of us as Jamaicans.

Friday, June 19, 2009

It's the little things that matter

I am sure that everyone has heard the saying "it's the little things that matter". This is usually in reference to a relationship but is no different at a country level or in business. After all, it is the little things that determine behaviour shaping the outcome of larger issues.
Dennis Chung

For example, in a company the outcome of profits is the result of many decisions that take place during the year. These could be matters such as enforcing deadlines, defining a proper marketing plan, creating financial projections based on the correct assumptions, etc. All these actions result in profit or loss for the company, as the sum of these parts results in the whole. This is why companies have line managers who deal with day-to-day management issues, because if these little things are not controlled, then the CEO's vision will be meaningless as there will be a disconnect between vision and reality.

Prerequisite for development
Similarly, for a country's progress it is the little things that matter. The overarching goal of a country is economic and social development, which means that not only should the country achieve relatively high levels of economic growth but the average citizen must feel like social progress is constantly being made. For development to occur both must happen simultaneously.

But a part of the danger in achieving that development lies in the management of the little things in a country, which if we get it right will translate into the economic and social development we require. Economics and sociology are based on human behaviour, and so if we were to always positively affect human behaviour then this would yield economic and social progress.

The average citizen's behaviour is not affected by macroeconomic targets, or by interest rates. In fact, it is the other way around. So it is logical that the desired outcome of interest rates and macroeconomic targets must start by first influencing the behaviour of the average citizen so that it translates into the economic and social behaviour needed to enhance development.

That is the way markets have always worked and will continue to work. In the United States, for example, the relaxed financial regulatory environment resulted in behaviour on Wall Street in which financial institutions created the risky Collateralised Debt Obligations (CDOs) causing the financial crisis in 2008.

This is why I keep saying that Jamaica's economic challenge is a social problem. It is primarily the way we have organised our society that has caused the economic stagnation we have seen since 1990. If, on the other hand, we were to arrange our society differently the resulting behaviour would create economic progress.

The biggest challenge the country continues to face is crime and the deviant behaviour of not only our most notorious criminals, but by most people. After all, when someone breaks the law or is unproductive at work, the cry is always to give him/her a chance or "is just a hustling". When the prime minister was speaking about the night noise recently, he mentioned that when confronted by the police the citizens will cry out that it is their way of enjoying themselves and it keeps them from criminal activities, as if everyone should ignore their lawlessness simply because we are being spared escalated crime levels.

Or when someone is caught breaking the traffic laws they say how hard the policeman is for giving them a ticket or impounding their vehicle. The lawlessness on the roads is symptomatic of the wider crime problem.

Respect for the citizen
On the other side of the coin, how can we expect our citizens to respect the law if the law does not respect them or we create an environment where, to get ahead, you must be stronger than everyone else? It is very important that justice not only be done but also be seen to be done. Two such instances come to mind.

(1) The police cannot expect that the citizen will give them intelligence to solve crimes if they are seen as the enemy of the citizen. And while I understand that most members of the police force are good people, similarly not all Jamaicans are criminals, but we have a very bad reputation as a country overrun by crime. Once a policeman is accused of a crime the public must know what has been done, as the recent reports of arrest have shown. Similarly, if a citizen accuses a policeman of a crime he did not commit, then the citizen must be held accountable.

(2) In the recent case of Nicole Fullerton, it should not have taken ten years. In order for justice to be done one must have the right to a quick trial, as happens in the USA. The Enron and other such cases were completed in one to two years, and started even after the case mentioned here. This is so for many cases in Jamaica that do not receive the profile of the Fullerton case.

I will say again, if we cannot solve these small issues then there is little hope of dealing with murders.

There are many other issues we need to deal with, but one other is the matter of how we protect our children. Recently, we have seen attempts to deal more firmly with carnal abuse and other cases. But where are the child protective services, or any other agency that deals with children's rights? It seems as if they are content with just developing policy about how to deal with child abuse, when what is needed is on-the-ground action.

Each day there is clear evidence of child abuse on our streets which does not need any in-depth investigation to deal with, and in fact contributes greatly to the deviant behaviour when these very children grow into men and women.

I speak of the children who can be seen on the streets:

(1) Selling goods, and they will tell you it is their parents who sent them out. This is child labour for all to see;

(2) Wiping windscreens and creating a nuisance to motorists;

(3) Unsupervised on the streets at all hours of the night; and

(4) Mothers who take their babies to the stop lights to join the ranks of the increasing number of beggars

If the child agencies were serious about dealing with abuse and protecting the rights of children, then these are some low-hanging fruit they would deal with. We do not need any new policies or laws to address these challenges.

Finally, one significant positive for improving our tourism product, or the general quality of life, does not cost much money. It is dealing with harassment on the roads. Those who engage in this activity should be taken off the streets and sometimes it is in plain sight of police officers, who have become so accustomed to this cultural norm that they don't even know what it is. For example, New Kingston, which is our main business centre, is filled with beggars who even set up car washes at the side of the roads.

Now after allowing all of this to happen on a daily basis within the clear view of the authorities, can we really say that we are serious about development?

Friday, June 12, 2009

Jamaica's Balance of Payments Challenge

At the start of the last fiscal year, I indicated that in 2009 the fiscal deficit would not be the most important economic indicator to focus on, as it was in the past. I thought that the Balance of Payments (BOP) would be the most important indicator to manage as I saw two things happening - (1) oil I thought, would go to US$120 per barrel and (2) the drying up of credit meant that the only way to create stability in the economy would be to manage the BOP.

Well, oil went to US$147 per barrel and, as expected, the trade deficit widened even further. I then expected that as the recession set in oil would fall to below US$70 per barrel and foreign exchange earnings would fall also, even more than the benefit from the fall in oil prices.

This again played out, and both the foreign exchange earnings and the oil price fell more rapidly than I expected, particularly after the fall of Lehman Brothers. I also indicated that even though in the second quarter of the last fiscal year, inflation as running over 20 per cent annualised, I expected that it would end the year between 11 and 14 per cent, which it did.

Why do I say all of this? It is because it is easy to predict the general trend of numbers given the relationship that exists between both of them. So it really should not be any surprise what happens in the economy, because if one is able to project one of two indicators, and general sentiment, then it is usually simple to predict the others.

The problem with Jamaica's economy still remains the BOP, to which all our other fortunes are tied, and therefore the only way to fix the economy is to address the BOP.

There is another worrying trend developing that we need to be aware of and put policies in place to deal with. These can be seen as follows:

1. Oil is again on the rise, and as I had anticipated at the start of the year, it could well average a price of US$70 per barrel for the year and hit US$100 per barrel by next year (I had told some of my friends when oil was at US$30 per barrel to buy oil, so I am coming for my commission, even if they didn't buy it).

2. The recovery that is coming may very well be a jobless recovery, meaning that the jobs lost will not be recovered.

3. Even after the global economies start to recover it will be a very long process, and this means that demand for consumer products, such as cars, may not recover any time soon. Remember that the average American has lost 25 per cent of his/her wealth, which was based on air in the first instance.

These are worrying signs for Jamaica as it will have a negative consequence on the BOP as follows:

1. Oil in January 2009, when the price was near US$30 per barrel was 23 per cent of the BOP, and will no doubt become a serious drain again.

2. Jamaica's main foreign exchange earners - tourism, remittances, and bauxite/alumina - depend heavily on consumer spending, and so may see little growth, at best.

This no doubt means that the country and companies will have to find ways to deal with this problem. I have suggested some of these possibilities in the past so will not bother to go over them, but suffice to say that I mentioned three areas:

1. I indicated that the most important minister in 2009 would be the agriculture minister, as the country's growth prospects depend on agriculture. He has in my view, done a good job within the confines of the environment he has to work in. In the first quarter of 2009, agriculture and fishery grew by 10 per cent while no other sector grew.

2. Crime, I indicated, would still be the biggest challenge for Jamaica, and it continues to be.

3. Bureaucracy - this continues to be a bug bear and will stymie the growth of the real growth prospect for the economy, the small business sector, as this is where future job growth will come from.

Change will only come from Jamaicans
While the government continues to grapple with the problem, we must all realise that real change will only come from us as individuals. Some of us have given up on Jamaica and have left her shores. In fact, I do receive a lot of email and messages on Facebook, re Jamaica's plight and what needs to be done.
Two weeks ago, I received an email from someone I know asking if I still had hope for Jamaica, and why I continued to try with a sinking ship. Similar sentiment has been expressed to me in other emails, but not in so direct a manner.

The fact is that we cannot as a people give up on our country. We cannot have any other country of birth, unless we believe in reincarnation, and then again, you may come back as a cockroach, only to be stepped on. But then again, is that any different from the way Jamaicans have been trampled on since independence? We could debate that.

The point is that Jamaica's change will only come from us Jamaicans and we must persevere to ensure that positive change comes. It is not going to be easy, as many Jamaicans themselves do not care too much about Jamaica. As long as their bellies are full then "Jamaica, no problem". And what I find is that this attitude is amongst those who are most vulnerable if Jamaica fails.

There are, on the other hand, some good Jamaicans I have the privilege of knowing, and these mostly are men who do not have to concern themselves about Jamaica, in reality, as they could always lead a good life elsewhere.

When US President Obama was elected to office, and Jamaicans were celebrating and joining in with the feeling of hope, I indicated that Jamaica would soon fall back into its own way. The fact is that we always celebrate and help the cause of everyone except Jamaicans. I remember our assistance in the Grenada revolution, and being at the forefront of the war against apartheid. We even applauded the courage of Colin Powell to break ranks with his party and support Obama, even though if someone ever supported someone in either political party they are thought of as JLP or PNP. In Jamaica there are no Jamaicans, apparently. And so we remain divided.

I appeal to all Jamaicans to stand up for what is right for Jamaica, as each time I see the likes of a Usain Bolt, Bob Marley, Mike Macullum etc I realise how much of a mighty people we are. Imagine, if we were to really take seriously the advancement of Jamaica, where we would be today.

Friday, June 05, 2009

Saving Jamaica $1 at a time

Two years after the Cricket World Cup (CWC) was held in the Caribbean, at much expense to the member countries, we are learning of how financially devastating it has been to the economies. In fact, Jamaica is being requested to write off US$4 (J$356) million of debt, and by doing so sink the Jamaican people further into poverty.
Dennis Chung

In addition to this requested write-off Jamaica spent nearly US$100 million in upgrading infrastructure and preparing for the hosting of CWC. The total expenditure to the Jamaican people, with this write-off, would be US$104 million. At today's exchange rate we are talking about approximately J$9 billion.

Expense accountability
I was one who along with Ronnie Thwaites warned that CWC was not the best use of our resources, and he is correct in reminding the Jamaican people that a warning was sounded about the expenditure at the time.

The Gleaner's editorial of June 4th 2009 can be interpreted to explain the comments by Thwaites as nothing but chest-beating, which I find an unfortunate explanation, as the media should be the very ones concerned about accountability. It is unfortunate that the Gleaner does not seem to recognise the comments as a call for accountability. It is not whether the money had a benefit or not but was it the best use of the scarce resources, and would agree with the Gleaner that the JTI must tell us if it has followed through on its post-tournament programme.

Instead it seems as if Jamaicans are being asked to pay no attention to the money that could have gone to educating many youths, fighting crime etc. Maybe we should be happy to just accept it. Never mind that the Trelawny sporting complex has never been made use of, and has effectively become a monument of waste. While I do understand the need for improving our infrastructure (and little argument can be made about the spending on Sabina Park), I expect that the media and politicians like Thwaites should be those watching out for the Jamaican people.

Secondly, I am concerned that the report in the Gleaner stating that the Ministry of Finance representative said that the accounts were completed, is reported as being countered by the Auditor General - "However, Auditor General.said the final accounts were completed but not signed."

If this was said then it would be erroneous, as a signed copy of the auditor's report is essential for a set of accounts to be deemed complete. It is this signed report that verifies its accuracy. If it means not signed by the directors then it would still be the same as auditors should not sign accounts unless signed by directors. Can you imagine a public company submitting an unsigned year-end report to the stock exchange saying it is complete, even though not signed?

It is therefore very important that we ascertain whether the accounts have been signed off by the auditors, and the report qualified or unqualified, as it would be irresponsible for Jamaica to write off any debt on the basis of an incomplete set of financial statements, that is without getting verification of the accuracy by a signed auditor's report.

The greater point, though, is that if we are going to save Jamaica from further debt and waste it must be done $1 at a time. We cannot excuse comments by a politician about past waste as "chest-thumping", and then at the same time ask them to be more vocal about the people's business.

Receiving the truth
A pastor recently said to me that if one wants to always receive the truth then you must be a good receiver of the truth. So if we dismiss an attempt by a politician to bring accountability to past expenditures, then can we complain when they fail to do so in the future? And can we continue to say to them that they must speak to the people about what is right and wrong?

I have found that we love to criticise without proper research, our politicians, while at the same time expect them to always be true to us. If we learn nothing else from Obama it must be that you cannot seek unity or positive action with hostility. In many instances we have vilified our politicians incorrectly, and because of that some might feel frustrated about making any change. If they try to level with Jamaicans they are not believed as we look at all politicians as having a deceitful objective, which I have found to be untrue. Just like criminality it is a few who create havoc. Does that mean we should treat all Jamaicans as criminals?

If we are to save Jamaica, it must be by looking at every $1 we spend and accept every comment by any politician, on either side, as long as it adds any hope that we intend to hold each other accountable for our actions, past and present. In doing so we must be careful not to falsely accuse our public servants, or in this case not to throw aside their well-intentioned statements as "chest-thumping". We must encourage this sort of dialogue, and not be more turned on by rumours vilifying others. That as far as I am concerned is gossip, at whatever level it happens. If we continue to do so then Jamaica will soon end up with public servants who are really not serving Jamaica.

For years I have heard Thwaites from the back benches of Parliament calling for accountability for each dollar we spend, and ensuring that we properly go through every line on the budget to ensure that we get value for each $1. If we were doing this maybe as a country we would have $700 billion instead of $1.2 trillion in debt. Or put another way, maybe we would be paying out 25 cents of each dollar for debt servicing rather than 56 cents. Imagine how much good this would have done for our economy.

And let me hasten to add, lest I be accused of speaking in Thwaites' favour because of friendship, that I will support him and any other politician as long as they speak in the interest of Jamaica and Jamaicans. Equally, if he, and others, forget their duty to Jamaica I will criticise them.

So while we excuse comments about the need for accountability as "chest-thumping", Jamaica is J$9 billion in debt with no clear accountability as to how the money we are now being asked to write off was spent, as the accounts are not independently verified. And no doubt we will continue to add more and more expenditure to our debt without doing any proper assessment of what the value is for Jamaicans.

Let us not forget that the money spent on CWC was not just expenditure to be forgotten because it had a perceived value. Part of the analysis must be what value it had for Jamaica, and much of it would have had a positive value. But was it the best use of the funds? We should remember that J$9 billion is the equivalent of J$3,333 for every Jamaican, or put another way, approximately half of the recently imposed tax package, as a result of past expenditure that we did not do any cost-benefit analysis for.

If we are also going to be asked to write off an additional US$4 million, then we must (1) ask for properly audited accounts to be presented in support; and (2) properly assess the cost or benefit and let the Jamaican people know what they are being asked to bear.