NOW FOR THE NEXT STEPS

THE inevitable debt rescheduling is upon us in the form of the Jamaica Debt Exchange (JDX), and is a welcome attempt to resolve the burdensome debt that would have led to Jamaica's continued suffering. While some of us may argue about the structure, and what we might or might not have done differently, one thing for sure is that the government must be commended for such a bold decision.

Let us understand, though, that the JDX is only the first in a series of steps that must be taken if we want to get to where "X" marks the spot on the treasure map of success. Like all treasure maps, there is a certain pattern and direction in which the steps are to be taken to arrive at the precise location of where the treasure is hidden.

The JDX is nothing but finding the map that will lead us to the treasure. It has added to it the fact that our path is now blocked by hostile forces that will only allow us to pass if we find the treasure. Our failure to do so will no doubt lead to an inescapable death, as we will have nothing to barter with for our lives. In short, the step that we have taken has set us on a path of no return, which we can only survive by taking the necessary steps to achieve the economic success that has eluded us for so long.

It is obvious to me what needs to be done in order for us to achieve that success. As I pointed out in my book, in April 2009, the only chance of seeing development in this country will have to come from "a much needed paradigm shift". That paradigm shift has not happened yet, and has only been started by the JDX. What policies are put in place will determine our progress along that much-needed seismic shift, which will only be truly complete and sustainable with a reform of our constitutional political system.

So now that we have turned the wheel of the car in the direction of the right path, we now have to keep the car on that path. Of utmost importance will be fiscal management. This will make or break the developmental structure we are trying to build. There can be no more "run with it" if we are to reach the Promised Land, because we have "sinned" so many times along the journey that there is no more forgiveness to come.

I reviewed the numbers in the economic programme, and if one does some projections it shows the significant challenges that face us down the road.

Based on the government projections, it is easy to compute that nominal GDP is expected to be $1.581 trillion in 2014. This means that based on the government estimate of a 120 per cent debt/GDP ratio by then the debt stock will be $1.898 trillion at that time.

The economic programme also provided the projected fiscal balance and primary balance percentages of GDP. We can compute the interest costs from that, which would see us having a fiscal balance of -$11 billion and a primary balance of $144 billion in 2014. If we assume that public sector wages are kept at the same figure for the next four years then we can also impute the following:

* While expenditure on programmes and capital expenditure will move from $129 billion in 2010 to $205 Billion in 2014, in real terms the 2014 spend will actually be less than currently, at $124 billion. This implies a much reduced state, which can be good if the state moves to the role of a facilitator of development rather than continuing to intervene. On the other hand, if it is not implemented properly we can end up with a much weaker state.
* If public sector wages are representative of the total wage bill in the economy, and wages are kept at the same figure over the next four years, and assuming we have steady employment, the real purchasing power of consumers will decline by an accumulated 34 per cent over the four years. This has a negative implication for businesses, and means that there will be less vibrancy in local business activity and an increased focus on external markets. This will mean that while the country may meet our earnings targets, we will create a greater disparity between the higher and lower income classes, which may lead to a further decline in the middle class. This will have to be guarded against as it is not good for development for this to happen.
* These numbers also show that over the next four years government will still have a need for financing, even though interest as a percentage of revenues is projected to come down from 53 percent in 2010 to 33 percent in 2014. The numbers also show that consumer purchasing power is expected to decline, which means that government funding is going to be primarily through company taxes and external funding, as consumption taxes will almost certainly underperform those. The implication is that the standard of living will decline for most.

From where I sit, and looking at this preliminary and brief analysis, it is not going to be an easy road. But government is going to be hard-pressed to ensure that the disparity in income is not too wide as this could lead to social conditions that we want to avoid. Government will also be tempted to raise taxes but must of necessity tighten its belt just like the consuming public; otherwise the extraction of more from less will result in further hardships.

One other spin-off from this is that local capital is going to be eroded and we will have to rely on foreigners to invest, if we are to see any substantial increase in economic activity. Lower interest rates will have the effect of making sectors more competitive, and will create opportunities in other sectors, but will not by itself spur investments. Investments depend more on predictability and the ease of capital to go to work. Therefore while the country embarks on the new economic programme, an essential ingredient of that is the significant reduction and control of crime and bureaucracy, in addition to maintaining low inflation levels.

There is a lot more detail that can come from this analysis but space does not allow it. Suffice it to say that the path of no return we have just started will not be