Friday, March 12, 2010


WHENEVER I am interviewed about the Jamaican economy, I usually come to the conclusion in my book that the only way for Jamaica to come out of our present downward spiral is to make a fundamental structural shift in our economic and social arrangements. The truth is that there is no other way, as illustrated by a house that is built on a structurally weak foundation. Even if one were to put a fresh coat of paint on the house every year, the foundation would still remain very weak and susceptible to damage.

When I look at the projections in the recent IMF programme, it gives the impression that much of what will be done is tinkering with the numbers and hoping to recover based on the same structural foundation on which we have been unsuccessfully trying to develop the country over the past 20 years.

Fiscal sustainability
In fact it seems as if the main focus by the IMF was to ensure fiscal sustainability so that they can get their money back, and there was not much concern for the development of the Jamaican economy. One cannot really blame the IMF for this myopic view on the economy, as all they really are is a bank to the world. And we all know that the main concern bankers have is to get a return on investment, no matter how caring the marketing sounds. All you have to do to find out is not be able to pay the credit card or loan they throw at you when you are debt-free.

A review of the numbers projected in the IMF paper shows that the fiscal budget balance is projected to move nicely from minus J$106.7 billion in 2009/10 to minus J$10.8 billion in 2013/14. The primary balance is projected to move over the same period from J$66.9 to J$143.4 billion, implying lower real expenditure in the Jamaican economy. But at the end of the day this will assure the IMF repayment.
When one looks, however, at the balance of payments and macroeconomic projections, it shows a difficult ride for the economy, as apart from the lower spending, real growth is projected at an accumulated 2.9% between 2009/10 and 2013/14, or an average of 0.58% per annum. Much of this is caused by our having to pay back for the loans we have been living off in the past.

But one must also examine projections to determine if we can always do better, and my own cursory examination of the numbers leads me to believe there is a significant opportunity for improvement. Unlike the IMF I am looking at the numbers from the point of view of economic development, and so I will see a different path. The irony is that this may even provide greater security for the IMF also.

The table shows extracts of the balance of payments, GDP, oil prices, and exchange rate assumptions of the economic programme. The exchange rate projection is arrived at by taking the 2008/9 GDP from the MOF website, and computing J$ GDP using the nominal GDP growth rate (IMF numbers), and dividing the total by the US$ GDP in the IMF numbers.

The numbers clearly show the following:
* Trade balance is expected to worsen, even with exports growing more than imports. Implication is that not much change is expected in the import content. This is an area of opportunity to be explored.

* The current account balance improvement is heavily dependent on growth in tourism and remittances. The implication is that the economy will remain highly dependent on services and not see much productivity increase (evidenced by remittances, fuel, and import content).

* More importantly, and an area of great opportunity, is that fuel imports are expected to move from 14% to 15.4% of GDP between 2009/10 to 2013/14. This stands out in the projections, and implies that we are projecting a more inefficient use of energy, even though we don't seem to be projecting any real growth in manufacturing, implying most of the use is consumption. This situation I think will be worse than projected as the assumption of oil prices seems overly optimistic. As an example, current oil price (before any real global recovery) is over US$81 while the IMF numbers project an average of US$77.30 in 2010/11.

All about energy
My own view is that focus on more efficient energy remains a significant opportunity for Jamaica. If we were to create energy projects and investments that decrease our energy use by 30 per cent on average, this could create (1) an import bill savings that would wipe out the current account deficit by 2013/14; (2) greater efficiency in manufacturing and service delivery, which could improve our international competitiveness and export earnings; (3) increase available opportunities for investment and ultimately fiscal revenues; and (4) act as a stabilising force for the exchange rate, positively impacting inflation and interest rates. This would certainly start a positive cycle of development.

The question may be asked about the possibility of this happening, and I use my own example. I have been for a while thinking of using solar energy at home, and after doing the research finally did so recently. This is especially as I expect energy costs to increase as a result of oil price increase, devaluation, and the GCT on JPS use over 200 KWH. Of course you have to ensure that you use a company which understands the technology and will be around, as one of the first companies I was looking at went out of business and the costs were higher based on the configuration. You also have to work out the cost-benefit analysis, which I did myself. The company I settled with, which I continue to work with, is Gormann Corporation.

Based on how I implemented and my cost-benefit analysis I expect a four-year payback period. And this does not include the new GCT charges or future increases. My JPS energy consumption fell by over 50 per cent immediately, and more importantly there is no maintenance, and the panels last up to 40 years, and batteries 12 to 14 years. What has not been factored in my computations is the cost benefit of no power outage or risk of equipment damage from JPS even if Jamaica were to see a six to eight-year payback period from the energy bill that could positively impact our future development.

Using this approach, if the government were to secure policy-based loans for cheaper energy projects, it would have the benefit of (1) stimulating jobs and the economy during and after the implementation period; (2) make Jamaican products more competitive; and (3) a 30 per cent import bill savings would reduce energy as a percentage of GDP from 14 per cent to 10.8 per cent. More importantly, it would also have the effect of improving standards of living.

A portion of those loans should be made available for customers with a good payment history at the JPS, to access security-free low interest loans, and those with a poor payment history to require security. An improvement of the public transportation to encourage use over private transportation would also have a significant positive effect on the energy bill, and is an argument for greater subsidy and investment in public transportation. In implementing these projects, however, the objectives must be very clear and the implementation carefully managed to meet the goals.

This illustrates that a focus on energy can have substantial benefits for the country. Maybe the IMF NEEDS to sharpen its pencil and re-examine the projections, as a focus on development rather than just monetary juggling will not only benefit the county but add greater security for their own payback.


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