Friday, February 25, 2011

2011 will be a challenging year

Last year I indicated that in 2011 we could look forward to some recovery in the global and local economy. This will be more evident in the global economy, as I believe that the Jamaican economy will still continue to struggle because of the structural issues it continues to face. It is my view also that the contractionary effect of the IMF policies will cause the recovery to be more of an uphill task than if the contraction was not as deep.

There are some positives that have happened during the recession. These include (1) Tax administration; (2) Divestment programme; (3) Attention to the Public Sector Transformation Programme; (4) Reduction in interest rates; (5) Emphasis on local agricultural production; (5) Completion of the Falmouth Pier and Montego Bay Conference Centre; and (7) Focus on reducing corruption in the police force and crime generally.

Despite these positives, however, the economy will continue to see significant challenges in 2011, in my view. Indications of this can be seen in the following areas:

o Global inflationary pressures from oil and food price increases, which I had indicated would take hold in 2011. Even before these global pressures, Jamaican businesses were already seeing inflationary pressures but could not increase prices because of falling demand;

o Interest rates globally will increase to deal with inflation and excess liquidity resulting from fiscal interventions in countries such as the US;

o The PSOJ has, through its National Security Advisory committee, pointed out that security is a major cost because of crime. They estimate that a whopping 20% of small business revenues go into security-related costs. The implication is that we may not see the upswing, in small business ventures, needed to drive job creation and growth;

o Commercial bank loans are trending down, and more importantly the loans to the productive sector, such as agriculture, have decreased;

o The majority of funds under the IMF programme have already been received. The positive side is that government has been able to successfully raise funds on the capital market, and should attempt to replace the expensive debt; and

o The trade deficit is worsening year over year.

The fact that the global recovery is slowly continuing this year represents an even greater disadvantage for Jamaica than the recessionary effect experienced last year. This may seem perplexing to some, but the reason for this is very simple. Between 2009 and 2010 when the Jamaican economy was in decline, I believe that while it proved difficult for individuals, it was good for the Jamaican economy. The reason for that is because of the way the Jamaican economy is structured. Prior to the recession, the Jamaican economy was growing, although at small rates. The contradiction, however, is that while the economy was growing, so was the debt and fiscal deficit. Simply put, what we were doing was growing by consumption, based on borrowed money. Therefore for every $1 we produced we consumed 72 cents of it, and exported 28 cents. At the same time we were importing between 70 and 80 cents to produce that $1. Mathematically, therefore, we were importing 80 cents and only exporting the equivalent of 36 cents (assuming we mark up the production by 50%).

Therefore when the economy was contracting, we were actually reducing the need for borrowed funds, and therefore cutting our suit to fit us.

Now that the global economy is recovering, we still have the same basic infrastructural problems that have been with us since the 1990s. If you factor in the negative effect of market demand, you will find that there is going to be a tug of war between fiscal and private sector demands. It will therefore be imperative for the public and private sector to find a happy medium, and this I think will be driven by government policy. There are some good initiatives undertaken (as mentioned above), but we will have to be a lot more decisive in our policies if we want to ensure that we stop the train before the track runs out.

Initiatives I support the government on - and wonder about what the IMF is thinking - are the JDIP, purchase of buses, and similar projects. If we are going to ensure that the economy does not go through any further contraction, government must take the lead in infrastructural projects that will not only provide much needed infrastructure and employment, but will also contribute to future savings in foreign exchange. The two most important sectors to focus on are agriculture and transport.

I can recall the opposition expressed when I supported the need for more money to be spent by the government on infrastructural projects. Suppose government had not continued to spend on road improvement and projects such as Falmouth Pier. Apart from the greater loss of jobs and crime we would have experienced, what sort of infrastructure would we have in this country? It is important that we not ignore our infrastructural support, or else we will be even less competitive.

A critical look at the balance of payments tells us about the challenges that lie ahead. A cursory look seems to indicate that things are going well, as we see the current account deficit improving by US$137.7M for the January to September period in 2010. The areas of improvement were (i) Services - US$56.2 million; (ii) Income - US$93.7 million; and (iii) Current Transfers - US$82.5 million. This overall performance is good, as any line we get the money from to turn around our fortunes is good. We have to be careful about how we develop these areas, however, so that we do not revert to the structural challenges coming out of the 1990s, as this will lead to a need for high interest rates in order to have macroeconomic stability.

The challenges from the BOP can be seen in:

(1) Declining trade deficit. Specifically we see a reduction in exports and an increase in imports;

(2) Services, although improved, show one of the reasons as a decline in expenditure of Jamaicans travelling abroad. This is good as it means lower consumption of overseas items but not because of increased expenditure locally, which means that it is a weakness of consumer demand;

(3) Income has improved because of reductions in official interest payments and reduction in profits remittances. The former is what we want to achieve, and is a move in the right direction, but the latter means there is less incentive for foreign investments; and

(4) Current transfers, which have come primarily from remittances, and an indication that the country is heading back to reliance on non-productive income.

The BOP and economic stagnation tells me that the market is trying to make the necessary adjustment to become more efficient. This is the way markets work. We continue to be dogged, however by societal, political, and bureaucratic challenges that inhibit this necessary market adjustment. If these challenges are not addressed effectively, then we will find ourselves with the same structural problems we have had since the 1990s.

Overall this means that although we see the global recovery, because of Jamaica's inherent structural problems we will continue to face challenges in 2011. Hopefully some of the policies being pursued by the government will bear fruit and alleviate some of these challenges.

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