Friday, January 06, 2012

Facing the challenges ahead

One certainty of the upcoming fiscal and calendar year is that it is going to be difficult and will require all hands on deck. This is why it disturbs me that when I look at some of the messages on social media, I see young persons, apparently expressing their disgust that the PNP won the election, saying that they expect that they will fail as a government. This is similar to the sentiments I saw expressed in 2007 by young persons sympathetic to the PNP.

It is interesting to note that these statements are not coming from the politicians who lost but from young persons who are supposed to be tomorrow's leaders. If this is the situation, then what hope do we have for tomorrow? Don't we have the sense to realise that if the PNP fails, no part of Jamaica will be spared? It is not that one area will do badly and the other will do well, based on the occupation by party supporters.

My message to these persons is that they should do everything in their power to make sure that the government of the day succeeds because 2012 is going to be a difficult year, and any wrong move could affect us for a very long time to come. Unless, of course, they have dual citizenship and don't plan to live here.

With that said, I want to look at some of the challenges we face as a country. Let me first say that while I believe that there will be significant challenges ahead I do not believe that they are insurmountable, and further I do not believe that there has to be a heavy dose of bitter medicine to resolve the challenges. It depends on how the situation is handled.

What is certain is that if the wrong moves are made then any slippage is going to have a significant negative effect on the country. One may say the following:

o But there is macroeconomic stability and this means that things are improving and we are on a path to growth; or

o But we have been here before, for example the financial crisis of the mid-1990s, and we managed to bring the economy back to small but consistent growth prior to the recession.

The difference this time is that we are working from a weakened position.

While I agree that there is macroeconomic stability, as I have always said, the best way to achieve stability in a patient is to kill the patient. So the reason why all our macro targets look good is because of the lack of economic activity. So everything seems stable. In fact when economies grow significantly, and start to overheat, the macro variables are never stable without monetary and fiscal policy intervention. If left unchecked, inflation and exchange rates will increase based on demand from growth.

What we have failed to remember is that the primary role of governance and economic policy is for the improvement of the standard of living of the people in the country. So managing to improve macroeconomic numbers, while the majority of the people get poorer, is bad policy. This is why I have always held the view that a Keynesian approach in a recessionary environment is not only necessary but is a responsibility of governance. We are now seeing the effects of the pro-cyclical and fiscal-oriented approach, as is being shown in the fiscal revenue targets.

This brings me to the other point, where one might say that we have been here before. Sure we have seen significant inflation and exchange rate movement in the early 1990s, and to some extent the early 1980s. We also had a significant recession in the early 1980s. We also saw many business failures in the mid-1990s. The difference is that in the 1990s and 1980s we had a very big advantage that we do not have today and that caused us to be able to find a way out of that crisis. We had access to debt through the capital markets.

There is a significant difference between today, the 1990s, and the 1980s. Without the ability to borrow money, or receive grants during those two periods, we would have seen a significant economic problem. The problem Jamaica has always faced is one of not being able to afford what we want to consume, whether it is on the government accounts or balance of payments (BOP) side.

Today what has happened is:

o We have a worsening BOP, with the first seven months of 2011 showing deterioration in the balance of payments by over US$600 million, and a current account deficit of over US$900 million. This was caused primarily by an increase in oil imports of over US$550 million and in addition associated freight costs. It is for this reason that I have always emphasised each time the need to deal with our energy situation as a priority. I am supportive of Paulwell's approach and hope that we can achieve this soon.

o Our fiscal revenues are some J$8.5 billion behind target, wile our expenditures are only J$3 billion behind target. This means that our fiscal deficit is J$5.5 billion worse than projected. I expect that given the low demand environment this situation will worsen.

But alas, there is no capital market to run to and get money unless we are willing to offer higher interest rates, and even so persons will be a lot more wary and unable (because of their own circumstances) to take up GOJ debt. What is certain is that there cannot be a JDX2 unless we want to see a serious problem in the economy. Also the FDI flows that helped us in the 1990s to 2000s are no longer there. In fact it seems more profits are being sent abroad than those coming in.

The government is also faced with the challenge of having to provide jobs, and I think has made the right decision that it is not practical to lay off public sector workers. This is something I have been saying for a while, as the redundancy cost and the negative effect on a stagnant economy would be impractical. Additionally I also agree that pension reform is not something that can materialise in the short term. I think, however, that we can start the process of tax reform in short order. We don't have to implement everything at once, but certainly it is important to pick the low-hanging fruits as soon as possible. How do you in the short term just change an embedded compensation package? Apart from equity issues it is just not an easy task.

So then what do we do? We have a worsening BOP and fiscal deficit and little ability to manoeuvre. It seems obvious to me and comes right back to the argument I have been pushing for the last few years. The only real hope is to grow our value-added debt, as was done in the mid-1980s, and ensure that what we use it for is greater than the cost. I don't know anyone with monthly income and debt payment of $50 and $100 respectively, who can reduce their debt by cutting back on expenditure.

Our only viable option right now is to get an extended fund facility with the IMF, as this is not only the avenue to IMF funds but also other multilateral funding. This means that we must save the IMF agreement, as without the IMF there is little else that can be done. And as I have always said, the targets we were pursuing were doing nothing more than contracting the economy while we were running out of options.

There are some policy moves that can be taken to make things easier ,and I am hopeful that this will be pursued by the government.

At the individual level, this is the time to get out of unproductive debt and consolidate your own expenditures.


Anonymous said...

What are your thoughts on the JEEP initiative? Do you consider it to be a productive debt venture?

Dennis Chung said...

In response to the question about the JEEP - I don't think anyone can say that it is productive unless they are aware of what is included in the JEEP. If for example (at one extreme) it is providing jobs for people to sweep streets already being cleaned by NSWMA, it would not be. But if it is focused on infrastructure projects, like bridges, gullies, flood prone areas, roads, then it more than likely is. It depends on how it is organized. What I will say is I support a stimulus package from the government to counter the IMF effects.

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