Friday, February 03, 2012

Jamaica's options diminishing

THIS is one time when I hate to say "I told you so" as it is in relation to Jamaica's economy. This is because it always seems as if the appropriate prediction to make is that implemented policies will not work and will cause our economic situation to worsen. I can, however, share this feeling of despair with Anne Shirley, Al Edwards, and Ralston Hyman, and therefore say "We told you so", as most other regular financial commentators do not need to share this feeling of guilt.

The recent fiscal and trade numbers point to what we have been saying since 2009, that the taxes imposed and the IMF programme would have had a contractionary effect. Added to this the fact that the IMF agreement was in limbo for over a year and this created industrial instability caused by the decision to reverse public sector wage contracts.

So here we are two years later with tax revenues running $14.5 billion behind target, for the first nine months of 2011/12, which I expect to worsen as we head into the final quarter. In addition, the balance of payments (BOP) for the first eight months of the 2011 calendar year showed a worsening current account deficit over the prior year comparative period of US$647.6 million, or over 150 per cent.

This suggests, in the strongest possible way, that we have not addressed the structural challenges facing the economy. But is this any surprise when the same IMF programme projected that oil imports would move from 14 to 14.5 per cent of GDP over the projected period?

What is more frightening about the fiscal numbers (as shown in the table) are the following:

- When compared to prior year, June, November, and December 2011, all showed reduction in tax revenues;

- For the nine months tax revenues were just up 5.1 per cent, when inflation was approximately 7 per cent, signifying a real reduction in tax revenues;

- In the current fiscal year, tax revenues fell short of budget by $13.3 billion more than the shortfall in the prior year; and

- The last three months of the fiscal year are always the most difficult for meeting tax revenue targets.

Against this background the minister and his team must craft a fiscal budget for 2012/13. This seems like a very difficult task within the context of our political, social, and economic environment. I have always maintained over the years that there are always options that can take us out of this mess, and I can think of a few. If these will be considered is dependent on our political and social environment. Will we take the road less travelled in Jamaica to economic development? I hope so, but history is not on the side of that being done.

What is clear is that because of the fiscal decisions taken since the recession hit us, we find ourselves here today. So all those who thought that Maynard Keynes was just something out of a Mother Goose fairy tale, it is instrumental to note that even Europe is now accepting that they need some stimulus to help create growth, as the fiscal austerity they embarked on two years ago has not worked. On the other hand, the US went the way of Keynes, and provided stimulus to the economy, resulting in growth, even though fragile. The US dollar has once again regained some credibility.

It is evident that our options are diminishing fast, as our failure to take the bold decisions have had persons comparing us with the demise of Greece and other parts of Europe. Instead we should have been compared with the US today, if only we had not discarded the teachings of Keynes.

So it is clear that programmes like the JEEP and Jamaica Employ are going to be critical to move the economy forward. I can think of a few ways that these can get off the ground while having the advantage of improving our BOP and using the least amount of resources. I trust that the cabinet retreat will emerge with a solid programme that will provide the much-needed stimulus.

It is going to be difficult, though, because of limited resources available. I have long said that Jamaica has a bigger accounting than economic problem. But being an accountant, maybe my views are prejudiced.

Apart from the stimulus option, the only other solution to the fiscal problem is to go for more value-added debt through the IMF programme. Going to the market is going to drive up interest rates, so it should not be seen as a solution. And also, cutting expenditure and/or raising taxes are only going to cause a further contraction in the economy.

It is important to reach an agreement with the IMF as soon as possible, as each passing day can only bring uncertainty. It was important for the minister on assuming office to have met with the IMF, and made the announcement of the status as he did. It is important now to finalise the discussions and keep the markets informed about what is happening.

It is also prudent to understand that of the three much-talked- about reforms being pushed (tax, pension, and public sector), only one can practically happen before the next IMF agreement, and that is tax. In the present form, however, the green paper will only serve to continue the tradition of the fiscal priority negatively affecting the economy.

Pension, I have always maintained, is an embedded compensation and therefore requires much consultation in addition to reforming the structure, as all the money has previously been lost in the consolidated fund. Public sector reform was approached in the wrong way and was therefore doomed to long deliberations.

With all that said, what is obvious is that our options are very limited, and it is going to take the best of the minister, his team, and the Government to steer the Jamaican ship through the troubled waters ahead.


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