From time to time I get the question from people involved in all sectors, “what’s up with the economy?” In summary my view is that the economy is like a bird perched on a tree limb after flying head on into a pane of glass. The bird could recover and fly into the skies or could find that the shock of the collision was too much and fall to the ground. This of course depends on how well positioned the bird is on the branch and also how devastating the impact of the collision was.
This is the current position of our economic affairs. The economy is precariously positioned and any strong wind or deliberately crafted support structure could move it in one direction or another. The major factors of course include (1) how we address the crime situation; (2) how effectively we wipe out any corruption by public officials; (3) our ability to eradicate general lawlessness and indiscipline; (4) creating efficiencies in the public sector and eliminating bureaucracy; (5) a more practical legislative framework, encouraging investments; (6) continued reduction in interest rates and care not to over regulate the economy; (7) continued investments in our physical and social infrastructure; and (8) not put politicking above the economy.
If we can strategically deal with these major issues, to ensure a positive outcome, then we will not have to worry about economic growth, and we will see an upswing in all our critical sectors and capital market.
Fiscal Accounts
One of the dark clouds that has continued to hang over the economy (seems like eternity) has been the state of our fiscal accounts and national debt. The fiscal deficit that was budgeted to be around J$21 billion, or 2.5% of GDP, has once more overshot that target, and with the tabling of the supplementary estimates last week, is certain to be at least J$40 billion and 4% of GDP come March 31, 2007. This has resulted from the increased expenditure estimates, less than projected revenue collection, and a slower than anticipated economic growth.
This of course has come as no surprise to me, as I had stated at the start of the financial year that:
The revenue targets were too optimistic, as a 20% growth in tax revenues was just not on the cards, and this was said against the back ground of (a) the cement crisis; and (b) predictions of a very active hurricane season. We did not have any hurricanes and still, as at the ten months ended January 2007, the revenue was some J$5 Billion behind target. Imagine if we had a hurricane, or even a glancing Ivan-type blow;
I do not think that the economy had the capacity to grow at 3% to 4%. This of course is because of the crime levels, that affect investor and consumer confidence, and the lack of a proper road infrastructure, which if we are relying on agriculture as a main pivot for growth then this is extremely important. Since then we have made some gains in this area; and
Debt was going to end the year close to J$1 trillion. This is no surprise to me, as I did not believe that we would make the revenue targets, and since we were hosting world cup this year, and also going into elections, I thought that we would need more money than projected and would have to go to the capital markets, as the country cannot bear anymore taxes, which would be counter-productive.
Now that we have seen the first supplementary estimates, we know that the expenditure side will come in at J$372 billion, instead of the original J$358 billion. But what of the revenue side. After all if we want to project the deficit then we will need to estimate what the revenue is likely to be. This calls for some financial statement type analysis, and I will try to use my training as an accountant to do some estimates here.
Revenue estimates
We know that at the end of January 2007, the ten months results showed that revenues were some J$5.2 billion behind target. Of this amount tax revenues were J$4.2 billion behind; non-tax revenues were J$1.7 billion ahead; bauxite levy was J$211.5 million above; capital revenues were J$1.3 billion ahead; and grants $1.7 billion ahead. So as I had anticipated, the tax revenue line is where the major problem is, and this is primarily because for some reason we were too optimistic in the budget. And this was after the GCT collections of the Christmas season.
So in the two remaining months (February and March 2007) is it possible for us to catch up with the J$5.2 billion deficit, while at the same time meet the J$26.3 billion tax collection in March, which I think will be the deciding factor as to whether or not we even come close to our revenue targets.
Of the J$26.3 billion tax revenues projected for March 2007, J$8.4 relates to company profits tax (J$6.7 billion collected in March 2006), and J$4.8 billion of PAYE (J$3.4 billion in March 2006).
Table 1 shows the significant revenue line items that will affect the budget out turn for 2007. It clearly shows that in all lines, except tax on interest and GCT on imports, we are behind revenue projections. In the case of tax on interest this is only so because the government practices cash accounting and the tax on interest to pension funds was not being paid back, in a timely manner, in the first half of the fiscal year. The column to the far right shows the likely out turn for company profits taxes, PAYE, and local GCT, which are the more significant items.
Revenue outcomes
With the poor results being shown by publicly listed companies, I do not expect that we will exceed the J$34.6 billion collected last financial year. My reason for saying this is based on a quick analysis of the financial results over the two years. I looked at the 2006 audited reports of 34 companies that pay taxes in Jamaica, or in the case of some companies that are late, at the date of writing, the third quarter reports.
In 2005 they would have made accumulated profit before tax of J$43 billion and J$45.4 billion in 2006, a mere 5.67% increase. The tax charge in 2005 was J$8.9 and J$9.2 billion, an increase of 2.75%. The tax charge in both years were calculated under the same accounting standard dealing with income tax charges, and so there would not be any material difference in the way the computations were done. This means that company taxes can be expected to grow around 3%, as these public companies should be representative of the companies in Jamaica.
Based on this reasoning then we may end up with company profits taxes of around J$17.4 billion, growing from $15 billion in the 2006 fiscal year. This would fall short, of the 2007 projection of J$20.1 billion, by J$2.7 billion, of which it is already J$1.2 billion behind.
PAYE should follow the trend for the performance to date, and should come in at around J$41 billion, some J$2.4 billion less than projections. This is affected by the fact that the MOU2 restricted the increases to public sector workers, and private companies, based on their results, have not given any significant salary increases, or bonuses, in the financial year. A 25% increase on this line was never in the cards.
Local GCT has of course not met projections because the economy has not grown at the 3% to 4% projected, and instead has come out at less than 3%. The shortfall here will be about J$2.9 billion. GCT from the activity generated from world cup will not get in government coffers until April to May 2007, as there is a one month delay in filing GCT returns.
Revenues then will come in at about J$8.1 billion below budget, unless outstanding taxes, or some other unexpected revenue in take is forthcoming. This means that the fiscal deficit will come in at the projected J$21 billion plus the supplementary estimates of $14 billion plus the revenue shortfall of J$8 billion, for a total of around J$43 billion. It could always be a little better or worse.
Equity Market
Another concern people have is what will happen on the equity market. Last year the equity market started its recovery, after going through a major downturn for the two years prior. So obviously investors are concerned about what will happen going forward.
The bottom line is that stock prices move, over the medium to long term, based on fundamentals of the company, which is affected by the economy. The economy also affects investor confidence levels and can affect stock prices. Last year we saw where consumer and investor confidence rose from the lows of the prior year, and similarly we saw where the equity market made a comeback. I believe there is a direct correlation between these, and so the way that the economy is handled is very important in determining what happens in the equity markets.
I expect, however, that certain stocks on the equity market will continue to do well. My view is that most will not perform as in the past, and there are certain stocks that one can zero in on. Some that performed well in the past will not perform well in the future, as we have seen a change in the paradigm, as interest rates have been coming down and some amount of realignment is taking place. Those capable of competing effectively with, and distributing, internationally produced products will fare better.
One reason for not expecting much from most stocks this year is that Jamaica’s economy is now around 70% service and 30% goods producing. If you look at the public companies, the main service sector are the financial companies, and with the reversal of interest rates many will under perform last year, as the results have been showing. There are some financial companies that will do well, however, and these have adjusted well to the changing market conditions already, with more adjustments to come. The main growth areas of agriculture, tourism, and construction are not well represented on the equity market. The financial companies that benefit from these growth areas will be the ones that realign their loan portfolios to accommodate these sectors. One can get an indication of these by looking at the balance sheet.
Alternative investments
One certainly could not comment on the market without looking at alternative investments. This has been the buzz for the past few months. Even TVJ’s news asked the public if they would invest in unregulated investment clubs, and over 50% of respondents said yes. Whether we want to accept these or not the fact is that the investing public is willing to take risks. We must educate and regulate.
The fact also is that the investment products provided in the Jamaican market have been far less than innovative, and has not kept pace with international markets. When we look at the development of capital markets in the United States, we can certainly appreciate how far behind we are. With the ease of access to these markets what it means is that if we over regulate, and seek to keep alternative investments out of Jamaica, then we will find that capital will leave Jamaica for investments in other countries. We are in a global market and we can either adapt or suffer the consequences.
It is important, however, that the regulators continue to have oversight over what products are offered in the market. And we see that even the US has tried to control private activity by banning internet gaming, which is a private transaction between the player and the service provider over the internet. This is the challenge that regulators face.
Today’s alternative investments, however, become the staple investment products of tomorrow. It is this creativity that drives capital markets. Even in the US they are trying to grapple with how to deal with hedge funds, and the general consensus is that although they provide a big risk, the best way to deal with them is to have some oversight but not outlaw them. Whether we like it or not, these alternative investments are here to stay, and just as in the US hedge funds have grown to be significant players, so too will alternative investments continue to grow in Jamaica, and whichever financial institution refuses to get into the market will find that they will lose market share.
Legislative framework
I would like to make a comment on the importance of the legislative framework in encouraging investment. This of course is very important, as if we are unable to put the proper legislative support in place, then businesses will not feel comfortable investing in Jamaica, not to mention the fact that every day Jamaicans will not be able to be productive in an environment where their rights are not protected.
I give one example, as relates to the labour laws. I know hat labour laws are important to protect the rights of workers but sometimes I think we go too far. I am involved in an organization that employed a watchman. He was working with the organization for a few years and had been warned on many occasions about not smoking ganja, as well as sleeping on the job. Finally he was fired and paid a total of four weeks notice and all other outstanding amounts.
He went to the Ministry of Labour, and complained that he got less than was due to him, in that he should have gotten more notice pay, which under the law is true. But after being dismissed for smoking and sleeping on the job, the organization is now being asked to pay more money, when he was not living up to his side of the contract, and what’s more is that this was told to the Ministry but they were not concerned with this. Now how do we intend to encourage local or international investors with this sort of archaic legislation? In other words productivity is the servant of legislation.
It’s leadership
So what happens to us going forward? It is clear that we will not meet the projected growth and fiscal targets and our debt will get close to the J$1 trillion dollar mark, a milestone we should certainly not be proud of. What is not clear is how the politicians will approach the economy going forward into the election, and this is the wild card that we have to deal with. I think that the next few months is going to show what our leaders are made of, and who puts Jamaica and Jamaicans first, and Jamaicans should be aware of the politicking leading up to the election, as this will let us know who is pro-Jamaica, and who is pro-party.
The main problem that we have as a country is one of leadership, not crime, education or the economy. These are mere symptoms of our leadership. So the gauge for me is what the leadership does, as this ultimately affects the confidence levels and the economy.
Friday, March 23, 2007
Cricket, aeroplanes, and poverty
A recent article in Forbes magazine looked at what some of the world's billionaires drive. Of course at the top of the list were Bill Gates and Warren Buffett. Gates drives a 1999 Porsche 911 and a 1988 Porsche 959 coupe. Buffett drives a 2001 Lincoln Town car with the words THRIFTY on the licence plate. The magazine also states that the trend noticed is that billionaires tend not to focus on material possessions such as cars, which depreciate, but rather tend to put their resources and efforts into their businesses.
Recently, I was having a discussion with a well-known Jamaican, who commented that while working in Trinidad in the 1980s, it was very obvious to him that instead of buying fancy cars and houses, as Jamaicans do, what Trinidadians did was to retool their factories and spend most of their money on modernising the businesses. Well, they became the manufacturers for CARICOM and we had FINSAC. This is not to justify the manner with which a Trinidadian, recently being interviewed by Cliff Hughes, pompously stated that the agreement to supply LNG to Jamaica was an MOU and therefore not binding on either party. What happened to the word of a government? Doesn't that mean anything anymore? I am sure that this is not the sentiment of the prime minister, and people like that should be banned from speaking for fear of reversing our CARICOM efforts.
Resource usage
These two accounts bring to the forefront the relationship between cricket, aeroplanes, and poverty, in the Jamaican context. They all compete for the same resources. Of course in true Jamaican style, cricket and aeroplanes (Air Jamaica) get the lion's share, while poverty continues to increase because it is deprived of resources as a result of cricket and aeroplanes. I can say this for the politicians who that are afraid to because it might cost them votes, as no one is going to vote for me.
On the day of the opening ceremony at the expensive Trelawny multi-purpose stadium, TVJ covered this magnificent affair, with all the Jamaicans present enjoying themselves immensely. In true Jamaican style, we showed the world that we know how to party. Two stories later I saw an elderly teary-eyed lady saying that she fell down carrying water in a bucket to her home, because there was no running water. Still another report showed a man saying that his car had been damaged by the police who had borrowed it to chase thieves on many occasions, as they had no vehicle, and he was having difficulty being compensated.
Now this is the same country where we spend J$9 billion to host world cup cricket, and maybe about J$2 - J$3 billion on the Trelawny stadium. This is the same country that has a national airline that lost US$153 million (J$10 billion) in 2006, and US$120 million (J$8 billion) in 2005.
This is the same country that runs a sugar company that loses hundreds of millions of dollars each year. As the celebrated IMF report states in paragraph 14 ".the data indicate that the deficit of the JUTC exceeded planned amounts by three-fold; that of the sugar company exceeded planned amounts by almost seven-fold; and that of Air Jamaica has been more than double the expected amount. Altogether, the excesses of these three enterprises amount to almost 1 per cent of GDP this year."
In addition to all these losses, we spend J$ billions on a stadium to host an opening ceremony and some warm-up matches, and which might have some positive revenue impact in the future. In the present, though, the old lady can continue to carry the water, and fall down while doing it, because the money has to be spent on cricket, aeroplanes, and sugar to sweeten the hardship. Although she will have made sacrifices for these expenditures to have taken place, and for some Jamaicans to have enjoyed the ceremony, more than likely she will not live to see the benefits of the expenditures, if any of us will.
Needless to say, when I saw the newscast I was more than hurt by the disregard we have for the less fortunate in this country. And those who suffer the most will not be able to enjoy the cricket, because at US$80 per ticket it will not be possible to buy water and go to the cricket match also. And even if they could afford to, then they might not be able to get a bath in time to attend.
Development is key
If we as a country are serious about development then we have to make better choices. We cannot continue to spend money needlessly on events that do not add long-term value. Not in the position we are in. I am not saying that we should not have hosted the opening ceremony and the cricket matches, but why not spend J$1.5 billion or J$2 billion less and fix up the national stadium for the opening ceremony? Still have the expenditure on Sabina and the physical infrastructure, but seek to spend the money more wisely. If we had taken that approach and spent J$1.5 billion less, would it have negatively impacted the benefits? I think not.
With respect to Air Jamaica, this thing seems like an ever-expanding black hole. Even if we consider the MIT report, which says that the net benefit of Air Jamaica is over J$5 billion per annum, which I doubt very much, the present losses seem to be eating away at that net benefit. I also have no doubt that Air Jamaica is losing passengers, as if you want to get to your destination on time, Air Jamaica is not the likely choice. If we cannot contain the losses, and turn a profit by 2009, as called for in the business plan, I will agree with the IMF, shut it down. We cannot continue to spend J$10 billion per year to support an airline that has borrowed the crutches from the Jamaican dollar.
We must face the fact that our resources are very scarce, and we need to be very wary of what we spend it on and how. It is only by spending on things that will provide value in excess of the spend that we will get out of the situation we are in and achieve development. Growth is not difficult to get, or at least should not be, it is development that is a challenge and what we must focus on. In 2007 we should not have an old lady carrying water from the river because there is no piped water. We should not have the police having to borrow a private car to provide security. A duty-free car for the police is just over J$1 million. A fraction of J$2 billion could have provided the cars we need to fight crime.
So at the end of cricket and the losses of Air Jamaica, my question is, what is the benefit we expect to gain? Will we have a more educated work force? Will crime be reduced? Will we be able to save our tourist capital from the jaws of crime? Will our youth have more employment opportunities because they have acquired a skill? Will the old lady have piped water and the police get the vehicles they need because of the revenue flows generated? We don't need the benefits 10 years from now, we need THEM now.
It is not good enough that we will benefit from whatever monies we spend. The timing is important. If someone develops a product that is useful for the next generation then it means that his business will fail, if he has no other product or service. The lesson is that when we spend monies, we must be careful to ensure not only that the benefits are forthcoming but that it happens in a timely manner. Because at the end of the celebrations, while the money is being spent, then there comes reality, when it has to be paid back.
Recently, I was having a discussion with a well-known Jamaican, who commented that while working in Trinidad in the 1980s, it was very obvious to him that instead of buying fancy cars and houses, as Jamaicans do, what Trinidadians did was to retool their factories and spend most of their money on modernising the businesses. Well, they became the manufacturers for CARICOM and we had FINSAC. This is not to justify the manner with which a Trinidadian, recently being interviewed by Cliff Hughes, pompously stated that the agreement to supply LNG to Jamaica was an MOU and therefore not binding on either party. What happened to the word of a government? Doesn't that mean anything anymore? I am sure that this is not the sentiment of the prime minister, and people like that should be banned from speaking for fear of reversing our CARICOM efforts.
Resource usage
These two accounts bring to the forefront the relationship between cricket, aeroplanes, and poverty, in the Jamaican context. They all compete for the same resources. Of course in true Jamaican style, cricket and aeroplanes (Air Jamaica) get the lion's share, while poverty continues to increase because it is deprived of resources as a result of cricket and aeroplanes. I can say this for the politicians who that are afraid to because it might cost them votes, as no one is going to vote for me.
On the day of the opening ceremony at the expensive Trelawny multi-purpose stadium, TVJ covered this magnificent affair, with all the Jamaicans present enjoying themselves immensely. In true Jamaican style, we showed the world that we know how to party. Two stories later I saw an elderly teary-eyed lady saying that she fell down carrying water in a bucket to her home, because there was no running water. Still another report showed a man saying that his car had been damaged by the police who had borrowed it to chase thieves on many occasions, as they had no vehicle, and he was having difficulty being compensated.
Now this is the same country where we spend J$9 billion to host world cup cricket, and maybe about J$2 - J$3 billion on the Trelawny stadium. This is the same country that has a national airline that lost US$153 million (J$10 billion) in 2006, and US$120 million (J$8 billion) in 2005.
This is the same country that runs a sugar company that loses hundreds of millions of dollars each year. As the celebrated IMF report states in paragraph 14 ".the data indicate that the deficit of the JUTC exceeded planned amounts by three-fold; that of the sugar company exceeded planned amounts by almost seven-fold; and that of Air Jamaica has been more than double the expected amount. Altogether, the excesses of these three enterprises amount to almost 1 per cent of GDP this year."
In addition to all these losses, we spend J$ billions on a stadium to host an opening ceremony and some warm-up matches, and which might have some positive revenue impact in the future. In the present, though, the old lady can continue to carry the water, and fall down while doing it, because the money has to be spent on cricket, aeroplanes, and sugar to sweeten the hardship. Although she will have made sacrifices for these expenditures to have taken place, and for some Jamaicans to have enjoyed the ceremony, more than likely she will not live to see the benefits of the expenditures, if any of us will.
Needless to say, when I saw the newscast I was more than hurt by the disregard we have for the less fortunate in this country. And those who suffer the most will not be able to enjoy the cricket, because at US$80 per ticket it will not be possible to buy water and go to the cricket match also. And even if they could afford to, then they might not be able to get a bath in time to attend.
Development is key
If we as a country are serious about development then we have to make better choices. We cannot continue to spend money needlessly on events that do not add long-term value. Not in the position we are in. I am not saying that we should not have hosted the opening ceremony and the cricket matches, but why not spend J$1.5 billion or J$2 billion less and fix up the national stadium for the opening ceremony? Still have the expenditure on Sabina and the physical infrastructure, but seek to spend the money more wisely. If we had taken that approach and spent J$1.5 billion less, would it have negatively impacted the benefits? I think not.
With respect to Air Jamaica, this thing seems like an ever-expanding black hole. Even if we consider the MIT report, which says that the net benefit of Air Jamaica is over J$5 billion per annum, which I doubt very much, the present losses seem to be eating away at that net benefit. I also have no doubt that Air Jamaica is losing passengers, as if you want to get to your destination on time, Air Jamaica is not the likely choice. If we cannot contain the losses, and turn a profit by 2009, as called for in the business plan, I will agree with the IMF, shut it down. We cannot continue to spend J$10 billion per year to support an airline that has borrowed the crutches from the Jamaican dollar.
We must face the fact that our resources are very scarce, and we need to be very wary of what we spend it on and how. It is only by spending on things that will provide value in excess of the spend that we will get out of the situation we are in and achieve development. Growth is not difficult to get, or at least should not be, it is development that is a challenge and what we must focus on. In 2007 we should not have an old lady carrying water from the river because there is no piped water. We should not have the police having to borrow a private car to provide security. A duty-free car for the police is just over J$1 million. A fraction of J$2 billion could have provided the cars we need to fight crime.
So at the end of cricket and the losses of Air Jamaica, my question is, what is the benefit we expect to gain? Will we have a more educated work force? Will crime be reduced? Will we be able to save our tourist capital from the jaws of crime? Will our youth have more employment opportunities because they have acquired a skill? Will the old lady have piped water and the police get the vehicles they need because of the revenue flows generated? We don't need the benefits 10 years from now, we need THEM now.
It is not good enough that we will benefit from whatever monies we spend. The timing is important. If someone develops a product that is useful for the next generation then it means that his business will fail, if he has no other product or service. The lesson is that when we spend monies, we must be careful to ensure not only that the benefits are forthcoming but that it happens in a timely manner. Because at the end of the celebrations, while the money is being spent, then there comes reality, when it has to be paid back.
What’s up with the economy
From time to time I get the question from people involved in all sectors, “what’s up with the economy?” In summary my view is that the economy is like a bird perched on a tree limb after flying head on into a pane of glass. The bird could recover and fly into the skies or could find that the shock of the collision was too much and fall to the ground. This of course depends on how well positioned the bird is on the branch and also how devastating the impact of the collision was.
This is the current position of our economic affairs. The economy is precariously positioned and any strong wind or deliberately crafted support structure could move it in one direction or another. The major factors of course include (1) how we address the crime situation; (2) how effectively we wipe out any corruption by public officials; (3) our ability to eradicate general lawlessness and indiscipline; (4) creating efficiencies in the public sector and eliminating bureaucracy; (5) a more practical legislative framework, encouraging investments; (6) continued reduction in interest rates and care not to over regulate the economy; (7) continued investments in our physical and social infrastructure; and (8) not put politicking above the economy.
If we can strategically deal with these major issues, to ensure a positive outcome, then we will not have to worry about economic growth, and we will see an upswing in all our critical sectors and capital market.
Fiscal Accounts
One of the dark clouds that has continued to hang over the economy (seems like eternity) has been the state of our fiscal accounts and national debt. The fiscal deficit that was budgeted to be around J$21 billion, or 2.5% of GDP, has once more overshot that target, and with the tabling of the supplementary estimates last week, is certain to be at least J$40 billion and 4% of GDP come March 31, 2007. This has resulted from the increased expenditure estimates, less than projected revenue collection, and a slower than anticipated economic growth.
This of course has come as no surprise to me, as I had stated at the start of the financial year that:
The revenue targets were too optimistic, as a 20% growth in tax revenues was just not on the cards, and this was said against the back ground of (a) the cement crisis; and (b) predictions of a very active hurricane season. We did not have any hurricanes and still, as at the ten months ended January 2007, the revenue was some J$5 Billion behind target. Imagine if we had a hurricane, or even a glancing Ivan-type blow;
I do not think that the economy had the capacity to grow at 3% to 4%. This of course is because of the crime levels, that affect investor and consumer confidence, and the lack of a proper road infrastructure, which if we are relying on agriculture as a main pivot for growth then this is extremely important. Since then we have made some gains in this area; and
Debt was going to end the year close to J$1 trillion. This is no surprise to me, as I did not believe that we would make the revenue targets, and since we were hosting world cup this year, and also going into elections, I thought that we would need more money than projected and would have to go to the capital markets, as the country cannot bear anymore taxes, which would be counter-productive.
Now that we have seen the first supplementary estimates, we know that the expenditure side will come in at J$372 billion, instead of the original J$358 billion. But what of the revenue side. After all if we want to project the deficit then we will need to estimate what the revenue is likely to be. This calls for some financial statement type analysis, and I will try to use my training as an accountant to do some estimates here.
Revenue estimates
We know that at the end of January 2007, the ten months results showed that revenues were some J$5.2 billion behind target. Of this amount tax revenues were J$4.2 billion behind; non-tax revenues were J$1.7 billion ahead; bauxite levy was J$211.5 million above; capital revenues were J$1.3 billion ahead; and grants $1.7 billion ahead. So as I had anticipated, the tax revenue line is where the major problem is, and this is primarily because for some reason we were too optimistic in the budget. And this was after the GCT collections of the Christmas season.
So in the two remaining months (February and March 2007) is it possible for us to catch up with the J$5.2 billion deficit, while at the same time meet the J$26.3 billion tax collection in March, which I think will be the deciding factor as to whether or not we even come close to our revenue targets.
Of the J$26.3 billion tax revenues projected for March 2007, J$8.4 relates to company profits tax (J$6.7 billion collected in March 2006), and J$4.8 billion of PAYE (J$3.4 billion in March 2006).
Table 1 shows the significant revenue line items that will affect the budget out turn for 2007. It clearly shows that in all lines, except tax on interest and GCT on imports, we are behind revenue projections. In the case of tax on interest this is only so because the government practices cash accounting and the tax on interest to pension funds was not being paid back, in a timely manner, in the first half of the fiscal year. The column to the far right shows the likely out turn for company profits taxes, PAYE, and local GCT, which are the more significant items.
Revenue outcomes
With the poor results being shown by publicly listed companies, I do not expect that we will exceed the J$34.6 billion collected last financial year. My reason for saying this is based on a quick analysis of the financial results over the two years. I looked at the 2006 audited reports of 34 companies that pay taxes in Jamaica, or in the case of some companies that are late, at the date of writing, the third quarter reports.
In 2005 they would have made accumulated profit before tax of J$43 billion and J$45.4 billion in 2006, a mere 5.67% increase. The tax charge in 2005 was J$8.9 and J$9.2 billion, an increase of 2.75%. The tax charge in both years were calculated under the same accounting standard dealing with income tax charges, and so there would not be any material difference in the way the computations were done. This means that company taxes can be expected to grow around 3%, as these public companies should be representative of the companies in Jamaica.
Based on this reasoning then we may end up with company profits taxes of around J$17.4 billion, growing from $15 billion in the 2006 fiscal year. This would fall short, of the 2007 projection of J$20.1 billion, by J$2.7 billion, of which it is already J$1.2 billion behind.
PAYE should follow the trend for the performance to date, and should come in at around J$41 billion, some J$2.4 billion less than projections. This is affected by the fact that the MOU2 restricted the increases to public sector workers, and private companies, based on their results, have not given any significant salary increases, or bonuses, in the financial year. A 25% increase on this line was never in the cards.
Local GCT has of course not met projections because the economy has not grown at the 3% to 4% projected, and instead has come out at less than 3%. The shortfall here will be about J$2.9 billion. GCT from the activity generated from world cup will not get in government coffers until April to May 2007, as there is a one month delay in filing GCT returns.
Revenues then will come in at about J$8.1 billion below budget, unless outstanding taxes, or some other unexpected revenue in take is forthcoming. This means that the fiscal deficit will come in at the projected J$21 billion plus the supplementary estimates of $14 billion plus the revenue shortfall of J$8 billion, for a total of around J$43 billion. It could always be a little better or worse.
Equity Market
Another concern people have is what will happen on the equity market. Last year the equity market started its recovery, after going through a major downturn for the two years prior. So obviously investors are concerned about what will happen going forward.
The bottom line is that stock prices move, over the medium to long term, based on fundamentals of the company, which is affected by the economy. The economy also affects investor confidence levels and can affect stock prices. Last year we saw where consumer and investor confidence rose from the lows of the prior year, and similarly we saw where the equity market made a comeback. I believe there is a direct correlation between these, and so the way that the economy is handled is very important in determining what happens in the equity markets.
I expect, however, that certain stocks on the equity market will continue to do well. My view is that most will not perform as in the past, and there are certain stocks that one can zero in on. Some that performed well in the past will not perform well in the future, as we have seen a change in the paradigm, as interest rates have been coming down and some amount of realignment is taking place. Those capable of competing effectively with, and distributing, internationally produced products will fare better.
One reason for not expecting much from most stocks this year is that Jamaica’s economy is now around 70% service and 30% goods producing. If you look at the public companies, the main service sector are the financial companies, and with the reversal of interest rates many will under perform last year, as the results have been showing. There are some financial companies that will do well, however, and these have adjusted well to the changing market conditions already, with more adjustments to come. The main growth areas of agriculture, tourism, and construction are not well represented on the equity market. The financial companies that benefit from these growth areas will be the ones that realign their loan portfolios to accommodate these sectors. One can get an indication of these by looking at the balance sheet.
Alternative investments
One certainly could not comment on the market without looking at alternative investments. This has been the buzz for the past few months. Even TVJ’s news asked the public if they would invest in unregulated investment clubs, and over 50% of respondents said yes. Whether we want to accept these or not the fact is that the investing public is willing to take risks. We must educate and regulate.
The fact also is that the investment products provided in the Jamaican market have been far less than innovative, and has not kept pace with international markets. When we look at the development of capital markets in the United States, we can certainly appreciate how far behind we are. With the ease of access to these markets what it means is that if we over regulate, and seek to keep alternative investments out of Jamaica, then we will find that capital will leave Jamaica for investments in other countries. We are in a global market and we can either adapt or suffer the consequences.
It is important, however, that the regulators continue to have oversight over what products are offered in the market. And we see that even the US has tried to control private activity by banning internet gaming, which is a private transaction between the player and the service provider over the internet. This is the challenge that regulators face.
Today’s alternative investments, however, become the staple investment products of tomorrow. It is this creativity that drives capital markets. Even in the US they are trying to grapple with how to deal with hedge funds, and the general consensus is that although they provide a big risk, the best way to deal with them is to have some oversight but not outlaw them. Whether we like it or not, these alternative investments are here to stay, and just as in the US hedge funds have grown to be significant players, so too will alternative investments continue to grow in Jamaica, and whichever financial institution refuses to get into the market will find that they will lose market share.
Legislative framework
I would like to make a comment on the importance of the legislative framework in encouraging investment. This of course is very important, as if we are unable to put the proper legislative support in place, then businesses will not feel comfortable investing in Jamaica, not to mention the fact that every day Jamaicans will not be able to be productive in an environment where their rights are not protected.
I give one example, as relates to the labour laws. I know hat labour laws are important to protect the rights of workers but sometimes I think we go too far. I am involved in an organization that employed a watchman. He was working with the organization for a few years and had been warned on many occasions about not smoking ganja, as well as sleeping on the job. Finally he was fired and paid a total of four weeks notice and all other outstanding amounts.
He went to the Ministry of Labour, and complained that he got less than was due to him, in that he should have gotten more notice pay, which under the law is true. But after being dismissed for smoking and sleeping on the job, the organization is now being asked to pay more money, when he was not living up to his side of the contract, and what’s more is that this was told to the Ministry but they were not concerned with this. Now how do we intend to encourage local or international investors with this sort of archaic legislation? In other words productivity is the servant of legislation.
It’s leadership
So what happens to us going forward? It is clear that we will not meet the projected growth and fiscal targets and our debt will get close to the J$1 trillion dollar mark, a milestone we should certainly not be proud of. What is not clear is how the politicians will approach the economy going forward into the election, and this is the wild card that we have to deal with. I think that the next few months is going to show what our leaders are made of, and who puts Jamaica and Jamaicans first, and Jamaicans should be aware of the politicking leading up to the election, as this will let us know who is pro-Jamaica, and who is pro-party.
The main problem that we have as a country is one of leadership, not crime, education or the economy. These are mere symptoms of our leadership. So the gauge for me is what the leadership does, as this ultimately affects the confidence levels and the economy.
This is the current position of our economic affairs. The economy is precariously positioned and any strong wind or deliberately crafted support structure could move it in one direction or another. The major factors of course include (1) how we address the crime situation; (2) how effectively we wipe out any corruption by public officials; (3) our ability to eradicate general lawlessness and indiscipline; (4) creating efficiencies in the public sector and eliminating bureaucracy; (5) a more practical legislative framework, encouraging investments; (6) continued reduction in interest rates and care not to over regulate the economy; (7) continued investments in our physical and social infrastructure; and (8) not put politicking above the economy.
If we can strategically deal with these major issues, to ensure a positive outcome, then we will not have to worry about economic growth, and we will see an upswing in all our critical sectors and capital market.
Fiscal Accounts
One of the dark clouds that has continued to hang over the economy (seems like eternity) has been the state of our fiscal accounts and national debt. The fiscal deficit that was budgeted to be around J$21 billion, or 2.5% of GDP, has once more overshot that target, and with the tabling of the supplementary estimates last week, is certain to be at least J$40 billion and 4% of GDP come March 31, 2007. This has resulted from the increased expenditure estimates, less than projected revenue collection, and a slower than anticipated economic growth.
This of course has come as no surprise to me, as I had stated at the start of the financial year that:
The revenue targets were too optimistic, as a 20% growth in tax revenues was just not on the cards, and this was said against the back ground of (a) the cement crisis; and (b) predictions of a very active hurricane season. We did not have any hurricanes and still, as at the ten months ended January 2007, the revenue was some J$5 Billion behind target. Imagine if we had a hurricane, or even a glancing Ivan-type blow;
I do not think that the economy had the capacity to grow at 3% to 4%. This of course is because of the crime levels, that affect investor and consumer confidence, and the lack of a proper road infrastructure, which if we are relying on agriculture as a main pivot for growth then this is extremely important. Since then we have made some gains in this area; and
Debt was going to end the year close to J$1 trillion. This is no surprise to me, as I did not believe that we would make the revenue targets, and since we were hosting world cup this year, and also going into elections, I thought that we would need more money than projected and would have to go to the capital markets, as the country cannot bear anymore taxes, which would be counter-productive.
Now that we have seen the first supplementary estimates, we know that the expenditure side will come in at J$372 billion, instead of the original J$358 billion. But what of the revenue side. After all if we want to project the deficit then we will need to estimate what the revenue is likely to be. This calls for some financial statement type analysis, and I will try to use my training as an accountant to do some estimates here.
Revenue estimates
We know that at the end of January 2007, the ten months results showed that revenues were some J$5.2 billion behind target. Of this amount tax revenues were J$4.2 billion behind; non-tax revenues were J$1.7 billion ahead; bauxite levy was J$211.5 million above; capital revenues were J$1.3 billion ahead; and grants $1.7 billion ahead. So as I had anticipated, the tax revenue line is where the major problem is, and this is primarily because for some reason we were too optimistic in the budget. And this was after the GCT collections of the Christmas season.
So in the two remaining months (February and March 2007) is it possible for us to catch up with the J$5.2 billion deficit, while at the same time meet the J$26.3 billion tax collection in March, which I think will be the deciding factor as to whether or not we even come close to our revenue targets.
Of the J$26.3 billion tax revenues projected for March 2007, J$8.4 relates to company profits tax (J$6.7 billion collected in March 2006), and J$4.8 billion of PAYE (J$3.4 billion in March 2006).
Table 1 shows the significant revenue line items that will affect the budget out turn for 2007. It clearly shows that in all lines, except tax on interest and GCT on imports, we are behind revenue projections. In the case of tax on interest this is only so because the government practices cash accounting and the tax on interest to pension funds was not being paid back, in a timely manner, in the first half of the fiscal year. The column to the far right shows the likely out turn for company profits taxes, PAYE, and local GCT, which are the more significant items.
Revenue outcomes
With the poor results being shown by publicly listed companies, I do not expect that we will exceed the J$34.6 billion collected last financial year. My reason for saying this is based on a quick analysis of the financial results over the two years. I looked at the 2006 audited reports of 34 companies that pay taxes in Jamaica, or in the case of some companies that are late, at the date of writing, the third quarter reports.
In 2005 they would have made accumulated profit before tax of J$43 billion and J$45.4 billion in 2006, a mere 5.67% increase. The tax charge in 2005 was J$8.9 and J$9.2 billion, an increase of 2.75%. The tax charge in both years were calculated under the same accounting standard dealing with income tax charges, and so there would not be any material difference in the way the computations were done. This means that company taxes can be expected to grow around 3%, as these public companies should be representative of the companies in Jamaica.
Based on this reasoning then we may end up with company profits taxes of around J$17.4 billion, growing from $15 billion in the 2006 fiscal year. This would fall short, of the 2007 projection of J$20.1 billion, by J$2.7 billion, of which it is already J$1.2 billion behind.
PAYE should follow the trend for the performance to date, and should come in at around J$41 billion, some J$2.4 billion less than projections. This is affected by the fact that the MOU2 restricted the increases to public sector workers, and private companies, based on their results, have not given any significant salary increases, or bonuses, in the financial year. A 25% increase on this line was never in the cards.
Local GCT has of course not met projections because the economy has not grown at the 3% to 4% projected, and instead has come out at less than 3%. The shortfall here will be about J$2.9 billion. GCT from the activity generated from world cup will not get in government coffers until April to May 2007, as there is a one month delay in filing GCT returns.
Revenues then will come in at about J$8.1 billion below budget, unless outstanding taxes, or some other unexpected revenue in take is forthcoming. This means that the fiscal deficit will come in at the projected J$21 billion plus the supplementary estimates of $14 billion plus the revenue shortfall of J$8 billion, for a total of around J$43 billion. It could always be a little better or worse.
Equity Market
Another concern people have is what will happen on the equity market. Last year the equity market started its recovery, after going through a major downturn for the two years prior. So obviously investors are concerned about what will happen going forward.
The bottom line is that stock prices move, over the medium to long term, based on fundamentals of the company, which is affected by the economy. The economy also affects investor confidence levels and can affect stock prices. Last year we saw where consumer and investor confidence rose from the lows of the prior year, and similarly we saw where the equity market made a comeback. I believe there is a direct correlation between these, and so the way that the economy is handled is very important in determining what happens in the equity markets.
I expect, however, that certain stocks on the equity market will continue to do well. My view is that most will not perform as in the past, and there are certain stocks that one can zero in on. Some that performed well in the past will not perform well in the future, as we have seen a change in the paradigm, as interest rates have been coming down and some amount of realignment is taking place. Those capable of competing effectively with, and distributing, internationally produced products will fare better.
One reason for not expecting much from most stocks this year is that Jamaica’s economy is now around 70% service and 30% goods producing. If you look at the public companies, the main service sector are the financial companies, and with the reversal of interest rates many will under perform last year, as the results have been showing. There are some financial companies that will do well, however, and these have adjusted well to the changing market conditions already, with more adjustments to come. The main growth areas of agriculture, tourism, and construction are not well represented on the equity market. The financial companies that benefit from these growth areas will be the ones that realign their loan portfolios to accommodate these sectors. One can get an indication of these by looking at the balance sheet.
Alternative investments
One certainly could not comment on the market without looking at alternative investments. This has been the buzz for the past few months. Even TVJ’s news asked the public if they would invest in unregulated investment clubs, and over 50% of respondents said yes. Whether we want to accept these or not the fact is that the investing public is willing to take risks. We must educate and regulate.
The fact also is that the investment products provided in the Jamaican market have been far less than innovative, and has not kept pace with international markets. When we look at the development of capital markets in the United States, we can certainly appreciate how far behind we are. With the ease of access to these markets what it means is that if we over regulate, and seek to keep alternative investments out of Jamaica, then we will find that capital will leave Jamaica for investments in other countries. We are in a global market and we can either adapt or suffer the consequences.
It is important, however, that the regulators continue to have oversight over what products are offered in the market. And we see that even the US has tried to control private activity by banning internet gaming, which is a private transaction between the player and the service provider over the internet. This is the challenge that regulators face.
Today’s alternative investments, however, become the staple investment products of tomorrow. It is this creativity that drives capital markets. Even in the US they are trying to grapple with how to deal with hedge funds, and the general consensus is that although they provide a big risk, the best way to deal with them is to have some oversight but not outlaw them. Whether we like it or not, these alternative investments are here to stay, and just as in the US hedge funds have grown to be significant players, so too will alternative investments continue to grow in Jamaica, and whichever financial institution refuses to get into the market will find that they will lose market share.
Legislative framework
I would like to make a comment on the importance of the legislative framework in encouraging investment. This of course is very important, as if we are unable to put the proper legislative support in place, then businesses will not feel comfortable investing in Jamaica, not to mention the fact that every day Jamaicans will not be able to be productive in an environment where their rights are not protected.
I give one example, as relates to the labour laws. I know hat labour laws are important to protect the rights of workers but sometimes I think we go too far. I am involved in an organization that employed a watchman. He was working with the organization for a few years and had been warned on many occasions about not smoking ganja, as well as sleeping on the job. Finally he was fired and paid a total of four weeks notice and all other outstanding amounts.
He went to the Ministry of Labour, and complained that he got less than was due to him, in that he should have gotten more notice pay, which under the law is true. But after being dismissed for smoking and sleeping on the job, the organization is now being asked to pay more money, when he was not living up to his side of the contract, and what’s more is that this was told to the Ministry but they were not concerned with this. Now how do we intend to encourage local or international investors with this sort of archaic legislation? In other words productivity is the servant of legislation.
It’s leadership
So what happens to us going forward? It is clear that we will not meet the projected growth and fiscal targets and our debt will get close to the J$1 trillion dollar mark, a milestone we should certainly not be proud of. What is not clear is how the politicians will approach the economy going forward into the election, and this is the wild card that we have to deal with. I think that the next few months is going to show what our leaders are made of, and who puts Jamaica and Jamaicans first, and Jamaicans should be aware of the politicking leading up to the election, as this will let us know who is pro-Jamaica, and who is pro-party.
The main problem that we have as a country is one of leadership, not crime, education or the economy. These are mere symptoms of our leadership. So the gauge for me is what the leadership does, as this ultimately affects the confidence levels and the economy.
Friday, March 02, 2007
Valuing our spending
The first supplementary estimates for 2006/07 were tabled on Tuesday by them minister of finance. It shows that the government will be spending $14 billion more than the original budget estimates. The recurrent expenditure has been increased by $13 billion (6.2%) to $224 billion, and the capital side increased by $1 billion to $147 billion.
On the recurrent side, the main contributors to the $13-billion increase were (1) Public debt charges (Ministry of Finance)- $4 billion; and (2) Salaries (Ministry of Education - $6 billion and Ministry of Health - $3 billion). On the capital side, we see allocations to the Ministry of Finance to redeem public debt, additional amounts to Sabina Park, Air Jamaica, security and health.
The main areas that have received the increased allocations were wages and salaries (received the lion's share), Cricket World Cup, and debt servicing. Certainly these should not come as a surprise as we would have known from earlier in the fiscal year about the greater-than-projected salary increases, under the MOU2, the fact that net debt borrowing was racing ahead of projections, and the massive expenditure taking place on World Cup Cricket. The question that we need to ask is, are we efficiently allocating our resources to ensure that we get the maximum value-added from each dollar spent.
Lower return per dollar
At the start of the fiscal year, I had indicated that the way we spend each dollar would need to be the main focus. The fact is that we had already projected a fiscal deficit of $21 billion (2% of GDP) and after the supplementary estimates, and the performance of the revenue side, we can expect a deficit of $41 to $45 billion (4% of GDP). At the same time, our actual growth will come out at around 2.6%, when we had projected 3%. We can take from this then that we will be getting a lower return from each dollar spent than we had projected. In other words, if we projected expenditure of $358 billion and GDP growth of 3%, and we are spending $372 billion for GDP growth of 2.6%, then it means that we are spending more to get less.
This is the way we need to look at the expenditures that we undertake, as at the end of the day all that matters is that we are getting a greater return on what we spend. In other words, when governments spend money, it has to have a value-added return in mind, although it is measured in a different way than in the private sector. When the government spends on health, education and security it does so because we want to achieve a highly productive society and a safe environment to live in. This is the basic function of governments. We need to therefore ask ourselves, what is the best use of our scarce resources to maximise the returns to society.
It is within this light that we have to examine the supplementary estimates and the general way that we allocate resources. The first question I would ask is, why we are projecting to spend $14 Billion more than originally budgeted when we are going to grow at a slower rate. Is it that we did not properly estimate the expenditure requirements, and therefore misaligned our spending with the growth estimates? Is it that in order to grow at 3%, we need to spend more money, or is it that we need to allocate our already scarce resources to better uses?
Examples of this relate to the sugar industry and Air Jamaica. The IMF has been recommending that we shut down both the sugar factories and Air Jamaica for over a year now. The reason for this is that they remain a strain on the fiscal accounts. Air Jamaica, for example, has accumulated losses of over US$1 billion (J$7 billion). It is therefore very important to ensure that Air Jamaica becomes profitable in 2009, or at minimum subsidies should be no more than US$30 million, as it does have some economic benefit to the country. The fact also is that air travel is extremely important to a country like Jamaica, which relies on tourism for foreign exchange earnings. If it is bleeding at the rate of US$100 million per annum, however, then we have to look at alternatives. The sugar industry is a clearer situation, however, and we must make a transition from the current structure of the sugar industry or close it, as other Caribbean countries have done.
Priority spending
We have to decide what the priority is for our spending. Our net borrowing has been $25 billion more than projected, for the 10 months ended January 2007. Have we made the best use of that additional borrowing? We still see the need for better equipping of the police force; greater health facilities; and more funding for education. These, I believe, are the primary pillars on which a progressive society should be based. If we do not have a highly literate and healthy population then our productivity levels will be lower than our international competitors. If we are unable to control crime, then we could have the most beautiful aeroplanes in the world, no tourists will come here. It is therefore very important for us to focus on, or at least give greater resources to, the basic social and physical infrastructures if we are to grow at the levels comparable to the world economy, and even our region.
The global economy and Latin American region are growing at rates of upwards of 5%, so when we are celebrating 2.6% (1/2 of what others are growing at) then we really do not understand where we should be. Much of this growth that we are seeing is because of the global expansion and liquidity that we are benefiting from. There are fears currently that the global and US economies may be weakening, and increased talk that it is possible that the US economy could go into recession by the end of 2007 into 2008. If this happens then we will be affected. It therefore continues to be very important that we spend each dollar in a way that it provides us with the greatest benefit.
Now that we have spent $8 billion on cricket, and $4 billion of that on the two stadiums, we need to ensure that a plan is put in place to make back that money. Any plan can only be supported by the reduction of crime, however, and so just as we have allocated monies to cricket world cup, Air Jamaica, and sugar, it is also very important that we allocate appropriate funds to security, education and health.
One thing I have always commended the government on, which continues to be their main achievement, has been the building of the highways. Irrespective of what some persons may want to say, a good road infrastructure is very important for the economic development of any country and for too long we have neglected this. It is very important not just to stop there, however, as the development of the minor roads, leading from the agricultural lands, is also necessary for the efficient transportation of our agricultural produce to market.
This argument is similar to the concept of Mazlow's Hierarchy of needs. At a very basic level, man needs food, water and shelter to survive. When he has achieved that and extra resources remain then he will look at acquiring the nicer things of life until he eventually has everything and looks towards self- actualisation. The way we have always approached it is that we seek to acquire the finest motor vehicle, paying a car loan, while renting the smallest room in a remote part of town, not knowing where the next meal is going to come from.
On the recurrent side, the main contributors to the $13-billion increase were (1) Public debt charges (Ministry of Finance)- $4 billion; and (2) Salaries (Ministry of Education - $6 billion and Ministry of Health - $3 billion). On the capital side, we see allocations to the Ministry of Finance to redeem public debt, additional amounts to Sabina Park, Air Jamaica, security and health.
The main areas that have received the increased allocations were wages and salaries (received the lion's share), Cricket World Cup, and debt servicing. Certainly these should not come as a surprise as we would have known from earlier in the fiscal year about the greater-than-projected salary increases, under the MOU2, the fact that net debt borrowing was racing ahead of projections, and the massive expenditure taking place on World Cup Cricket. The question that we need to ask is, are we efficiently allocating our resources to ensure that we get the maximum value-added from each dollar spent.
Lower return per dollar
At the start of the fiscal year, I had indicated that the way we spend each dollar would need to be the main focus. The fact is that we had already projected a fiscal deficit of $21 billion (2% of GDP) and after the supplementary estimates, and the performance of the revenue side, we can expect a deficit of $41 to $45 billion (4% of GDP). At the same time, our actual growth will come out at around 2.6%, when we had projected 3%. We can take from this then that we will be getting a lower return from each dollar spent than we had projected. In other words, if we projected expenditure of $358 billion and GDP growth of 3%, and we are spending $372 billion for GDP growth of 2.6%, then it means that we are spending more to get less.
This is the way we need to look at the expenditures that we undertake, as at the end of the day all that matters is that we are getting a greater return on what we spend. In other words, when governments spend money, it has to have a value-added return in mind, although it is measured in a different way than in the private sector. When the government spends on health, education and security it does so because we want to achieve a highly productive society and a safe environment to live in. This is the basic function of governments. We need to therefore ask ourselves, what is the best use of our scarce resources to maximise the returns to society.
It is within this light that we have to examine the supplementary estimates and the general way that we allocate resources. The first question I would ask is, why we are projecting to spend $14 Billion more than originally budgeted when we are going to grow at a slower rate. Is it that we did not properly estimate the expenditure requirements, and therefore misaligned our spending with the growth estimates? Is it that in order to grow at 3%, we need to spend more money, or is it that we need to allocate our already scarce resources to better uses?
Examples of this relate to the sugar industry and Air Jamaica. The IMF has been recommending that we shut down both the sugar factories and Air Jamaica for over a year now. The reason for this is that they remain a strain on the fiscal accounts. Air Jamaica, for example, has accumulated losses of over US$1 billion (J$7 billion). It is therefore very important to ensure that Air Jamaica becomes profitable in 2009, or at minimum subsidies should be no more than US$30 million, as it does have some economic benefit to the country. The fact also is that air travel is extremely important to a country like Jamaica, which relies on tourism for foreign exchange earnings. If it is bleeding at the rate of US$100 million per annum, however, then we have to look at alternatives. The sugar industry is a clearer situation, however, and we must make a transition from the current structure of the sugar industry or close it, as other Caribbean countries have done.
Priority spending
We have to decide what the priority is for our spending. Our net borrowing has been $25 billion more than projected, for the 10 months ended January 2007. Have we made the best use of that additional borrowing? We still see the need for better equipping of the police force; greater health facilities; and more funding for education. These, I believe, are the primary pillars on which a progressive society should be based. If we do not have a highly literate and healthy population then our productivity levels will be lower than our international competitors. If we are unable to control crime, then we could have the most beautiful aeroplanes in the world, no tourists will come here. It is therefore very important for us to focus on, or at least give greater resources to, the basic social and physical infrastructures if we are to grow at the levels comparable to the world economy, and even our region.
The global economy and Latin American region are growing at rates of upwards of 5%, so when we are celebrating 2.6% (1/2 of what others are growing at) then we really do not understand where we should be. Much of this growth that we are seeing is because of the global expansion and liquidity that we are benefiting from. There are fears currently that the global and US economies may be weakening, and increased talk that it is possible that the US economy could go into recession by the end of 2007 into 2008. If this happens then we will be affected. It therefore continues to be very important that we spend each dollar in a way that it provides us with the greatest benefit.
Now that we have spent $8 billion on cricket, and $4 billion of that on the two stadiums, we need to ensure that a plan is put in place to make back that money. Any plan can only be supported by the reduction of crime, however, and so just as we have allocated monies to cricket world cup, Air Jamaica, and sugar, it is also very important that we allocate appropriate funds to security, education and health.
One thing I have always commended the government on, which continues to be their main achievement, has been the building of the highways. Irrespective of what some persons may want to say, a good road infrastructure is very important for the economic development of any country and for too long we have neglected this. It is very important not just to stop there, however, as the development of the minor roads, leading from the agricultural lands, is also necessary for the efficient transportation of our agricultural produce to market.
This argument is similar to the concept of Mazlow's Hierarchy of needs. At a very basic level, man needs food, water and shelter to survive. When he has achieved that and extra resources remain then he will look at acquiring the nicer things of life until he eventually has everything and looks towards self- actualisation. The way we have always approached it is that we seek to acquire the finest motor vehicle, paying a car loan, while renting the smallest room in a remote part of town, not knowing where the next meal is going to come from.
Friday, February 23, 2007
No public law and order
The official numbers continue to show positive economic growth and all indications are that this will continue. As I have stated before, however, our economy is in a fragile situation and must be treated with care, as this economic growth can easily be compromised by crime and reckless political decisions. Outside of crime, my main concern remains that leading up to elections the future of Jamaica, and Jamaicans, will take second place to politicking.
One of the main factors driving investments is confidence and this is a significant reason why Jamaica’s economy experienced some amount of buoyancy over the last six months of 2006. The confidence index showed that investor confidence improved, and consumer confidence remained high, during the last calendar year, and no doubt this would have contributed to the improved economic performance.
Over the first two months of 2007, however, we have seen crime return with a vengeance, with over 200 murders being committed thus far. More frightening, however, is the number of police who seem to be involved in criminal activities. It is indeed a good thing that this is being brought to light. No doubt this level of police corruption has always existed but finally it seems as if the leadership of the police seems to be bent on doing something about it. This is a welcome sign and Jamaicans have waited too long for this type of leadership to emerge, which needs now to be replicated in our political system. If we can weed out corrupt politicians in a similar vein then this country will be one of the best places to live.
Police shake up
On Wednesday both newspapers reported that the police high command is going through a major shake up in order to combat the growing crime problem. I believe that this move is a realization that even at the highest levels the police have been compromised. This endemic corruption within the police force is of course the major inhibitor to solving crime, as if the body that is supposed to fight crime is compromised then there can be no solution.
Over the years we have sought to deal with crime by announcing aggressive assaults consistently through the use of ant-crime squads, which have done nothing more than cause great pain to the less fortunate people. In other words we have tried to deal with crime by “cracking skulls” rather than intelligence, and by doing so have created some criminals within the police force itself.
If we are really serious about solving crime it is not enough to just focus on reducing the murder rate. This is of course necessary in the short term, but a long term solution must be to attack the root of lawlessness. When I look around at places such as Montego Bay and Kingston, it is obvious to me what the main problem is. The fact is that generally there has been a break down of public law and order, which the only one that seems to have made any concerted effort to address, in my opinion, has been Mayor Mckenzie.
I have always said that we cannot be effective in reducing murders over the long run if we cannot even control a few taxi men who continue to treat the roads as if it is their private driveway. Two weeks ago I wrote about the state of Montego Bay, our tourist capital. The main problem with Montego Bay is the lack of public order, and this responsibility I think rests squarely with the parish council and the chamber of commerce.
Recently I met with a good Montegonian, Mark Kerr-Jarrett, and discussed with him the current state of affairs in Montego Bay. He also is of the opinion that the man problem in Montego Bay is a lack of public law and order. He also correctly stated that if Montego Bay is to recover then public law and order must be enforced by the local authorities and police. He agreed with me that if we allow Montego Bay to dissolve into oblivion than the entire Jamaica would suffer, as much of Jamaica’s tourism spending is derived from there. This would be a major blow to our current path of economic growth. Maybe what we need is to have Montegonians elect their Mayor directly, as in Portmore, so that people such as Kerr-Jarrett can run for office without subjecting themselves to the filth of our political system.
Any effort to permanently deal with the scourge of criminality in this country, must not only be addressed at hardened criminals, but must of necessity include an assault on the break down of law and order generally. We need to put a stop to the manufacture of criminals by discontinuing the corruption in the public sector and enforcing discipline in the society. Public law and order issues includes (1) public disturbance through the playing of loud music, at anytime of the day, from dancehalls and churches alike; (2) the lack of proper pedestrian signs, which results in people crossing the roads whenever they feel the need; (3) taxi men who continue to hold bedside conversations in the road with each other, by stopping in the middle of the road; (4) double parking on the roadways; (5) littering of gullies, without sufficient fines and enforcement; and (6) vending on the sidewalks.
Discipline required
Unless we can address these issues we will not be able to maintain discipline in the society. And if we cannot have basic discipline then these same undisciplined people will grow up to be hardened criminals. What happens is that people will continue to buck the system as much as possible to see what more they can get away with. So when goods are imported, without being properly approved, then when people get away with this they will feel that they can bring in illegal goods or even export them. I listened to the reaction of a caller to a call in programme, who lamented the fact that the authorities planned to make skin-bleaching products illegal, and that if it were done then he would vote against the government. This shows that people realize that politicians will sell their soul for political power. The crime would be if the government bows to this sort of pressure.
This is no different in a company. If there are no HR rules to govern behaviour of people in an organization then their will be no lines of authority and chaos will result. In the long run you will find that no decisions can be made as the persons in charge lose authority. A small organization can get away with this, but as the organization grows then strict rules must be in place to govern behaviour else stagnation will take place. Similarly, we cannot expect to grow a country and still have practices that are suitable for a small town.
When there is a breakdown of law and order then it is the biggest “bandooloo” who will prosper, not the one with the best talent. This is the danger that Jamaica faces. This causes inefficiencies to creep into the market, and eventually the country becomes internationally uncompetitive, as even though we will have no regard for efficiency, we will still be subject to the workings of the global economy.
As one talk-show host loves to say, “The man who plays by the rules gets shafted”. If Jamaica does not ensure that there are rules that everyone plays by consistently then the whole country will get shafted.
One of the main factors driving investments is confidence and this is a significant reason why Jamaica’s economy experienced some amount of buoyancy over the last six months of 2006. The confidence index showed that investor confidence improved, and consumer confidence remained high, during the last calendar year, and no doubt this would have contributed to the improved economic performance.
Over the first two months of 2007, however, we have seen crime return with a vengeance, with over 200 murders being committed thus far. More frightening, however, is the number of police who seem to be involved in criminal activities. It is indeed a good thing that this is being brought to light. No doubt this level of police corruption has always existed but finally it seems as if the leadership of the police seems to be bent on doing something about it. This is a welcome sign and Jamaicans have waited too long for this type of leadership to emerge, which needs now to be replicated in our political system. If we can weed out corrupt politicians in a similar vein then this country will be one of the best places to live.
Police shake up
On Wednesday both newspapers reported that the police high command is going through a major shake up in order to combat the growing crime problem. I believe that this move is a realization that even at the highest levels the police have been compromised. This endemic corruption within the police force is of course the major inhibitor to solving crime, as if the body that is supposed to fight crime is compromised then there can be no solution.
Over the years we have sought to deal with crime by announcing aggressive assaults consistently through the use of ant-crime squads, which have done nothing more than cause great pain to the less fortunate people. In other words we have tried to deal with crime by “cracking skulls” rather than intelligence, and by doing so have created some criminals within the police force itself.
If we are really serious about solving crime it is not enough to just focus on reducing the murder rate. This is of course necessary in the short term, but a long term solution must be to attack the root of lawlessness. When I look around at places such as Montego Bay and Kingston, it is obvious to me what the main problem is. The fact is that generally there has been a break down of public law and order, which the only one that seems to have made any concerted effort to address, in my opinion, has been Mayor Mckenzie.
I have always said that we cannot be effective in reducing murders over the long run if we cannot even control a few taxi men who continue to treat the roads as if it is their private driveway. Two weeks ago I wrote about the state of Montego Bay, our tourist capital. The main problem with Montego Bay is the lack of public order, and this responsibility I think rests squarely with the parish council and the chamber of commerce.
Recently I met with a good Montegonian, Mark Kerr-Jarrett, and discussed with him the current state of affairs in Montego Bay. He also is of the opinion that the man problem in Montego Bay is a lack of public law and order. He also correctly stated that if Montego Bay is to recover then public law and order must be enforced by the local authorities and police. He agreed with me that if we allow Montego Bay to dissolve into oblivion than the entire Jamaica would suffer, as much of Jamaica’s tourism spending is derived from there. This would be a major blow to our current path of economic growth. Maybe what we need is to have Montegonians elect their Mayor directly, as in Portmore, so that people such as Kerr-Jarrett can run for office without subjecting themselves to the filth of our political system.
Any effort to permanently deal with the scourge of criminality in this country, must not only be addressed at hardened criminals, but must of necessity include an assault on the break down of law and order generally. We need to put a stop to the manufacture of criminals by discontinuing the corruption in the public sector and enforcing discipline in the society. Public law and order issues includes (1) public disturbance through the playing of loud music, at anytime of the day, from dancehalls and churches alike; (2) the lack of proper pedestrian signs, which results in people crossing the roads whenever they feel the need; (3) taxi men who continue to hold bedside conversations in the road with each other, by stopping in the middle of the road; (4) double parking on the roadways; (5) littering of gullies, without sufficient fines and enforcement; and (6) vending on the sidewalks.
Discipline required
Unless we can address these issues we will not be able to maintain discipline in the society. And if we cannot have basic discipline then these same undisciplined people will grow up to be hardened criminals. What happens is that people will continue to buck the system as much as possible to see what more they can get away with. So when goods are imported, without being properly approved, then when people get away with this they will feel that they can bring in illegal goods or even export them. I listened to the reaction of a caller to a call in programme, who lamented the fact that the authorities planned to make skin-bleaching products illegal, and that if it were done then he would vote against the government. This shows that people realize that politicians will sell their soul for political power. The crime would be if the government bows to this sort of pressure.
This is no different in a company. If there are no HR rules to govern behaviour of people in an organization then their will be no lines of authority and chaos will result. In the long run you will find that no decisions can be made as the persons in charge lose authority. A small organization can get away with this, but as the organization grows then strict rules must be in place to govern behaviour else stagnation will take place. Similarly, we cannot expect to grow a country and still have practices that are suitable for a small town.
When there is a breakdown of law and order then it is the biggest “bandooloo” who will prosper, not the one with the best talent. This is the danger that Jamaica faces. This causes inefficiencies to creep into the market, and eventually the country becomes internationally uncompetitive, as even though we will have no regard for efficiency, we will still be subject to the workings of the global economy.
As one talk-show host loves to say, “The man who plays by the rules gets shafted”. If Jamaica does not ensure that there are rules that everyone plays by consistently then the whole country will get shafted.
Friday, February 16, 2007
What determines investments?
Last Wednesday the Fed Reserve chairman, Ted Bernanke, reported on US economic outlook at Capitol Hill. The global investment market zeroed in on any indication about inflation and the direction of interest rate movements. The movement of interest rates is of course one of the most fundamental factors affecting investment decisions. If rates go up, then the currency becomes more attractive to hold relative to another, as the returns on holding the currency is greater. On the other hand, a rise in interest rates is unfriendly for real investments as it means that as an option, borrowing money becomes more expensive, and consumers will have less disposable income. Similarly, if rates decrease then it means that financing for a business becomes less expensive, and this will encourage business activity.
From the consumer’s perspective, lower interest rates means that mortgages, and other consumer loans become cheaper. Consumers will take advantage of the less expensive money to improve their life styles by buying new houses and motor vehicles.
Here in Jamaica, one concern expressed is that even though interest rates are declining, we have not seen a corresponding increase in commercial investments. This of course is cause for concern, as if there is no increase in real investments then foreign assets are more attractive, which will place some amount of pressure on the exchange rate. It is therefore critical to understand what factors affect new investments, as clearly declining interest rates is not enough.
Jan-06 Dec-06 Change
T-Bill 12.47% 11.60% (0.87%)
Installment credit 23.07% 21.65% (1.42%)
Mortgage credit 20.26% 13.09% (7.17%)
Personal credit 29.19% 27.64% (1.55%)
Commercial credit 13.72% 13.36% (0.36%)
Local Govt & Other Public Entities 12.09% 12.12% 0.03%
Central Govt 16.49% 13.83% (2.66%)
Overall A/W Rate 17.50% 17.59% 0.09%
Average interest rates
The table shows how average interest rates have moved, between January and December 2006, on various types of loans (www.boj.org.jm). Average Treasury bill rates have reduced by 0.87% over the period. The most substantial reduction has been in mortgage credit, and this is evident in the aggressive rates that are being offered by institutions such as BNS and Jamaica National. The other areas that have seen a fall of more than 1% are installment credit (hire purchase included), personal credit (which would include motor car loans), and loans to central government (which would be impacted by the reducing rates on government paper).
What we find is that commercial credit has not seen any significant reduction in rates. The question is what would have caused such significant reductions in consumer type loans, but in the area where it is needed to fund business expansion (commercial credit) the rate reduction has been marginal in comparison. The two main factors in my opinion are (1) there is a much greater demand for consumer borrowing, influenced by the advertising and loan facilities made available by banks; and (2) banks consider commercial loans more risky than consumer loans, as spreads are lower and venture capital is not readily available from banks.The low demand for commercial loans, and the accompanying risk-averse nature of banks, results from a perception developed out of the FINSAC era and the lack of confidence in the ability of the authorities to administer law and order. One of the main negatives of the high interest rate policy Jamaica pursued, leading to FINSAC, was not the loss of investments, but rather the damage done to our entrepreneurial spirit.
The fact is that even if interest rates were to be reduced by 5%, there would still be limited uptake in corresponding investments. The reason for this is that investment decisions are affected by much more than interest rates, and other monetary policy. We have to remember that economics is a social science, and consequently is a study of the behaviour of people. When we change monetary policy to influence economic outcomes, what we are hoping to do is influence the behaviour of individuals. So reducing interest rates does not by itself improve economic performance.
When interest rates are reduced, it is expected to have the result of affecting people’s investment decisions, as it is hoped that an individual will want to borrow money at the lower cost and invest it in real businesses, which gives a higher return than the cost of the funds borrowed. And this is what happens in countries such as the US and UK. The reason why a rate reduction will have the intended effect therefore is because individuals will react in the desired way. What we need to ascertain then is what is it that influences this reaction from individuals?
In the US, for example, when the Fed wants consumers to increase economic activity and drive new investments they will lower interest rates. Lower rates will mean reduced funding costs for businesses and consumer purchases. Thus demand for debt financing will increase. When these funds are accessed then individuals will look at the investment options available and invest in ventures that will give them a consistently higher return than the cost of the borrowed funds. Lower rates will also cause the currency to devalue against that of major trading partners (assuming their rates do not change), resulting in the relative price of goods produced being cheaper, thus increasing exports.
Social factors
The problem we have is that the social factors are a challenge for us. The expected effect of interest rate movements assumes that investors are indifferent between investing in financial products and real investments, and whether they do or not depends on the level of interest rates as one factor. This of course also assumes that people have the necessary confidence in the economy that they will want to make real investments, which is the issue for Jamaica.
The confidence of Jamaicans is affected by (1) the memory of FINSAC; (2) the level of crime, and in particular extortion, which is an unpredictable cost of business; (3) the level of government bureaucracy; (4) the unpredictability of tax policy; (5) the competence of our workforce; and (6) the time it takes to resolve commercial transactions in the courts; as some examples. If investors cannot have reasonable confidence that the environment will remain suitable for business, then irrespective of how low interest rates are, we will not see any significant increase in real investments. Instead we will see investments in ventures that provide quick returns, as one is not sure how much time is available for investment recovery. This is certainly one reason behind the choice of some Jamaicans to invest in high risk alternative investments, as it is their right to do. After all it is not as if we have moved out of real investments to paper investments. We were mainly invested in government paper before, so all we have done is moved from one paper investment to another.
If we are serious about increasing the number of real investments by Jamaicans, we must encourage an environment where people feel safe to invest. Our crime problem, government bureaucracy, and the way we handle development work in our tourist capital does not leave one with a lot of confidence in the investment environment.
From the consumer’s perspective, lower interest rates means that mortgages, and other consumer loans become cheaper. Consumers will take advantage of the less expensive money to improve their life styles by buying new houses and motor vehicles.
Here in Jamaica, one concern expressed is that even though interest rates are declining, we have not seen a corresponding increase in commercial investments. This of course is cause for concern, as if there is no increase in real investments then foreign assets are more attractive, which will place some amount of pressure on the exchange rate. It is therefore critical to understand what factors affect new investments, as clearly declining interest rates is not enough.
Jan-06 Dec-06 Change
T-Bill 12.47% 11.60% (0.87%)
Installment credit 23.07% 21.65% (1.42%)
Mortgage credit 20.26% 13.09% (7.17%)
Personal credit 29.19% 27.64% (1.55%)
Commercial credit 13.72% 13.36% (0.36%)
Local Govt & Other Public Entities 12.09% 12.12% 0.03%
Central Govt 16.49% 13.83% (2.66%)
Overall A/W Rate 17.50% 17.59% 0.09%
Average interest rates
The table shows how average interest rates have moved, between January and December 2006, on various types of loans (www.boj.org.jm). Average Treasury bill rates have reduced by 0.87% over the period. The most substantial reduction has been in mortgage credit, and this is evident in the aggressive rates that are being offered by institutions such as BNS and Jamaica National. The other areas that have seen a fall of more than 1% are installment credit (hire purchase included), personal credit (which would include motor car loans), and loans to central government (which would be impacted by the reducing rates on government paper).
What we find is that commercial credit has not seen any significant reduction in rates. The question is what would have caused such significant reductions in consumer type loans, but in the area where it is needed to fund business expansion (commercial credit) the rate reduction has been marginal in comparison. The two main factors in my opinion are (1) there is a much greater demand for consumer borrowing, influenced by the advertising and loan facilities made available by banks; and (2) banks consider commercial loans more risky than consumer loans, as spreads are lower and venture capital is not readily available from banks.The low demand for commercial loans, and the accompanying risk-averse nature of banks, results from a perception developed out of the FINSAC era and the lack of confidence in the ability of the authorities to administer law and order. One of the main negatives of the high interest rate policy Jamaica pursued, leading to FINSAC, was not the loss of investments, but rather the damage done to our entrepreneurial spirit.
The fact is that even if interest rates were to be reduced by 5%, there would still be limited uptake in corresponding investments. The reason for this is that investment decisions are affected by much more than interest rates, and other monetary policy. We have to remember that economics is a social science, and consequently is a study of the behaviour of people. When we change monetary policy to influence economic outcomes, what we are hoping to do is influence the behaviour of individuals. So reducing interest rates does not by itself improve economic performance.
When interest rates are reduced, it is expected to have the result of affecting people’s investment decisions, as it is hoped that an individual will want to borrow money at the lower cost and invest it in real businesses, which gives a higher return than the cost of the funds borrowed. And this is what happens in countries such as the US and UK. The reason why a rate reduction will have the intended effect therefore is because individuals will react in the desired way. What we need to ascertain then is what is it that influences this reaction from individuals?
In the US, for example, when the Fed wants consumers to increase economic activity and drive new investments they will lower interest rates. Lower rates will mean reduced funding costs for businesses and consumer purchases. Thus demand for debt financing will increase. When these funds are accessed then individuals will look at the investment options available and invest in ventures that will give them a consistently higher return than the cost of the borrowed funds. Lower rates will also cause the currency to devalue against that of major trading partners (assuming their rates do not change), resulting in the relative price of goods produced being cheaper, thus increasing exports.
Social factors
The problem we have is that the social factors are a challenge for us. The expected effect of interest rate movements assumes that investors are indifferent between investing in financial products and real investments, and whether they do or not depends on the level of interest rates as one factor. This of course also assumes that people have the necessary confidence in the economy that they will want to make real investments, which is the issue for Jamaica.
The confidence of Jamaicans is affected by (1) the memory of FINSAC; (2) the level of crime, and in particular extortion, which is an unpredictable cost of business; (3) the level of government bureaucracy; (4) the unpredictability of tax policy; (5) the competence of our workforce; and (6) the time it takes to resolve commercial transactions in the courts; as some examples. If investors cannot have reasonable confidence that the environment will remain suitable for business, then irrespective of how low interest rates are, we will not see any significant increase in real investments. Instead we will see investments in ventures that provide quick returns, as one is not sure how much time is available for investment recovery. This is certainly one reason behind the choice of some Jamaicans to invest in high risk alternative investments, as it is their right to do. After all it is not as if we have moved out of real investments to paper investments. We were mainly invested in government paper before, so all we have done is moved from one paper investment to another.
If we are serious about increasing the number of real investments by Jamaicans, we must encourage an environment where people feel safe to invest. Our crime problem, government bureaucracy, and the way we handle development work in our tourist capital does not leave one with a lot of confidence in the investment environment.
Friday, February 09, 2007
Impairing our assets
Recently we had a fire at the Riverton City dump, which caused immense discomfort to people living miles away. Some commentators were of the opinion that the dump should be relocated elsewhere as this was not an isolated incident and it is not ideal to have such a large dump close to residential communities. I think that it doesn't really matter where the dump is located, because people will move to the surrounding areas anyway and the authorities will not even bother to ensure proper zoning.
But where, I thought, would be an ideal location for the dump? Aha! How about the middle of Montego Bay? The second city is already in such a deplorable state that nobody would notice if a dump were to be located right there.
I mean, if you go through Montego Bay you will see that the city is now a totally disorganised area, overrun by undisciplined behaviour, particularly on the streets in the downtown area. The roadwork being done as you approach the second city is disgraceful. It is good that the work is being done, as it will have long-term benefits, but why does it have to take so long? I mean, this is supposed to be the tourism capital of Jamaica, and we have managed to maintain this chaotic status quo for so long! If they were really serious about completing the work as soon as possible, shouldn't work be happening 24/7, as they do in developed countries? If the reason is that the direct cost of working 24 hours is greater, isn't the cost to business activity much more than any additional cost of working 24 hours?
Depleting our assets
When tourists come to Montego Bay, the only place we fix up for them is the hip strip. Outside of the hip strip Montego Bay is in a disastrous state. Even the hip strip is on the decline and is a much underutilised asset. There is no doubt that the Montego Bay that tourists used to look forward to visiting is no longer the same. It is because of the manner in which we have depleted our national assets that the only tourists we seem to get are those who prefer to remain sequestered in all-inclusive hotels. It is the same way that we have allowed the degradation of the seven-mile beach stretch in Negril.
If we are serious about improving Montego Bay's value and attractiveness to tourists, we must put the proper public and private structures in place. We need to elect a parish council, form a chamber of commerce branch, and put a police force in place just like in Kingston. I say that these need to be in place because no one can convince me that we have (1) a parish council with an effective mayor; (2) a Montego Bay chamber of commerce; and (3) a police force. There is no way that that these bodies could exist and have Montego Bay remain in such a deplorable state.
As far as I know, it is the responsibility of the parish council to ensure order in the city. Instead, visitors to the town see a chaotic situation where drivers stop in the middle of the road to talk to each other, people double-park on almost every street , vendors line the streets in makeshift stalls, and the garbage is as prevalent as the number of people walking around. People cross the street at will, as there are no marked pedestrian crossings, thus bringing traffic to a standstill at peak periods. And don't bother talking about the police, as the entire force seems to be located on the hip strip.
The hip strip has become an area of retreat for the locals, as the number of tourists traversing the strip seems to be in decline also. If we were really serious about maximising tourism in Montego Bay, wouldn't we use the hip strip as a place to market our culture and an area where tourists would flock 24/7, instead of leaving it to just restaurants and a strip of clubs at night? For example, during the recently concluded "music festival" we should have transformed the hip strip into an area where jazz music could be played all day and all night, and properly organised street vending of Jamaican products could take place. Instead, we hosted a stage show for three nights. The strip should not have vehicular traffic, but rather people should park on the fringes and walk or be transported by carriages. Just imagine the difference that would make to the attractiveness of the place.
Crime capital
It is because of the indiscipline that prevails in the city that it has fast become the crime capital of Jamaica. I have always said that if we cannot control indiscipline generally, then how do we intend to deal with crime? Over the years we have allowed Montego Bay to be taken over by squatters and have transferred the indiscipline from downtown Kingston to downtown Montego Bay.
Behind remittances, tourism has the highest foreign exchange inflow. So what we are doing is putting our foreign exchange earnings in danger, and even though it is the direct responsibility of the non-existent parish council and chamber of commerce, the government should ensure that this national asset is protected because in the long run it will affect the entire Jamaica.
Maybe we need to start applying accounting standards when assessing the value of our national assets. The standards call for periodic impairment tests to be done on a company's assets to determine if there has been any impairment in the value of the assets. If, for example, an asset is originally valued at $100 and after the impairment test is done the asset shows a value of $60, then $40 is written off the value of the asset, just as NCB has consistently done with the Supreme Ventures shares.
Similarly, if we were to do an impairment test on our cities, beaches, and other national assets, we may well find that the values have been impaired. If we do not protect the value of our assets, which give us the natural competitive advantage in tourism, then we will soon find that we no longer have that competitive advantage. I have always believed that Jamaica's tourism is much less than it should be because we have not been able to properly exploit the natural beauty and culture of Jamaica. Instead, there is always a half-hearted effort to develop tourism.
If we are serious about maximising our tourism potential then we must have a properly developed strategic plan. This must not just include advertising Jamaica, because if we do not protect and develop our assets then we will only be advertising an inferior product. Instead, we allow countries such as Barbados, Bahamas, and Cuba to outclass us in tourism per capita numbers, when we have a superior natural competitive advantage from our beauty and culture.
I believe this is a national crisis which must be addressed by the government. I put it in the hands of central government, because the parish council and chamber of commerce are both ineffective. We cannot have this level of indiscipline permeating our tourist capital. If we do not act now, then sooner or later tourists will be less than enthusiastic about coming back to Jamaica, as all they will encounter are touts and dilapidated attractions.
As if all our efforts at wasting away our assets were not enough, we have gone ahead and charged US$100 for obtaining a Caricom visa during Cricket World Cup, when the fallout could actually cost us much more.
But where, I thought, would be an ideal location for the dump? Aha! How about the middle of Montego Bay? The second city is already in such a deplorable state that nobody would notice if a dump were to be located right there.
I mean, if you go through Montego Bay you will see that the city is now a totally disorganised area, overrun by undisciplined behaviour, particularly on the streets in the downtown area. The roadwork being done as you approach the second city is disgraceful. It is good that the work is being done, as it will have long-term benefits, but why does it have to take so long? I mean, this is supposed to be the tourism capital of Jamaica, and we have managed to maintain this chaotic status quo for so long! If they were really serious about completing the work as soon as possible, shouldn't work be happening 24/7, as they do in developed countries? If the reason is that the direct cost of working 24 hours is greater, isn't the cost to business activity much more than any additional cost of working 24 hours?
Depleting our assets
When tourists come to Montego Bay, the only place we fix up for them is the hip strip. Outside of the hip strip Montego Bay is in a disastrous state. Even the hip strip is on the decline and is a much underutilised asset. There is no doubt that the Montego Bay that tourists used to look forward to visiting is no longer the same. It is because of the manner in which we have depleted our national assets that the only tourists we seem to get are those who prefer to remain sequestered in all-inclusive hotels. It is the same way that we have allowed the degradation of the seven-mile beach stretch in Negril.
If we are serious about improving Montego Bay's value and attractiveness to tourists, we must put the proper public and private structures in place. We need to elect a parish council, form a chamber of commerce branch, and put a police force in place just like in Kingston. I say that these need to be in place because no one can convince me that we have (1) a parish council with an effective mayor; (2) a Montego Bay chamber of commerce; and (3) a police force. There is no way that that these bodies could exist and have Montego Bay remain in such a deplorable state.
As far as I know, it is the responsibility of the parish council to ensure order in the city. Instead, visitors to the town see a chaotic situation where drivers stop in the middle of the road to talk to each other, people double-park on almost every street , vendors line the streets in makeshift stalls, and the garbage is as prevalent as the number of people walking around. People cross the street at will, as there are no marked pedestrian crossings, thus bringing traffic to a standstill at peak periods. And don't bother talking about the police, as the entire force seems to be located on the hip strip.
The hip strip has become an area of retreat for the locals, as the number of tourists traversing the strip seems to be in decline also. If we were really serious about maximising tourism in Montego Bay, wouldn't we use the hip strip as a place to market our culture and an area where tourists would flock 24/7, instead of leaving it to just restaurants and a strip of clubs at night? For example, during the recently concluded "music festival" we should have transformed the hip strip into an area where jazz music could be played all day and all night, and properly organised street vending of Jamaican products could take place. Instead, we hosted a stage show for three nights. The strip should not have vehicular traffic, but rather people should park on the fringes and walk or be transported by carriages. Just imagine the difference that would make to the attractiveness of the place.
Crime capital
It is because of the indiscipline that prevails in the city that it has fast become the crime capital of Jamaica. I have always said that if we cannot control indiscipline generally, then how do we intend to deal with crime? Over the years we have allowed Montego Bay to be taken over by squatters and have transferred the indiscipline from downtown Kingston to downtown Montego Bay.
Behind remittances, tourism has the highest foreign exchange inflow. So what we are doing is putting our foreign exchange earnings in danger, and even though it is the direct responsibility of the non-existent parish council and chamber of commerce, the government should ensure that this national asset is protected because in the long run it will affect the entire Jamaica.
Maybe we need to start applying accounting standards when assessing the value of our national assets. The standards call for periodic impairment tests to be done on a company's assets to determine if there has been any impairment in the value of the assets. If, for example, an asset is originally valued at $100 and after the impairment test is done the asset shows a value of $60, then $40 is written off the value of the asset, just as NCB has consistently done with the Supreme Ventures shares.
Similarly, if we were to do an impairment test on our cities, beaches, and other national assets, we may well find that the values have been impaired. If we do not protect the value of our assets, which give us the natural competitive advantage in tourism, then we will soon find that we no longer have that competitive advantage. I have always believed that Jamaica's tourism is much less than it should be because we have not been able to properly exploit the natural beauty and culture of Jamaica. Instead, there is always a half-hearted effort to develop tourism.
If we are serious about maximising our tourism potential then we must have a properly developed strategic plan. This must not just include advertising Jamaica, because if we do not protect and develop our assets then we will only be advertising an inferior product. Instead, we allow countries such as Barbados, Bahamas, and Cuba to outclass us in tourism per capita numbers, when we have a superior natural competitive advantage from our beauty and culture.
I believe this is a national crisis which must be addressed by the government. I put it in the hands of central government, because the parish council and chamber of commerce are both ineffective. We cannot have this level of indiscipline permeating our tourist capital. If we do not act now, then sooner or later tourists will be less than enthusiastic about coming back to Jamaica, as all they will encounter are touts and dilapidated attractions.
As if all our efforts at wasting away our assets were not enough, we have gone ahead and charged US$100 for obtaining a Caricom visa during Cricket World Cup, when the fallout could actually cost us much more.
Friday, February 02, 2007
The problem of capacity
If a car is built to go at a top speed of 150 kilometres per hour (kph) then we all know that it is highly unlikely that it will get to 200 kph. Similarly if a tree does not have an adequate root structure to support its branches then it will fall at the first wind. This came to mind as I attended the Air Jamaica Jazz and Blues festival last weekend.
There is no doubt that the festival has a large, and a much greater possibility of a larger, impact on the Jamaican economy. Not only does it provide substantial revenues for the organizers but when one thinks of the demand for accommodation, food, entertainment and products, emanating from the festival, the multiplier effect is tremendous. This is especially important as the festival comes at a time when the tourist season is off its peak, thus creating revenues for the tourism capital in a time when many of the assets would have been operating close to or below breakeven.
Maximizing assets
The foresight to have created the festival at this time is indeed a lesson in good management, as it was deliberately created to give a return on underutilized assets during a down period. This is typically an easy way to maximize return on investments. In other words, if you have already incurred the cost of the assets and operations then selling the product or service below the normal price during the slow period can actually bring greater profits. Accountants analyze this using what we call marginal costing.
The concept behind this music festival (deliberately called so because I don’t think it has much to do with Jazz and Blues anymore) should definitely be replicated in other areas to bring even greater revenue flows. It is this creativity of thought that drives markets as I mentioned in my article last week in relation to capital markets. What the various music festivals have shown us is the powerful revenue generating capacity of Jamaica and our culture, which we have not really made any serious attempt to maximize.
The main problem that we are faced with, which was demonstrated at the Air Jamaica music festival, is one of capacity. The failing of the festival is that we were not able to maximize the possible economic benefits. This is a direct result of our weak infrastructural support, which prevents us from maximizing our growth. Someone said to me that the Jazz festival was a success, which it might well have been, however we need to also look at success not from the point of view of what we are satisfied with but what could have been, in other words the opportunity cost or value.
As an example, I attended a football match in the United States where there were some 90,000 persons in attendance. Even with so many persons attending we arrived to the stadium from where we were staying in ten minutes. This of course was as a result of their infrastructure as well as organization. These two were missing at the recent music festival. First of all we do not have enough rooms and the road network to handle significant numbers. Secondly, I believe that the organizers should have taken a much more proactive approach to handling the traffic, and if they had done this might not have lost the estimated 4,000 persons that did not attend on the Saturday night as a result of the Friday night. This 4,000 times US$80 per person (J$21.6 million) is the direct opportunity cost of not having the infrastructural support and the organization. I say direct because there is the indirect revenue lost to the surrounding businesses in the Montego Bay area.
I have heard a lot of people say that they will not be going back to the festival next year because of the lack of organization. Before any of the organizers say that the event was well organized let me say this. When one is marketing a service it is much more than the point at which the service is delivered. It is the whole experience, which in this case would mean arriving into Montego Bay, whether by air or car; the food experience; the entertainment facilities outside of the show; the ease of transportation; the experience with the people; and finally the show itself. When one spends three hours in traffic going to and from the venue then it reduces the time to enjoy the other parts of the experience. It also reduces the time available for spending on the other activities.
Economic growth
This is a similar problem that we face with economic growth. Our current social and infrastructural support does not provide us with the capacity to grow over 2.5% to 3.5% at most. In other words if we want the car to go faster then we have to put in a more powerful engine. The factors that continue to limit us remain literacy levels, crime and corruption, slow moving justice system, poor road network, lack of organization of our agricultural sector; among the challenges we face.
If therefore we want to really put the economy on a strong and consistent growth path, we have to build the foundation for growth. This means that we must have deliberate policies and strategies around improving our literacy rates, eliminating crime, improving the roads, and a deliberate action plan as to how we will develop our agricultural sector to replace food imports.
What this means then is that we have to look at our limited resources and see what the best value for spend is. In other words what is the value added from (1) continued subsidies being pumped into Air Jamaica; and (2) the massive spend on World Cup cricket, as two examples. Would we have been better off spending that money on cleaning up the police force or providing proper education or health facilities for the potential criminals?
The problem I think is that this sort of road map to national development may not exist. If anyone knows about it I would love to see it. This lack of a proper plan to national development causes us to focus short term on things like balancing the budget, while what we sacrifice in order to do that is the capital expenditure and investment required to develop that infrastructural support needed for economic growth.
Even within companies this sort of support is necessary. A company will never realize its true potential if the infrastructural support is not in place to facilitate the revenue side. In other words the need for a proper technology infrastructure and human resources are key to any company’s development in today’s world. This is the main difference driving a successful multinational versus a national company.
Although we may not have experienced much jazz at the festival we can’t say that we were short of “blues”. If we are really serious about development though we have to adopt a more structured approach. We have to look at each item of expenditure and make a decision not on how the electorate will see it or meeting a short term fiscal target solely, but rather what is the medium to long term value added to be gained.
If we do this then we may find that much of the expenditures we have committed to may not have been in our best interest, even though it looks good. One such question surrounds the expenditure on World Cup Cricket. The problem with this is not that it is not good for Jamaica, but rather that we have not done the proper analysis to know.
There is no doubt that the festival has a large, and a much greater possibility of a larger, impact on the Jamaican economy. Not only does it provide substantial revenues for the organizers but when one thinks of the demand for accommodation, food, entertainment and products, emanating from the festival, the multiplier effect is tremendous. This is especially important as the festival comes at a time when the tourist season is off its peak, thus creating revenues for the tourism capital in a time when many of the assets would have been operating close to or below breakeven.
Maximizing assets
The foresight to have created the festival at this time is indeed a lesson in good management, as it was deliberately created to give a return on underutilized assets during a down period. This is typically an easy way to maximize return on investments. In other words, if you have already incurred the cost of the assets and operations then selling the product or service below the normal price during the slow period can actually bring greater profits. Accountants analyze this using what we call marginal costing.
The concept behind this music festival (deliberately called so because I don’t think it has much to do with Jazz and Blues anymore) should definitely be replicated in other areas to bring even greater revenue flows. It is this creativity of thought that drives markets as I mentioned in my article last week in relation to capital markets. What the various music festivals have shown us is the powerful revenue generating capacity of Jamaica and our culture, which we have not really made any serious attempt to maximize.
The main problem that we are faced with, which was demonstrated at the Air Jamaica music festival, is one of capacity. The failing of the festival is that we were not able to maximize the possible economic benefits. This is a direct result of our weak infrastructural support, which prevents us from maximizing our growth. Someone said to me that the Jazz festival was a success, which it might well have been, however we need to also look at success not from the point of view of what we are satisfied with but what could have been, in other words the opportunity cost or value.
As an example, I attended a football match in the United States where there were some 90,000 persons in attendance. Even with so many persons attending we arrived to the stadium from where we were staying in ten minutes. This of course was as a result of their infrastructure as well as organization. These two were missing at the recent music festival. First of all we do not have enough rooms and the road network to handle significant numbers. Secondly, I believe that the organizers should have taken a much more proactive approach to handling the traffic, and if they had done this might not have lost the estimated 4,000 persons that did not attend on the Saturday night as a result of the Friday night. This 4,000 times US$80 per person (J$21.6 million) is the direct opportunity cost of not having the infrastructural support and the organization. I say direct because there is the indirect revenue lost to the surrounding businesses in the Montego Bay area.
I have heard a lot of people say that they will not be going back to the festival next year because of the lack of organization. Before any of the organizers say that the event was well organized let me say this. When one is marketing a service it is much more than the point at which the service is delivered. It is the whole experience, which in this case would mean arriving into Montego Bay, whether by air or car; the food experience; the entertainment facilities outside of the show; the ease of transportation; the experience with the people; and finally the show itself. When one spends three hours in traffic going to and from the venue then it reduces the time to enjoy the other parts of the experience. It also reduces the time available for spending on the other activities.
Economic growth
This is a similar problem that we face with economic growth. Our current social and infrastructural support does not provide us with the capacity to grow over 2.5% to 3.5% at most. In other words if we want the car to go faster then we have to put in a more powerful engine. The factors that continue to limit us remain literacy levels, crime and corruption, slow moving justice system, poor road network, lack of organization of our agricultural sector; among the challenges we face.
If therefore we want to really put the economy on a strong and consistent growth path, we have to build the foundation for growth. This means that we must have deliberate policies and strategies around improving our literacy rates, eliminating crime, improving the roads, and a deliberate action plan as to how we will develop our agricultural sector to replace food imports.
What this means then is that we have to look at our limited resources and see what the best value for spend is. In other words what is the value added from (1) continued subsidies being pumped into Air Jamaica; and (2) the massive spend on World Cup cricket, as two examples. Would we have been better off spending that money on cleaning up the police force or providing proper education or health facilities for the potential criminals?
The problem I think is that this sort of road map to national development may not exist. If anyone knows about it I would love to see it. This lack of a proper plan to national development causes us to focus short term on things like balancing the budget, while what we sacrifice in order to do that is the capital expenditure and investment required to develop that infrastructural support needed for economic growth.
Even within companies this sort of support is necessary. A company will never realize its true potential if the infrastructural support is not in place to facilitate the revenue side. In other words the need for a proper technology infrastructure and human resources are key to any company’s development in today’s world. This is the main difference driving a successful multinational versus a national company.
Although we may not have experienced much jazz at the festival we can’t say that we were short of “blues”. If we are really serious about development though we have to adopt a more structured approach. We have to look at each item of expenditure and make a decision not on how the electorate will see it or meeting a short term fiscal target solely, but rather what is the medium to long term value added to be gained.
If we do this then we may find that much of the expenditures we have committed to may not have been in our best interest, even though it looks good. One such question surrounds the expenditure on World Cup Cricket. The problem with this is not that it is not good for Jamaica, but rather that we have not done the proper analysis to know.
Thursday, January 25, 2007
Developing financial markets
Last week I wrote about the importance of regulations, and referred specifically to OLINT and Cashplus, which have been the focus of many discussions over the past few months. The debate around these investment schemes have heightened over the past week and seems to have climaxed with statements from David Smith, explaining that he does not guarantee 10% per month, and Errol Ennis, stoutly defending his right to operate and lambasting the Financial Investigations Division.
This is exactly what I saw coming, and why I wrote the article last week. The fact is that if we do not (1) have a proper regulatory environment in place; and (2) rule quickly on contentious issues then there will be contradiction. This does nothing more than waste our energies on matters that should be solved by preset structural processes. I drew a parallel with a company, where the HR structure and rules are not in place. What happens is that you end up managing multiple personalities and hence waste precious time dealing with HR issues, which really are not solvable without a defined set of acceptable behaviours, while the competition focuses on making money.
This is precisely what will happen to us as a country. While we debate, through our emotions and self interest, whether or not OLINT or Cashplus is legitimate, our international competitors are busy developing their own financial markets and raising their productivity levels. The fact is that we take much too long to make rulings one way or the other on issues because we fail to objectively analyze and put the proper rules in place to deal with them.
Creative ideas
Financial markets do not develop by maintaining the same products and services for eternity. We have seen the development of our own capital markets through the introduction of commercial paper and money market transactions. Internationally also when derivatives were developed many thought that these may be a problem simply because it was not fully understood. So if we want to develop markets we must continue to encourage creative thought. Every successful company starts with an idea, and for every successful company there are five failures. What we must never do though is discourage creativity, or what the Americans refer to as invention.
As this creativity is being encouraged though, the regulators have a very important balancing act to play. While they must not interfere to the extent of killing creativity, they need to ensure that new ideas do not have the intention of defrauding investors, and that all relevant information is made available to the public. Even after all of that, however, investors will always be free to make their own decisions and take as much risk as they want once they have all available information and understand it. For example if I want to gamble all my money on a donkey running against stallions in a race, and I understand the risks, then it should be my business to do so.
It is therefore a very delicate tightrope that regulators must walk, but they must do so. In other words instead of fuelling the debate by not ruling on the matter, let us put it to rest. In any event, while we wait there are many persons who are putting their monies into currency trading, and risky hedge funds, and even fraudulent internet schemes, by just turning on their computer. Are we going to protect these persons by taking away their computers and banning DSL connections? What we must do is understand the risks, document it, and communicate it to the public, and where we believe that further protection is needed, legislate it. Investors can also protect themselves from risky investments through portfolio diversification, but there is always a place for high risk investments.
Even if the regulators choose to legislate against certain activities, however, this is no guarantee that the public will not participate. Today we have something called the internet. This has opened up access to global markets and makes the job of regulators difficult in protecting the investing public. The only way to really address this is by education. This was a point referred to by Errol Ennis in an interview on Nationwide News.
Internet access
While I was a Commissioner at the Betting, Gaming & Lotteries Commission, I was charged by the chairman with the responsibility of looking into the then new advent of Internet Gaming. One point the regulators found difficulty with was, when doing a transaction on the internet, in what jurisdiction does it occur. Does it have jurisdiction (a) where the server is located, which could be in a different location from where both parties to the transaction are; (b) where the payment originates or terminates; (c) the location of the buyer; or (d) the location of the seller? And where does the acceptance of the offer occur, forming the binding contract? Which regulator therefore has jurisdiction over the transaction?
The United States spent years looking at this, as they sought to ban Internet Gaming in their country, without much success. Until the president recently signed legislation outlawing the provision of Internet Gaming services in the US, these organizations flourished, and with the signing of the legislation into force one company was reported as writing off US$350 million, having to sell the company for US$1. In my opinion though this will still not stop the average American from gambling on internet sites. All it will do is force the activity underground but it will still happen. Just as law enforcement has realized that the best way to fight drug use, including the legal drugs, is by education to stem demand, so too they will eventually have to educate to control Internet Gaming.
If we intend on carrying on a market economy then we must understand that it is important for capital markets to develop. That development, however, will not happen by becoming complacent with what we have, but always looking for that next new idea that will spur greater growth. Last week comments were made by Milton Brady that there is no reason why financial institutions should today be saying that falling interest rates have reduced their profitability. He lamented the fact that the Finance Minister gave the sector two years warning that rates, and margins, on GOJ paper would be coming down. He further stated that some financial institutions have failed to wean themselves off GOJ paper and still invests an average of 35% of assets in it. Naturally therefore net interest income and profits must fall.
The Jamaican public, like every other national, rationally continues to seek higher returns. In the US this has led to the explosion of hedge funds and private equity schemes. These hedge funds have lost and earned a lot of money, and have made upwards of 40% in 2006, playing with billions of US$ on bets such as where oil prices will go. What the regulators ensure is that they play by the rules and investors are aware of the risks. It is through the creation of new ways of thinking that capital markets expand making way for much needed equity for new businesses.
My main concern remains that we do everything to protect the Jamaican market while developing it. What I do know is (1) the world is not waiting on us to sort out our challenges, just as they have leap frogged us in economic development while we tried to grapple with globalization and our politics; (2) we cannot afford another “FINSAC”; (3) we must develop our capital markets with new ideas; and (4) regulators will not be able to forcibly protect investors against themselves with the internet. The ball is in the court of the regulators.
This is exactly what I saw coming, and why I wrote the article last week. The fact is that if we do not (1) have a proper regulatory environment in place; and (2) rule quickly on contentious issues then there will be contradiction. This does nothing more than waste our energies on matters that should be solved by preset structural processes. I drew a parallel with a company, where the HR structure and rules are not in place. What happens is that you end up managing multiple personalities and hence waste precious time dealing with HR issues, which really are not solvable without a defined set of acceptable behaviours, while the competition focuses on making money.
This is precisely what will happen to us as a country. While we debate, through our emotions and self interest, whether or not OLINT or Cashplus is legitimate, our international competitors are busy developing their own financial markets and raising their productivity levels. The fact is that we take much too long to make rulings one way or the other on issues because we fail to objectively analyze and put the proper rules in place to deal with them.
Creative ideas
Financial markets do not develop by maintaining the same products and services for eternity. We have seen the development of our own capital markets through the introduction of commercial paper and money market transactions. Internationally also when derivatives were developed many thought that these may be a problem simply because it was not fully understood. So if we want to develop markets we must continue to encourage creative thought. Every successful company starts with an idea, and for every successful company there are five failures. What we must never do though is discourage creativity, or what the Americans refer to as invention.
As this creativity is being encouraged though, the regulators have a very important balancing act to play. While they must not interfere to the extent of killing creativity, they need to ensure that new ideas do not have the intention of defrauding investors, and that all relevant information is made available to the public. Even after all of that, however, investors will always be free to make their own decisions and take as much risk as they want once they have all available information and understand it. For example if I want to gamble all my money on a donkey running against stallions in a race, and I understand the risks, then it should be my business to do so.
It is therefore a very delicate tightrope that regulators must walk, but they must do so. In other words instead of fuelling the debate by not ruling on the matter, let us put it to rest. In any event, while we wait there are many persons who are putting their monies into currency trading, and risky hedge funds, and even fraudulent internet schemes, by just turning on their computer. Are we going to protect these persons by taking away their computers and banning DSL connections? What we must do is understand the risks, document it, and communicate it to the public, and where we believe that further protection is needed, legislate it. Investors can also protect themselves from risky investments through portfolio diversification, but there is always a place for high risk investments.
Even if the regulators choose to legislate against certain activities, however, this is no guarantee that the public will not participate. Today we have something called the internet. This has opened up access to global markets and makes the job of regulators difficult in protecting the investing public. The only way to really address this is by education. This was a point referred to by Errol Ennis in an interview on Nationwide News.
Internet access
While I was a Commissioner at the Betting, Gaming & Lotteries Commission, I was charged by the chairman with the responsibility of looking into the then new advent of Internet Gaming. One point the regulators found difficulty with was, when doing a transaction on the internet, in what jurisdiction does it occur. Does it have jurisdiction (a) where the server is located, which could be in a different location from where both parties to the transaction are; (b) where the payment originates or terminates; (c) the location of the buyer; or (d) the location of the seller? And where does the acceptance of the offer occur, forming the binding contract? Which regulator therefore has jurisdiction over the transaction?
The United States spent years looking at this, as they sought to ban Internet Gaming in their country, without much success. Until the president recently signed legislation outlawing the provision of Internet Gaming services in the US, these organizations flourished, and with the signing of the legislation into force one company was reported as writing off US$350 million, having to sell the company for US$1. In my opinion though this will still not stop the average American from gambling on internet sites. All it will do is force the activity underground but it will still happen. Just as law enforcement has realized that the best way to fight drug use, including the legal drugs, is by education to stem demand, so too they will eventually have to educate to control Internet Gaming.
If we intend on carrying on a market economy then we must understand that it is important for capital markets to develop. That development, however, will not happen by becoming complacent with what we have, but always looking for that next new idea that will spur greater growth. Last week comments were made by Milton Brady that there is no reason why financial institutions should today be saying that falling interest rates have reduced their profitability. He lamented the fact that the Finance Minister gave the sector two years warning that rates, and margins, on GOJ paper would be coming down. He further stated that some financial institutions have failed to wean themselves off GOJ paper and still invests an average of 35% of assets in it. Naturally therefore net interest income and profits must fall.
The Jamaican public, like every other national, rationally continues to seek higher returns. In the US this has led to the explosion of hedge funds and private equity schemes. These hedge funds have lost and earned a lot of money, and have made upwards of 40% in 2006, playing with billions of US$ on bets such as where oil prices will go. What the regulators ensure is that they play by the rules and investors are aware of the risks. It is through the creation of new ways of thinking that capital markets expand making way for much needed equity for new businesses.
My main concern remains that we do everything to protect the Jamaican market while developing it. What I do know is (1) the world is not waiting on us to sort out our challenges, just as they have leap frogged us in economic development while we tried to grapple with globalization and our politics; (2) we cannot afford another “FINSAC”; (3) we must develop our capital markets with new ideas; and (4) regulators will not be able to forcibly protect investors against themselves with the internet. The ball is in the court of the regulators.
Friday, January 19, 2007
The importance of regulations
About two weeks ago someone referred to me as the marketing manager for OLINT. Around the same time a friend called me to ask if I was the owner of Cashplus, as that is what they were told. In the latter case I don’t even know who the principals are, but as usual Jamaicans care little for fact in many instances and more for sensationalism, so that whenever something is said they would rather hold onto it if it encourages gossip.
These comments no doubt originated because I have been calling for the regulation of these entities and some persons have seen this as a push for legitimization. Never mind the fact that Brian Wynter also called for the regulation of these entities, else they will fail, but I am not aware of anyone saying that he is the marketing manager. I don’t share the opinion that they will fail because they are not regulated, but regulation is important to reduce the risk to the investing public.
Need for regulations
The comments on my position are unfortunate as it illustrates the inability to see beyond the emotions of our own positions. The fact is that it shows how easily we forget the past and is a concern that we do not learn. In the 1990s, because of the lack of a proper regulatory environment, we suffered probably the greatest setback to our economy ever – FINSAC. My argument for regulation of these entities is therefore because if anyone of these entities were to fail it would have a contagious effect, greater than malaria, throughout the financial sector and would negatively affect the confidence contributing to the current growth trend. It is therefore within the interest of the players within the financial sector to regulate these entities rather than continuously debate whether they are legitimate or not. I cannot understand the short sighted approach of some of our more sophisticated thinkers.
I am happy to see that Brian Wynter was reported as calling for these entities to be regulated, and is indicative of the positive influence that the FSC has had on monitoring our financial sector. We cannot like regulation when it suits us but disagree with it when it does not.
No one can argue with the fact that the financial market in the US is probably the most developed. Additionally it is through the development of financial markets that other sectors are able to expand as it creates capital for businesses. Capital markets are not developed by shutting out new ideas but by bringing them under regulation and ensuring that they complement the existing financial structure.
This is the importance of regulations. If we do not abide by regulations then we have nothing but chaos leading to failure. If we do not have laws to regulate our daily lives and commercial transactions then we cannot have progress; we will not have investments; and more importantly there will be no justice and crime will increase. Similarly within markets and companies, if we do not have regulations then we will not have predictability; we will not have protection for investors, employers and employees. In short we would have a free for all system where investors and employees are taken advantage of, vigilante justice will prevail, and there will be no development.
This of course brings to mind the use of monies for purposes other than originally intended, and I speak specifically to the use of the National Insurance Fund and the Capital Development Fund (CDF). When we communicate to the public, or participants in any fund, that the funds will be used for a specific purpose, we establish a trust relationship. When we betray that trust by using the funds for other purposes then we create animosity.
Use of funds
In addition there is a reason for rules being established around the use of funds. When the rules were originally established it would be because it is on this basis that the funds could be raised and the uses would have been thought to be for maximum benefit. This is no different from the use of money in private pension funds that the government will correctly strictly regulate. The change in the use of the monies from these funds therefore fly in the face of the regulatory environment that the government is trying to strengthen, and doing a good job at. If the government is going to lead in this area, however, it is very important to do so by example.
There is no need for another bureaucratic body to be established to monitor the CDF, as recommended by the Opposition Leader, as we already have enough rules to govern this fund. There must be documentation surrounding the objectives of the fund; there are the rules of fund accounting, which governments should adhere to; and there should also be greater parliamentary oversight, which is what they are paid to do. What we must do is enforce the rules.
This lack of the enforcement of regulations results in a lack of structure and prohibits growth. Nowhere is this more obvious than in a company, where this can be seen more readily. If one looks at large multinational companies there is a common thread; they all have standard rules to govern every policy. So the determination as to disciplinary matters, reporting, charitable contributions, expense accounts etc. are all guided by standard rules. If this was not so then there would be no controlled expansion and where growth is not controlled then it is difficult to know when any part of that company is in trouble; in other words it takes away the predictability and control. This is one of the reasons why I always say to small business owners that it is very important to report your correct profits and pay the right taxes. If you setup your accounts to be unstructured to make it difficult for the tax man you also make it easy for the person wanting to commit fraud and will prevent expansion and early retirement.
What happens also is that human resources become unmanageable, costs are not controllable, and productivity inevitably declines. The company then finds itself unable to compete effectively as they do not have enough control to adapt quickly to changes. No where is this more true than in the military. The rigid discipline enforced in the army is necessary as any weakness in the field could contribute to a defeat and the substantial loss of lives, and maybe the fall of a government. It is important that when the General gives the command that it is not only communicated effectively but also that the command is followed without question. That way the only risk is that the wrong command is given but there is no confusion as to what is to be done.
There is no doubt that regulations are very important and we must try to regulate all the areas that provide risk to the public. If we do not do so then we are being irresponsible in our approach to managing the economy. It is not enough to say that there is justification for bending the rules, as there will always be justifiable reasons for flouting the rules depending on who has the power to do so at the time. Today we may find ourselves in the position of benefiting from the compromise of rules and tomorrow we can find ourselves on the other side. So it is very important that we develop a culture of strictly applying rules and order.
These comments no doubt originated because I have been calling for the regulation of these entities and some persons have seen this as a push for legitimization. Never mind the fact that Brian Wynter also called for the regulation of these entities, else they will fail, but I am not aware of anyone saying that he is the marketing manager. I don’t share the opinion that they will fail because they are not regulated, but regulation is important to reduce the risk to the investing public.
Need for regulations
The comments on my position are unfortunate as it illustrates the inability to see beyond the emotions of our own positions. The fact is that it shows how easily we forget the past and is a concern that we do not learn. In the 1990s, because of the lack of a proper regulatory environment, we suffered probably the greatest setback to our economy ever – FINSAC. My argument for regulation of these entities is therefore because if anyone of these entities were to fail it would have a contagious effect, greater than malaria, throughout the financial sector and would negatively affect the confidence contributing to the current growth trend. It is therefore within the interest of the players within the financial sector to regulate these entities rather than continuously debate whether they are legitimate or not. I cannot understand the short sighted approach of some of our more sophisticated thinkers.
I am happy to see that Brian Wynter was reported as calling for these entities to be regulated, and is indicative of the positive influence that the FSC has had on monitoring our financial sector. We cannot like regulation when it suits us but disagree with it when it does not.
No one can argue with the fact that the financial market in the US is probably the most developed. Additionally it is through the development of financial markets that other sectors are able to expand as it creates capital for businesses. Capital markets are not developed by shutting out new ideas but by bringing them under regulation and ensuring that they complement the existing financial structure.
This is the importance of regulations. If we do not abide by regulations then we have nothing but chaos leading to failure. If we do not have laws to regulate our daily lives and commercial transactions then we cannot have progress; we will not have investments; and more importantly there will be no justice and crime will increase. Similarly within markets and companies, if we do not have regulations then we will not have predictability; we will not have protection for investors, employers and employees. In short we would have a free for all system where investors and employees are taken advantage of, vigilante justice will prevail, and there will be no development.
This of course brings to mind the use of monies for purposes other than originally intended, and I speak specifically to the use of the National Insurance Fund and the Capital Development Fund (CDF). When we communicate to the public, or participants in any fund, that the funds will be used for a specific purpose, we establish a trust relationship. When we betray that trust by using the funds for other purposes then we create animosity.
Use of funds
In addition there is a reason for rules being established around the use of funds. When the rules were originally established it would be because it is on this basis that the funds could be raised and the uses would have been thought to be for maximum benefit. This is no different from the use of money in private pension funds that the government will correctly strictly regulate. The change in the use of the monies from these funds therefore fly in the face of the regulatory environment that the government is trying to strengthen, and doing a good job at. If the government is going to lead in this area, however, it is very important to do so by example.
There is no need for another bureaucratic body to be established to monitor the CDF, as recommended by the Opposition Leader, as we already have enough rules to govern this fund. There must be documentation surrounding the objectives of the fund; there are the rules of fund accounting, which governments should adhere to; and there should also be greater parliamentary oversight, which is what they are paid to do. What we must do is enforce the rules.
This lack of the enforcement of regulations results in a lack of structure and prohibits growth. Nowhere is this more obvious than in a company, where this can be seen more readily. If one looks at large multinational companies there is a common thread; they all have standard rules to govern every policy. So the determination as to disciplinary matters, reporting, charitable contributions, expense accounts etc. are all guided by standard rules. If this was not so then there would be no controlled expansion and where growth is not controlled then it is difficult to know when any part of that company is in trouble; in other words it takes away the predictability and control. This is one of the reasons why I always say to small business owners that it is very important to report your correct profits and pay the right taxes. If you setup your accounts to be unstructured to make it difficult for the tax man you also make it easy for the person wanting to commit fraud and will prevent expansion and early retirement.
What happens also is that human resources become unmanageable, costs are not controllable, and productivity inevitably declines. The company then finds itself unable to compete effectively as they do not have enough control to adapt quickly to changes. No where is this more true than in the military. The rigid discipline enforced in the army is necessary as any weakness in the field could contribute to a defeat and the substantial loss of lives, and maybe the fall of a government. It is important that when the General gives the command that it is not only communicated effectively but also that the command is followed without question. That way the only risk is that the wrong command is given but there is no confusion as to what is to be done.
There is no doubt that regulations are very important and we must try to regulate all the areas that provide risk to the public. If we do not do so then we are being irresponsible in our approach to managing the economy. It is not enough to say that there is justification for bending the rules, as there will always be justifiable reasons for flouting the rules depending on who has the power to do so at the time. Today we may find ourselves in the position of benefiting from the compromise of rules and tomorrow we can find ourselves on the other side. So it is very important that we develop a culture of strictly applying rules and order.
Thursday, January 11, 2007
Maximizing growth
Any objective assessment of the Jamaican economy will show that there has been improvement in our growth prospects. These signs include (1) growth in the agricultural sector, and particularly non-traditional exports; (2) record tourist arrivals, and the expansion of rooms; (3) revitalization of the construction industry, following the unnecessary cement crisis; (4) reducing interest rates, spurring interest in small business; (5) increased business confidence; and (6) the fact that, behind mineral and fuels, the machinery/equipment category is the second highest import, implying new investments.
Despite these signs, however, we have to bear in mind that the growth is still in a very fragile state, and can easily be reversed in the blink of an eye. So while we recognize these positive signs, we must still put careful management is in place to ensure that (a) the positive trend is not disrupted; and (b) growth is maximized.
I have been saying since last year that the main threats to this fragile growth remain political actions, crime and corruption. It is against this background that I say that Jamaica does not have an economic problem but rather a social one. The fact is that if we were to positively address our leadership and political issues, corruption in the police force, enforce discipline, and improve training opportunities, then we could seriously address the economics.
Improved confidence
My opinion is that the only real difference between the current upbeat perception and a few months ago is primarily one of improved confidence. There has been no substantial change in infrastructural support; there has been no change in the goods and services we have a competitive advantage in; and there has been no change in literacy standards. The main changes have been (1) improved business confidence; (2) a reduction in reported crimes towards the end of last year (positively affecting perception); (3) improved consumer confidence, as a result of Sista P becoming Prime Minister; and (4) a gradual reduction in interest rates and continued stability in the exchange rate. In short it is the perceived improvement in the will of the leadership to address issues such as high interest rates and crime that is driving confidence and a willingness to invest.
This is what many of us have been arguing for a while, that is, government should not be involved in determining economic policy and investments, but rather should just create a positive environment and leave it to the private sector to grow the economy. If we had an economic problem then even with a positive environment it would be difficult to show economic improvement. What we must do is keep on top of the social issues of responsible governance, crime, corruption and education, thereby reducing the cost of delivering the final products and services. If we are able to deal with crime and governance then we could almost immediately improve the growth in agriculture and tourism. The point is that we have latent potential in these sectors that is being stymied by the social issues, and once the social factors are fixed we can see effortless growth.
What we must do is therefore ensure that we maximize the growth prospects. No doubt Jamaica is benefiting from the improved global environment, and no doubt based on economic cycles this global growth will eventually come to an end. It is therefore very important that we maximize the benefits from global growth and therefore prepare for any downturn that may come in the future. As an example, last year we did not have any significant natural disaster, but we managed to create our own, the cement crisis. Can you imagine if the cement debacle did not occur what sort of economic expansion we would have seen? This again speaks to the issue of governance, which again is a social/political, not economic issue.
It is also against this background that the surprise postponement of the increased income tax threshold is damaging to the economy. Such a move not only damages confidence but is a short sighted approach to managing the fiscal accounts. The Finance Minister has in the past responded to concerns of the public and I am confident that he will again correct this situation, as he has shown a commitment to doing what is necessary to improve the fiscal situation. The cost of the threshold increase is approximately J$5 Billion, but the effect from the loss in confidence and economic activity could be more over a longer period. We must be careful that situations like these do not recur as it could upset our fragile growth.
Trade numbers
The trade numbers also show exports increasing 31% over the first nine months of 2005. However, the trade deficit widened by 14%. This was primarily because of the bill for minerals and fuels (oil), but also the import of machinery/equipment was over 20% of the import bill. Thus both categories accounted for over 50% of imports. The positives from this is that there has recently been a reduction in oil prices, and the pundits are expecting it to decrease further, and importing machinery means an expansion of investments and future exports. If this trend continues then we should see a positive effect on the trade deficit in 2007.
Even so we cannot have a hands off approach to managing this. We must maximize this potential by ensuring that incentives go to ventures producing for export and food for local consumption, which can replace imports. Import substitution is important as a part of our problem is that we have such a high import content that even when exports and tourism grows we see a corresponding increase in imports. If we strategize around ways to substitute local production for imports in certain areas this will be a big positive.
This is the type of management needed to maximize benefits from growth. It is not enough to be satisfied with growth of 2.5% to 3%, as we have a greater potential. In order for us to realize that potential, however, we must ensure that we take the necessary actions to improve the social and physical infrastructure to ramp up the capacity for greater growth.
This is similar to a company seeming prosperous when inefficiencies are masked by favourable market conditions. In other words, growth occurs because everyone around is growing (global economy), not recognizing that growth is occurring primarily because of the market rather than internal efficiencies. So when market conditions become unfavourable the operational and human resource capacity is insufficient to cope. It is therefore important not to be misled into believing that everything is going great guns and not work on the inefficiencies, for example the public sector.
We therefore cannot become complacent about the positive signs. Now more than ever we must ensure that we (1) address the inefficiencies in the system; and (2) not fall into complacency and too much “chest beating”, as any slip can result in a fall and a concussion.
Again I would like to remind everyone that we have been in this position before and because of political decisions, taken a few steps backward. Only last year we saw where crime statistics were improving only to be hit with a startling increase in the murder rate this year. This is illustrative of the need to remain on top of the issues.
Despite these signs, however, we have to bear in mind that the growth is still in a very fragile state, and can easily be reversed in the blink of an eye. So while we recognize these positive signs, we must still put careful management is in place to ensure that (a) the positive trend is not disrupted; and (b) growth is maximized.
I have been saying since last year that the main threats to this fragile growth remain political actions, crime and corruption. It is against this background that I say that Jamaica does not have an economic problem but rather a social one. The fact is that if we were to positively address our leadership and political issues, corruption in the police force, enforce discipline, and improve training opportunities, then we could seriously address the economics.
Improved confidence
My opinion is that the only real difference between the current upbeat perception and a few months ago is primarily one of improved confidence. There has been no substantial change in infrastructural support; there has been no change in the goods and services we have a competitive advantage in; and there has been no change in literacy standards. The main changes have been (1) improved business confidence; (2) a reduction in reported crimes towards the end of last year (positively affecting perception); (3) improved consumer confidence, as a result of Sista P becoming Prime Minister; and (4) a gradual reduction in interest rates and continued stability in the exchange rate. In short it is the perceived improvement in the will of the leadership to address issues such as high interest rates and crime that is driving confidence and a willingness to invest.
This is what many of us have been arguing for a while, that is, government should not be involved in determining economic policy and investments, but rather should just create a positive environment and leave it to the private sector to grow the economy. If we had an economic problem then even with a positive environment it would be difficult to show economic improvement. What we must do is keep on top of the social issues of responsible governance, crime, corruption and education, thereby reducing the cost of delivering the final products and services. If we are able to deal with crime and governance then we could almost immediately improve the growth in agriculture and tourism. The point is that we have latent potential in these sectors that is being stymied by the social issues, and once the social factors are fixed we can see effortless growth.
What we must do is therefore ensure that we maximize the growth prospects. No doubt Jamaica is benefiting from the improved global environment, and no doubt based on economic cycles this global growth will eventually come to an end. It is therefore very important that we maximize the benefits from global growth and therefore prepare for any downturn that may come in the future. As an example, last year we did not have any significant natural disaster, but we managed to create our own, the cement crisis. Can you imagine if the cement debacle did not occur what sort of economic expansion we would have seen? This again speaks to the issue of governance, which again is a social/political, not economic issue.
It is also against this background that the surprise postponement of the increased income tax threshold is damaging to the economy. Such a move not only damages confidence but is a short sighted approach to managing the fiscal accounts. The Finance Minister has in the past responded to concerns of the public and I am confident that he will again correct this situation, as he has shown a commitment to doing what is necessary to improve the fiscal situation. The cost of the threshold increase is approximately J$5 Billion, but the effect from the loss in confidence and economic activity could be more over a longer period. We must be careful that situations like these do not recur as it could upset our fragile growth.
Trade numbers
The trade numbers also show exports increasing 31% over the first nine months of 2005. However, the trade deficit widened by 14%. This was primarily because of the bill for minerals and fuels (oil), but also the import of machinery/equipment was over 20% of the import bill. Thus both categories accounted for over 50% of imports. The positives from this is that there has recently been a reduction in oil prices, and the pundits are expecting it to decrease further, and importing machinery means an expansion of investments and future exports. If this trend continues then we should see a positive effect on the trade deficit in 2007.
Even so we cannot have a hands off approach to managing this. We must maximize this potential by ensuring that incentives go to ventures producing for export and food for local consumption, which can replace imports. Import substitution is important as a part of our problem is that we have such a high import content that even when exports and tourism grows we see a corresponding increase in imports. If we strategize around ways to substitute local production for imports in certain areas this will be a big positive.
This is the type of management needed to maximize benefits from growth. It is not enough to be satisfied with growth of 2.5% to 3%, as we have a greater potential. In order for us to realize that potential, however, we must ensure that we take the necessary actions to improve the social and physical infrastructure to ramp up the capacity for greater growth.
This is similar to a company seeming prosperous when inefficiencies are masked by favourable market conditions. In other words, growth occurs because everyone around is growing (global economy), not recognizing that growth is occurring primarily because of the market rather than internal efficiencies. So when market conditions become unfavourable the operational and human resource capacity is insufficient to cope. It is therefore important not to be misled into believing that everything is going great guns and not work on the inefficiencies, for example the public sector.
We therefore cannot become complacent about the positive signs. Now more than ever we must ensure that we (1) address the inefficiencies in the system; and (2) not fall into complacency and too much “chest beating”, as any slip can result in a fall and a concussion.
Again I would like to remind everyone that we have been in this position before and because of political decisions, taken a few steps backward. Only last year we saw where crime statistics were improving only to be hit with a startling increase in the murder rate this year. This is illustrative of the need to remain on top of the issues.
Thursday, January 04, 2007
Strategic planning is important
The government recently released the fiscal numbers for the eight months ended November 2006. The overall fiscal deficit shows better than projections, as it was J$28.0 billion versus a projected J$29.6 billion. In order to fully appreciate the outturn, however, we have to go behind the numbers to see what it is telling us. In fact a closer analysis shows that we are in fact behind on our development targets, even though the absolute number appears to be better than projected.
The fact is that the deficit currently stands at over 3.0% of GDP versus a projected 2.5% of GDP. There are still four months to go but based on the growth rate it seems unlikely that this target will be achieved. As I have been saying since the start of the fiscal year, given the cement crisis and the infrastructural support, the economy does not show the capacity to grow at 3% to 4%. We did not have any natural disasters this year so in true Jamaican style we created our own, the cement crisis.
Tax revenues
My projection is that for the fiscal year the deficit will come in at over 3% of GDP simply because GDP growth will not be at the 3% to 4% projected. Because of this tax revenues will also come in below target, which already was very difficult to meet, as a 20% increase in tax revenues was always going to prove challenging. My own projection remains that we will achieve tax revenue growth of approximately 10% to 15% at most. My reasons are (i) the MOU will restrict growth in income; (ii) single digit inflation will keep prices relatively stable, meaning little growth in company profits, if any; (iii) the reduction in interest rates has affected company profits negatively; (iv) the first three months was positively affected by tax arrears collection; and (v) the planned increase in the income tax threshold would have negatively affected payroll taxes.
Many would argue that tax revenues are just J$2.7 billion (2%) behind budget with eight months gone. However, the last four months represents 39% of total tax revenues, and relies heavily on increased payroll, profits and interest taxes. Companies have shown less than expected profits; the savings rate has declined, and companies have laid off staff in order to deal with lower profitability. In addition lower profits means less Christmas bonuses. This translates to less tax collections, and may be a reason behind the government’s late decision to postpone the increased tax threshold until other allowances are removed to neutralize the effect.
This postponement can only negatively affect business and consumer confidence. We must bear in mind that the only real difference between today and a few months ago, when economic prospects did not seem so upbeat, is increased confidence. It is confidence that will lead persons to invest and spend monies. If we continue to make decisions that adversely affect the confidence in government pronouncements then it will only serve to restrict our growth. After all when taxes are to be increased the legislation is always hurried through, and in many cases not put into law until months or years after. It seems as if only when there is to be a credit given to the public that the administrative preparation has to be perfect. The cost of this decision could be more than the potential loss in revenues.
The fact that we always seem to struggle to meet our tax revenue and growth targets is symptomatic of the way we plan and approach budgets. As an example, each year we prepare budgets as if natural disasters are an exception rather than the norm. So when the hurricanes and the floods happen the government always seems surprised at the extent of the damage even though this occurs almost every year.
Strategic planning process
This is not a problem only to be found in the government budget, as private companies face this issue also. Budgets are seen as the beginning and end of the planning process when in fact they really should just be used to support the strategic planning process. Unless we understand this then each year we will be surprised that we miss the budget targets, and will also place the blame at the wrong feet. Whenever budget targets are not met we tend to focus on the Finance Minister as failing when it is because the operational objectives were not met why the budget was not achieved.
Looking at the annual budgetary process it seems as if there is little or no strategic planning. And if it is actually happening it seems to be overshadowed by the actual budget. The budget should be the outcome of the strategic planning process, thereby supporting the objectives set for the year. These strategies should be driven by the operational ministries, such as Education, Security, Health etc.
The strategic planning process should be as follows:
The Cabinet (Executive) should sit each year (maybe 6 months before the budget is presented) and set broad objectives for the coming fiscal year, e.g., to reduce unemployment by 1% or improve per capita income by $500. The important point here is that high level objectives should be set and measurements must be carefully selected so that they can guide growth objectives;
Each operational ministry should translate the high level objectives to achievable tasks, based on their operational capacity, and set timelines for each. Measurable targets should be set and at this stage each Ministry should prepare their own blueprint as to how the targets will be achieved;
The various ministries / departments should next put realistic costs to each operational strategy. Each task should have documented (i) the assumptions for meeting the target; and (ii) the impact it will have on meeting the high level objective for the ministry / department;
The executive team should meet to go over the plans of all Ministries. The strategic plans of the Ministries should include all departments and statutory organizations that falls within its accountability;
The Finance Ministry should consolidate the budgets and prioritize expenditure based on the value added to overall objective and resource availability. At this point the budget will be finalized and presented to the nation along with the strategic objectives.
It is important to understand that the budget is merely a support for the strategic plan, so that if the operational objectives are not met then the budget may not be met. Once we start focusing on the budget then we lose sight of the strategic objectives, which is really what will drive growth.
Unless we can approach our annual budget in this way then we may end up meeting our fiscal targets but not making any real progress. Because of this we get preoccupied with the absolute fiscal target when we should be concerned with whether or not our strategic objectives have been met. So at the end of 2006/07 fiscal year we may meet our absolute fiscal target, but productivity, per capita income and the quality of education may have all declined. Maybe we need to change the name to the fiscal strategic plan and in that way hold ministries responsible for achieving the targets they set at the start of the year.
The fact is that the deficit currently stands at over 3.0% of GDP versus a projected 2.5% of GDP. There are still four months to go but based on the growth rate it seems unlikely that this target will be achieved. As I have been saying since the start of the fiscal year, given the cement crisis and the infrastructural support, the economy does not show the capacity to grow at 3% to 4%. We did not have any natural disasters this year so in true Jamaican style we created our own, the cement crisis.
Tax revenues
My projection is that for the fiscal year the deficit will come in at over 3% of GDP simply because GDP growth will not be at the 3% to 4% projected. Because of this tax revenues will also come in below target, which already was very difficult to meet, as a 20% increase in tax revenues was always going to prove challenging. My own projection remains that we will achieve tax revenue growth of approximately 10% to 15% at most. My reasons are (i) the MOU will restrict growth in income; (ii) single digit inflation will keep prices relatively stable, meaning little growth in company profits, if any; (iii) the reduction in interest rates has affected company profits negatively; (iv) the first three months was positively affected by tax arrears collection; and (v) the planned increase in the income tax threshold would have negatively affected payroll taxes.
Many would argue that tax revenues are just J$2.7 billion (2%) behind budget with eight months gone. However, the last four months represents 39% of total tax revenues, and relies heavily on increased payroll, profits and interest taxes. Companies have shown less than expected profits; the savings rate has declined, and companies have laid off staff in order to deal with lower profitability. In addition lower profits means less Christmas bonuses. This translates to less tax collections, and may be a reason behind the government’s late decision to postpone the increased tax threshold until other allowances are removed to neutralize the effect.
This postponement can only negatively affect business and consumer confidence. We must bear in mind that the only real difference between today and a few months ago, when economic prospects did not seem so upbeat, is increased confidence. It is confidence that will lead persons to invest and spend monies. If we continue to make decisions that adversely affect the confidence in government pronouncements then it will only serve to restrict our growth. After all when taxes are to be increased the legislation is always hurried through, and in many cases not put into law until months or years after. It seems as if only when there is to be a credit given to the public that the administrative preparation has to be perfect. The cost of this decision could be more than the potential loss in revenues.
The fact that we always seem to struggle to meet our tax revenue and growth targets is symptomatic of the way we plan and approach budgets. As an example, each year we prepare budgets as if natural disasters are an exception rather than the norm. So when the hurricanes and the floods happen the government always seems surprised at the extent of the damage even though this occurs almost every year.
Strategic planning process
This is not a problem only to be found in the government budget, as private companies face this issue also. Budgets are seen as the beginning and end of the planning process when in fact they really should just be used to support the strategic planning process. Unless we understand this then each year we will be surprised that we miss the budget targets, and will also place the blame at the wrong feet. Whenever budget targets are not met we tend to focus on the Finance Minister as failing when it is because the operational objectives were not met why the budget was not achieved.
Looking at the annual budgetary process it seems as if there is little or no strategic planning. And if it is actually happening it seems to be overshadowed by the actual budget. The budget should be the outcome of the strategic planning process, thereby supporting the objectives set for the year. These strategies should be driven by the operational ministries, such as Education, Security, Health etc.
The strategic planning process should be as follows:
The Cabinet (Executive) should sit each year (maybe 6 months before the budget is presented) and set broad objectives for the coming fiscal year, e.g., to reduce unemployment by 1% or improve per capita income by $500. The important point here is that high level objectives should be set and measurements must be carefully selected so that they can guide growth objectives;
Each operational ministry should translate the high level objectives to achievable tasks, based on their operational capacity, and set timelines for each. Measurable targets should be set and at this stage each Ministry should prepare their own blueprint as to how the targets will be achieved;
The various ministries / departments should next put realistic costs to each operational strategy. Each task should have documented (i) the assumptions for meeting the target; and (ii) the impact it will have on meeting the high level objective for the ministry / department;
The executive team should meet to go over the plans of all Ministries. The strategic plans of the Ministries should include all departments and statutory organizations that falls within its accountability;
The Finance Ministry should consolidate the budgets and prioritize expenditure based on the value added to overall objective and resource availability. At this point the budget will be finalized and presented to the nation along with the strategic objectives.
It is important to understand that the budget is merely a support for the strategic plan, so that if the operational objectives are not met then the budget may not be met. Once we start focusing on the budget then we lose sight of the strategic objectives, which is really what will drive growth.
Unless we can approach our annual budget in this way then we may end up meeting our fiscal targets but not making any real progress. Because of this we get preoccupied with the absolute fiscal target when we should be concerned with whether or not our strategic objectives have been met. So at the end of 2006/07 fiscal year we may meet our absolute fiscal target, but productivity, per capita income and the quality of education may have all declined. Maybe we need to change the name to the fiscal strategic plan and in that way hold ministries responsible for achieving the targets they set at the start of the year.
Tuesday, December 26, 2006
The cost of corruption
On Christmas Eve, Sunday December 24th, the Gleaner published an article confirming what many of us have known for a long time. The report, entitled “Confession of a corrupt cop”, told of the ways the police corruptly made money by protecting criminals and making evidence disappear. It went on to speak about the silent code of not informing on a colleague, as this is seen as support. In my mind this is no different from the same “informer culture” that the police so publicly chastise inner city citizens about, and in the latter case it is more a means of survival rather than protecting wrong doing.
The 2006 Transparency International Corruption Perception Index showed Jamaica at a score of 3.6, out of 10, with 10 being the least corrupt. Other Caribbean countries scoring lower than Jamaica were Haiti (1.8), Guyana (2.5), Dominican Republic (2.8), Trinidad & Tobago (3.2), and Cuba (3.5). Barbados of course was at a score of 6.7. Is it any wonder that Barbados is perceived as the most developed Caribbean country? The fact is that corruption has a significant economic cost, and is a primary reason why economies under perform.
Corruption culture
Many commentators have been saying for sometime that corruption in the police force, and the political support given to it by way of denial over the years, is a fundamental reason why Jamaica is in our economic plight. Whenever a civil servant takes “a smalls” to do a favour for someone, the customs officer takes a bribe to let in a shipment of guns, or a politician awards a contract because of political affiliation, it eats away at our moral fibre and necessitates a premium for persons doing business in Jamaica. The fact is that if one were doing business in the war torn area of the Congo, you would demand a return way in excess of normal profits for the risk.
Similarly, when we create a culture of corruption it means that the return required for doing business in Jamaica is higher than countries such as Barbados. This will have an effect on driving inflation as quicker returns are required. It also discourages any investment in long term asset creation. We therefore end up with a trading and service society, as Jamaica has transformed into over the years.
This is one of the primary reasons why I have always said that Jamaica does not have an economic problem, but rather a social one. We have bauxite reserves, an attractive tourism product, the best coffee, reggae music, and we can go on and on. So from an economic standpoint there are many products that we have a natural competitive advantage in, which means that we have the basic requirements for economic growth. What we do not have is a society that can create wealth from our natural resources. And this is partly because by our actions we have so corrupted rational market behaviour that resources are not efficiently allocated.
When a politician awards a contract because of political affiliation it means that the best person may not get the contract, and because it is not awarded on a competitive bid then what results is mediocre work. The contractor knows that irrespective of the quality of the work performed that he/she will still be paid, and more often than not the price escalates. When a police officer turns his back when confronted with an illegal situation it creates an unfair competitive advantage for the criminal whose only purpose of starting a business is to launder money, rather than create a productive organization. When a member of parliament wins an election because his/her cronies stuff ballot boxes, it means that there is no drive to improve peoples’ lives, as whether people vote or not then he/she will be returned to power.
These examples illustrate clearly that corruption has a significant cost as it prevents markets from working in an efficient manner, and this in turn makes countries uncompetitive. It is this sort of culture that kills entrepreneurialism more than anything else.
Need for rules
In order for companies or countries to grow there needs to be rules, or processes, by which they act. For example, at one extreme if there was no justice system then what results is anarchy. In this case if someone has a commercial dispute then instead of resolving it in the courts then they may seek to do so by strong arm tactic and what’s worst is that the winner may be the incorrect one. If a company does not have guidelines for how they invest, then investments could happen because of friendship or the emotional decision of one person. In both cases, we see that the most efficient solution would not be arrived at, resulting in a corrupt business environment in the first case and possibly significant losses in the latter.
Similarly corruption has the effect of removing predictability from business decisions. We have for example heard of the high cost of doing business in Nigeria as at almost every level someone has to be paid. Only the most daring and those with connections end up doing business in such a country, despite their large oil reserves. Nigeria is proof that even if a country has one of the most valuable resources in the world, the viability of the economy is not guaranteed unless the society is organized in such a manner so as to exploit the natural advantages. This is the primary advantage that developed countries have over under developed and developing countries.
Whatever we may say about the United States, it is this organization and predictability that drives people to want to live there. The result is that the best minds will usually live in such a country, as they do not have to rely on their connections to survive. This points to another effect of corruption. It prevents the development of our human resources. After all why get educated if all I have to do is know a big wig in the government who can send a contract or two my way, when my friend who has wasted years at University, and missed nights of partying does not end up making the same money I do. After all whether he is smarter than me or not will not make me lose the contract.
Companies also compromise their development in this way. The administrative assistant who knows how to befriend the boss or the person who runs personal errands ends up getting the promotion and the most favour. The company will suffer a faster fate than the country; however, as based on this sort of behaviour it becomes inefficient, uncompetitive, and if it is lucky will survive at the bottom of the food chain. If we look at multinationals, or companies that remain on top for the long term, what they do is establish rules of performance
This “Confession of a corrupt cop” should therefore not be glossed over. This is at the heart of our economic and social issues and needs to be given the prominence it deserves. Unless we solve this issue of corruption in the police force then we will not be able to see the type of reduction in crime levels that we so desperately need, and the cost to Jamaica will continue to be tremendous.
and a system of accountability. Without this companies such as Wal-Mart, Microsoft, IBM, and even our very own Grace Kennedy could not remain at the top. On the other hand companies such as ENRON and WorldCom sought to bend the rules and we all know what happened.
The 2006 Transparency International Corruption Perception Index showed Jamaica at a score of 3.6, out of 10, with 10 being the least corrupt. Other Caribbean countries scoring lower than Jamaica were Haiti (1.8), Guyana (2.5), Dominican Republic (2.8), Trinidad & Tobago (3.2), and Cuba (3.5). Barbados of course was at a score of 6.7. Is it any wonder that Barbados is perceived as the most developed Caribbean country? The fact is that corruption has a significant economic cost, and is a primary reason why economies under perform.
Corruption culture
Many commentators have been saying for sometime that corruption in the police force, and the political support given to it by way of denial over the years, is a fundamental reason why Jamaica is in our economic plight. Whenever a civil servant takes “a smalls” to do a favour for someone, the customs officer takes a bribe to let in a shipment of guns, or a politician awards a contract because of political affiliation, it eats away at our moral fibre and necessitates a premium for persons doing business in Jamaica. The fact is that if one were doing business in the war torn area of the Congo, you would demand a return way in excess of normal profits for the risk.
Similarly, when we create a culture of corruption it means that the return required for doing business in Jamaica is higher than countries such as Barbados. This will have an effect on driving inflation as quicker returns are required. It also discourages any investment in long term asset creation. We therefore end up with a trading and service society, as Jamaica has transformed into over the years.
This is one of the primary reasons why I have always said that Jamaica does not have an economic problem, but rather a social one. We have bauxite reserves, an attractive tourism product, the best coffee, reggae music, and we can go on and on. So from an economic standpoint there are many products that we have a natural competitive advantage in, which means that we have the basic requirements for economic growth. What we do not have is a society that can create wealth from our natural resources. And this is partly because by our actions we have so corrupted rational market behaviour that resources are not efficiently allocated.
When a politician awards a contract because of political affiliation it means that the best person may not get the contract, and because it is not awarded on a competitive bid then what results is mediocre work. The contractor knows that irrespective of the quality of the work performed that he/she will still be paid, and more often than not the price escalates. When a police officer turns his back when confronted with an illegal situation it creates an unfair competitive advantage for the criminal whose only purpose of starting a business is to launder money, rather than create a productive organization. When a member of parliament wins an election because his/her cronies stuff ballot boxes, it means that there is no drive to improve peoples’ lives, as whether people vote or not then he/she will be returned to power.
These examples illustrate clearly that corruption has a significant cost as it prevents markets from working in an efficient manner, and this in turn makes countries uncompetitive. It is this sort of culture that kills entrepreneurialism more than anything else.
Need for rules
In order for companies or countries to grow there needs to be rules, or processes, by which they act. For example, at one extreme if there was no justice system then what results is anarchy. In this case if someone has a commercial dispute then instead of resolving it in the courts then they may seek to do so by strong arm tactic and what’s worst is that the winner may be the incorrect one. If a company does not have guidelines for how they invest, then investments could happen because of friendship or the emotional decision of one person. In both cases, we see that the most efficient solution would not be arrived at, resulting in a corrupt business environment in the first case and possibly significant losses in the latter.
Similarly corruption has the effect of removing predictability from business decisions. We have for example heard of the high cost of doing business in Nigeria as at almost every level someone has to be paid. Only the most daring and those with connections end up doing business in such a country, despite their large oil reserves. Nigeria is proof that even if a country has one of the most valuable resources in the world, the viability of the economy is not guaranteed unless the society is organized in such a manner so as to exploit the natural advantages. This is the primary advantage that developed countries have over under developed and developing countries.
Whatever we may say about the United States, it is this organization and predictability that drives people to want to live there. The result is that the best minds will usually live in such a country, as they do not have to rely on their connections to survive. This points to another effect of corruption. It prevents the development of our human resources. After all why get educated if all I have to do is know a big wig in the government who can send a contract or two my way, when my friend who has wasted years at University, and missed nights of partying does not end up making the same money I do. After all whether he is smarter than me or not will not make me lose the contract.
Companies also compromise their development in this way. The administrative assistant who knows how to befriend the boss or the person who runs personal errands ends up getting the promotion and the most favour. The company will suffer a faster fate than the country; however, as based on this sort of behaviour it becomes inefficient, uncompetitive, and if it is lucky will survive at the bottom of the food chain. If we look at multinationals, or companies that remain on top for the long term, what they do is establish rules of performance
This “Confession of a corrupt cop” should therefore not be glossed over. This is at the heart of our economic and social issues and needs to be given the prominence it deserves. Unless we solve this issue of corruption in the police force then we will not be able to see the type of reduction in crime levels that we so desperately need, and the cost to Jamaica will continue to be tremendous.
and a system of accountability. Without this companies such as Wal-Mart, Microsoft, IBM, and even our very own Grace Kennedy could not remain at the top. On the other hand companies such as ENRON and WorldCom sought to bend the rules and we all know what happened.
Monday, December 25, 2006
Subscribe to:
Posts (Atom)