I was going to write about the recent economic growth numbers and explain why I do not think Jamaica will grow at the projected 3 percent this year. But my mind was changed by an observation, which is a fundamental reason why we celebrate 2 percent growth when the rest of the world is at 5 percent.
In today’s world the most important unit of production is the individual. It is the individual that drives productivity in a global knowledge-based world. It is the ability of the individual to deliver the best service and create the best product that determines the success of companies and countries. One of the main problems with Jamaica is that perhaps the only thing that has been devalued more than the Jamaican dollar is the Jamaican people. Our politicians since independence have created a system of governance that discounts the primacy of Jamaicans, unless you are of course a politician.
So while the ordinary Jamaican can suffer, like Christ carrying the cross, in our efforts to reach that hilltop we aspire to, the privileged few have established a system where everything is convenient for them, and their close friends and relatives of course. In fact, when we arrive at the hilltop we find that it is used as a place to hoist the cross where we are crucified.
The Promised Land
This image came to my mind as I stopped at the US embassy, in Liguanea, to pick up something from someone who unfortunately had to be in the line. Unfortunate not because they were going to get a US visa but because of the manner that Jamaicans are treated in the process. I stood there for a while observing and felt sorry for the Jamaicans that had to be standing there for hours in the face of the rising sun, awaiting the chance to go to the Promised Land. The impression one gets of course is that us Jamaicans are lesser world citizens. There is no way that Americans would be allowed to go through such an ordeal of course, but I wonder what system is in place in other countries. Even the garden along the wall seems to have greater importance than the poor Jamaicans, as it is well kept and away from the road where damage can occur. The Jamaicans, however, are left to deal with the sun and possible damage from any reckless driver, who may have a few unpaid tickets but whom the police have been unable to apprehend.
But maybe if I were the Americans I would treat us Jamaicans with the same apparent level of disdain. The way the entrance is situated it seems as if it were deliberately designed that way so that persons in line would have to deal with the rising sun and possibly be discouraged from applying for US visas. But of course even this inconvenience is minor compared to the daily ordeal we have to go through based on the society that our politicians have so carefully crafted to ensure that Jamaicans face the same tribulation that all Christians know that Christ went through. So we could assume that the difficulties created by our governments may indeed be a willful intention to bring us closer to our God, as this suffering is indeed Christ-like.
So the Americans may think that if their government can treat them like that then why do we have to build a covering on the side of the road to protect them from the ravages of the sun? Why would we have to build a place where they can sit comfortably in while waiting to be processed? Why should we treat these persons like human beings when they come to our country where they run drugs, commit murders, and steal our jobs? Let us do as their governments do and process them like cattle, while at the same time collecting their visa application fees, which can contribute to reducing the large trade deficit we have created. As a Jamaican, I have to admit that the Americans may have some justification for saying this.
The patronizing way in which other countries view Jamaicans is of course the fault of our leaders. They are the ones that by their neglect perpetuate the indiscipline in society, which leads to the high crime rate, low literacy rate, poor economic performance, and low per capita income. This in turn forces Jamaicans to seek opportunities overseas but because of the low levels of literacy and indiscipline, they find that the best way to survive is by running drugs, and in the process killing a few people. That is why within the Caribbean, and in countries like little Cayman, we are seen as nuisances, because all we do apart from exporting crime is constantly go begging for assistance.
Encouraging corruption
The system put in place by the US embassy for visa applications is far less than adequate. First of all you apply for an appointment and a time is given to you. But the policeman on the outside shouts out to the Jamaican “cattle” that the time given to you does not mean anything, as even if you have a 7:30 AM appointment you can still go up to 11 AM. The most important thing is that you get inside before they close off for the day. So we have the right ingredients for creating a corrupt system, which may be a perk for the police appointed to the US embassy.
These ingredients are:
1. The police monitor the traffic and can make a determination of who goes to the front of the line. In fact while there I observed a lady pull up in a SUV and speak to a policeman there, in a very jovial manner of course. A healthy looking lady alighted from the car and was ushered to the front of the long line. Someone in the line mentioned that the driver was from a particular Ministry and carried persons there all the time. I asked a policewoman about this and she said that as long as I did not see any money passing then it was okay. Note: I did not bring up the subject of money. She went on to state that if she sees her family or friends she will carry them to the head of the line. Further, the police have the discretion of determining if someone has a valid complaint, such as time constraint, in order to elevate them to the front.
2. People are significantly inconvenienced and it may be cheaper for them to pay some money to go to the head of the line rather than lose 2 to 3 hours of productivity.
3. Appointment times are irrelevant thus creating a chaotic system.
This mix creates an environment where corruption can occur. I am not saying there is corruption but as Jamaicans say if you “rub butter on puss mouth” then what do you expect. Speaking to a policewoman there that someone should report this, her comment was that TVJ has come and other persons have written to the US embassy and their superiors about the problem and nothing has come out of it so she is indifferent about whether anyone wants to complain about it or not as nothing will change. This is the police so is it any wonder that we have a crime problem.
The disregard that politicians have had for Jamaicans is of course a fundamental reason why we are in the current economic situation. Until we realize that the individual is the most important ingredient for growth then we will always be a developing country, and treated as such by others. I am sure that politicians are aware of this type of situation Jamaicans face but is anyone making representation on behalf of Jamaicans. However, in true Third World style we will not vote based on these issues, but rather charisma, curry goat, and a box of beer.
Friday, May 18, 2007
Friday, May 11, 2007
Can Jamaica afford to grow?
At the start of the 2006/7 fiscal year I had indicated that we would not meet the fiscal revenue projections, and that we would fall short by 5 to 10 per cent, with the expectation of a natural disaster.
We ended up short about 5 per cent with no natural disaster. I also indicated during the fiscal year that at best we would be on target with expenditures, which we once again exceeded. I also thought that the fiscal deficit would come out at around 4 per cent, and not the 2.5 per cent projected. We ended up at 5.4 per cent, with J$14 billion of expenditure being put in 2007/8.
These estimations were based primarily on the fact that I did not believe that Jamaica had the capacity to grow at 3 to 4 per cent, and we ended up at around 2.8 per cent. Again, while 3 per cent for 2007/8 is probable, it is not likely, especially if we have a major natural disaster. I say this because I still do not think that we have the capacity to grow at that rate, and also the following factors will be a negative:
. The slowdown in the US economy will negatively affect us, and more importantly the problem in the housing market, although possibly subsiding, will affect discretionary income, which tourism depends on and 75 per cent of our tourists come from North America
Growth in the Latin American region is expected to be lower in the coming year;
. Our tourism sector has seen a slowdown over last year, and I expect that this may continue for a while;
. The cement company indicated that they expected softer cement sales in the last quarter, and this is an indication of a slowdown in construction; and
. Agriculture will not see as phenomenal growth as last year, as we are not recovering from any natural disasters.
With all these factors, it does not seem likely that we will achieve a 3 per cent growth rate.
I see this also in the context of the promises by both political parties that they will find money to finance free health care, education and more money for the police to fight crime. The accusations are that the money cannot be found and that these are mere promises which cannot be sustained. When I hear these comments the first thing I think to myself is, are we thinking logically and this is exactly the reason why we are constantly in this predicament.
It would have made sense to apply that reasoning to the money spent on Cricket World Cup. We do not question expenditure for two months of entertainment but seek to question the proposals by the prime minister and Opposition leader to spend money on health, education, and crime. It seems logical to me that the latter would have a far greater value than cricket.
The logic I apply to this is as follows:
1. If we are to grow at acceptable international rates then we need to have a productive workforce and an adequate social and physical infrastructure;
2. If we are to have a productive workforce and proper infrastructure then we need to have (a) an educated population; (b) a healthy population; and (c) a low crime rate;
3. If we are to achieve these things then we will need to put money into them given the fact that the majority of our people cannot afford it individually;
4. If we do not put money into these sectors then we will not lay the foundation to ensure we are internationally competitive and grow at acceptable rates;
5. If we do not grow at acceptable rates and become competitive then we will sink further into debt and poverty. We may even qualify for debt relief under the IMF's debt relief programme for countries in dire straits, if that is our objective;
6. Therefore, logic dictates that the only option for us is to invest adequate resources in health, education, and fighting crime to move the country forward; and
7. It follows logically then that we must find the resources to do these necessary things, and it may mean reallocating funds or radically reforming the public sector for efficiency. We have tried the route of taxation over the years and it has now reached a point where any further taxation becomes unproductive.
So, based on my reasoning, it is now a matter of how and when the money to finance these areas can be made available, and the longer we wait, while discussing it to death, the worse it becomes. A recent report by the World Bank states that crime costs us 3.7 per cent of GDP. This of course is only the logic of a simple accountant, who could be wrong, but if there is another way, someone please show me.
Customer service deficiencies
Another thing I would like to look at is the level of customer service in this country. Is it that the Jamaican consumers have "exploit me" written all over their foreheads?
Or is it that there is something seriously wrong with our education process and corporate culture? It seems as if everywhere I go there is a problem with customer service, and in many instances the regulators do a poor job in protecting consumer rights. Maybe because they are more concerned with the licensing and other fees they receive than the role they are set up for. I think the fees should go to government and then the government finances the regulators to avoid any conflict, but then again if it goes to government the regulators may not be financed effectively.
Apart from the issues I always write about, I had another problem with a large bank in Jamaica. I have a credit card with them that expired a few months ago. They sent me a new card but I did not activate it, and therefore do not have the use of it.
As far as I am concerned, the contract with the previous card ended and the only way for another contract to come into play is if I sign accepting the card or activate the new one. I did neither. But they sent me a statement with the annual fee for the new card, even though I have not activated it, signed for it, or called them to ask them to send it.
Well, my position is that I will not be paying the fee, will not be activating the card, and I would love to see if they are going to charge me penalty and interest on the annual fee, which another bank has done with me already, even though they were the ones that sent me a card I had not asked for. Each time I receive the statement I throw it in the garbage, so I guess the balance is very significant now, as it has been going on for almost two years. But I did not ask for a card to be sent to me.
I am sure that this practice is happening to anyone who is part of a mailing list the banks have access to, and the regulators may be aware of this. But is anything being done about it? I wonder about the poor consumer who is intimidated by this tactic and ends up paying the money because of a fear of not being on their receivables listing. Personally, I will not succumb to any financial institution that tries to hold me up and take away my money because they have failed to properly manage their balance sheets and are now prey to falling interest rates.
We ended up short about 5 per cent with no natural disaster. I also indicated during the fiscal year that at best we would be on target with expenditures, which we once again exceeded. I also thought that the fiscal deficit would come out at around 4 per cent, and not the 2.5 per cent projected. We ended up at 5.4 per cent, with J$14 billion of expenditure being put in 2007/8.
These estimations were based primarily on the fact that I did not believe that Jamaica had the capacity to grow at 3 to 4 per cent, and we ended up at around 2.8 per cent. Again, while 3 per cent for 2007/8 is probable, it is not likely, especially if we have a major natural disaster. I say this because I still do not think that we have the capacity to grow at that rate, and also the following factors will be a negative:
. The slowdown in the US economy will negatively affect us, and more importantly the problem in the housing market, although possibly subsiding, will affect discretionary income, which tourism depends on and 75 per cent of our tourists come from North America
Growth in the Latin American region is expected to be lower in the coming year;
. Our tourism sector has seen a slowdown over last year, and I expect that this may continue for a while;
. The cement company indicated that they expected softer cement sales in the last quarter, and this is an indication of a slowdown in construction; and
. Agriculture will not see as phenomenal growth as last year, as we are not recovering from any natural disasters.
With all these factors, it does not seem likely that we will achieve a 3 per cent growth rate.
I see this also in the context of the promises by both political parties that they will find money to finance free health care, education and more money for the police to fight crime. The accusations are that the money cannot be found and that these are mere promises which cannot be sustained. When I hear these comments the first thing I think to myself is, are we thinking logically and this is exactly the reason why we are constantly in this predicament.
It would have made sense to apply that reasoning to the money spent on Cricket World Cup. We do not question expenditure for two months of entertainment but seek to question the proposals by the prime minister and Opposition leader to spend money on health, education, and crime. It seems logical to me that the latter would have a far greater value than cricket.
The logic I apply to this is as follows:
1. If we are to grow at acceptable international rates then we need to have a productive workforce and an adequate social and physical infrastructure;
2. If we are to have a productive workforce and proper infrastructure then we need to have (a) an educated population; (b) a healthy population; and (c) a low crime rate;
3. If we are to achieve these things then we will need to put money into them given the fact that the majority of our people cannot afford it individually;
4. If we do not put money into these sectors then we will not lay the foundation to ensure we are internationally competitive and grow at acceptable rates;
5. If we do not grow at acceptable rates and become competitive then we will sink further into debt and poverty. We may even qualify for debt relief under the IMF's debt relief programme for countries in dire straits, if that is our objective;
6. Therefore, logic dictates that the only option for us is to invest adequate resources in health, education, and fighting crime to move the country forward; and
7. It follows logically then that we must find the resources to do these necessary things, and it may mean reallocating funds or radically reforming the public sector for efficiency. We have tried the route of taxation over the years and it has now reached a point where any further taxation becomes unproductive.
So, based on my reasoning, it is now a matter of how and when the money to finance these areas can be made available, and the longer we wait, while discussing it to death, the worse it becomes. A recent report by the World Bank states that crime costs us 3.7 per cent of GDP. This of course is only the logic of a simple accountant, who could be wrong, but if there is another way, someone please show me.
Customer service deficiencies
Another thing I would like to look at is the level of customer service in this country. Is it that the Jamaican consumers have "exploit me" written all over their foreheads?
Or is it that there is something seriously wrong with our education process and corporate culture? It seems as if everywhere I go there is a problem with customer service, and in many instances the regulators do a poor job in protecting consumer rights. Maybe because they are more concerned with the licensing and other fees they receive than the role they are set up for. I think the fees should go to government and then the government finances the regulators to avoid any conflict, but then again if it goes to government the regulators may not be financed effectively.
Apart from the issues I always write about, I had another problem with a large bank in Jamaica. I have a credit card with them that expired a few months ago. They sent me a new card but I did not activate it, and therefore do not have the use of it.
As far as I am concerned, the contract with the previous card ended and the only way for another contract to come into play is if I sign accepting the card or activate the new one. I did neither. But they sent me a statement with the annual fee for the new card, even though I have not activated it, signed for it, or called them to ask them to send it.
Well, my position is that I will not be paying the fee, will not be activating the card, and I would love to see if they are going to charge me penalty and interest on the annual fee, which another bank has done with me already, even though they were the ones that sent me a card I had not asked for. Each time I receive the statement I throw it in the garbage, so I guess the balance is very significant now, as it has been going on for almost two years. But I did not ask for a card to be sent to me.
I am sure that this practice is happening to anyone who is part of a mailing list the banks have access to, and the regulators may be aware of this. But is anything being done about it? I wonder about the poor consumer who is intimidated by this tactic and ends up paying the money because of a fear of not being on their receivables listing. Personally, I will not succumb to any financial institution that tries to hold me up and take away my money because they have failed to properly manage their balance sheets and are now prey to falling interest rates.
Friday, May 04, 2007
What is the budget's role?
At the Observer Business Leader Awards, 'Butch' Stewart spoke to one of the main issues affecting the economy - the need for a friendly business environment. He commented that in his business exploits throughout the Caribbean, Jamaica was the least friendly in terms of business. I would be a lot more inclined to believe comments about the business climate from a business person, such as Butch Stewart, than those from any multilateral agency or government official, many of whom had never had to contend with the business environment they have created.
One point of note is the need for greater tax compliance, which very importantly must be accompanied by tax reform. The government is now trying to rope in the estimated 40 per cent of the informal economy, which by their own policies they have assisted greatly to create. But while much greater tax compliance is extremely important, it is also essential that it be handled correctly for the protection of the economy. I say this because if tax administration does not take care in bringing the informal sector into the tax net, it could create a whole lot of judgements for tax payments and end up destroying many of the businesses. In other words, if 50 per cent of the informal economy shuts down because of stringent compliance measures, then we could end up losing 20 per cent of businesses (50 per cent of 40 per cent of the informal economy).
I recently had an experience where in trying to assist a small business to get compliant, I called the tax authorities and outlined the following situation: this person was in a bad way with all tax issues and wanted to make everything right. In order to do so, of course, he would need income and so I asked what needed to be done to bring this company into compliance while at the same time issuing a conditional clearance to allow them to proceed with business, while the compliance steps are being taken. Of course the "business-friendly" tax person said he was not willing to discuss any forward movement until certain filings were done. By this time of course the business may have to shut down, resulting in lost employment and economic activity. But the surprise of course would have been if the response was, "Sure, we can have this done within X timeframe if X is done."
Budget process
This brings me to the budgetary process. If the budget can be presented with no consideration of strategic direction, and policies on how we intend to move this country forward, then what could I expect from a public sector employee? The key to not being disappointed with government services is to have no expectations.
Almost every commentator on the budget, including myself, believes that the process lacks any policy direction for the country. In fact, the budgetary process has turned into a grand waste of time that slows down business activity for approximately two months every year, while we ponder our fate based on what the finance minister has to reveal. If the minister is kind enough not to introduce any new taxes, then we scamper back to our businesses to see if we can eke out profits for another year. If, on the other hand, the tax package and the increased debt burden cause us too much strain then we go back to see if it is beneficial to close down, given the high cost of redundancy and other closing costs. At the end of the main budget debate, who can say that they feel energised and enthused about the plans we have for the development of the country? If there is anyone out there who feels this way, please contact me and give me hope, because I do not feel that we have achieved anything from the budgetary process except some giveaways, although we have said that we have no money.
The budget process needs a major overhaul. Every company that aims to survive in a competitive world (not just make money from government paper) goes through a constant process of reinventing itself. This takes the form of looking at the business processes (internal and external) and conforming to what will add greatest value to the company. We also need to take a serious look at our budget process, which is certainly not geared towards developmental activities, but rather at balancing revenues with expenses.
Strategic plan needed
What we need is a focus on a wholesome strategic plan, supported by the budget, and not the budget setting the stage for policy objectives. Wouldn't it make more sense to have the sectoral debate as the main part of the budget and then the presentation by the finance minister as the support, advising how these policy objectives are to be financed? So then the security, education, and health ministers would present their policy directions to the nation, after a strategic process where the various sectors justify the value-added of their expenditures to the finance ministry. After these debates the finance minister would present to the nation how these plans are to be financed. But much is always made of the expenditure and revenue estimates, which without the policy directions are meaningless numbers.
So at the end of the main budget presentations this year, the conversations are not about the relevance of the development plans presented (because there were none), but rather the discussions focused on (1) How are the various promises to be justified? (2) What level will the debt end up at? (3) What will the fiscal deficit end up at? (4) How much money did Mirant get for the sale of JPS? (5) What was the response of the multilateral agencies in respect of borrowings? (6) Who did what, when and where?
Is this the best that we can do after 45 years of political independence? In a time when the world is celebrating growth rates of 5 per cent and above and our neighbours show growth rates of 9 and 10 per cent, we are ecstatic with 2.5 per cent. And, as if to show our complacency with this anaemic growth rate, we present a budget that provides no direction on how we will move forward with the development of Jamaica. So we do not know what the specific plans are to consistently achieve world-class growth rates and create the environment needed for greater private sector investments.
My hope continues to be that the sectoral debate will provide some greater insight as to how we will address problems such as crime, education and health. And these policies need to be credible and not just commitments made that are not kept. We need to know how we intend to restore the public's trust in our institutions, such as the courts and police force. We need to know what we intend to do about public entities such as Air Jamaica, SCJ, and JUTC which every year remain an increasing burden on the country's resources, without any light at the end of the tunnel.
The role of the annual budget should be about providing not only an update on the state of the economy, but what the plans are for moving the country forward. If at the end of the budget the objectives are not met, then the sectors with responsibility for policy, and the prime minister ultimately, should be held accountable by the opposition and the people for any failures. Until we get to this stage, then the annual budget will be nothing more than a ceremony of parading the latest outfits and a bunch of meaningless numbers being bandied about.
One point of note is the need for greater tax compliance, which very importantly must be accompanied by tax reform. The government is now trying to rope in the estimated 40 per cent of the informal economy, which by their own policies they have assisted greatly to create. But while much greater tax compliance is extremely important, it is also essential that it be handled correctly for the protection of the economy. I say this because if tax administration does not take care in bringing the informal sector into the tax net, it could create a whole lot of judgements for tax payments and end up destroying many of the businesses. In other words, if 50 per cent of the informal economy shuts down because of stringent compliance measures, then we could end up losing 20 per cent of businesses (50 per cent of 40 per cent of the informal economy).
I recently had an experience where in trying to assist a small business to get compliant, I called the tax authorities and outlined the following situation: this person was in a bad way with all tax issues and wanted to make everything right. In order to do so, of course, he would need income and so I asked what needed to be done to bring this company into compliance while at the same time issuing a conditional clearance to allow them to proceed with business, while the compliance steps are being taken. Of course the "business-friendly" tax person said he was not willing to discuss any forward movement until certain filings were done. By this time of course the business may have to shut down, resulting in lost employment and economic activity. But the surprise of course would have been if the response was, "Sure, we can have this done within X timeframe if X is done."
Budget process
This brings me to the budgetary process. If the budget can be presented with no consideration of strategic direction, and policies on how we intend to move this country forward, then what could I expect from a public sector employee? The key to not being disappointed with government services is to have no expectations.
Almost every commentator on the budget, including myself, believes that the process lacks any policy direction for the country. In fact, the budgetary process has turned into a grand waste of time that slows down business activity for approximately two months every year, while we ponder our fate based on what the finance minister has to reveal. If the minister is kind enough not to introduce any new taxes, then we scamper back to our businesses to see if we can eke out profits for another year. If, on the other hand, the tax package and the increased debt burden cause us too much strain then we go back to see if it is beneficial to close down, given the high cost of redundancy and other closing costs. At the end of the main budget debate, who can say that they feel energised and enthused about the plans we have for the development of the country? If there is anyone out there who feels this way, please contact me and give me hope, because I do not feel that we have achieved anything from the budgetary process except some giveaways, although we have said that we have no money.
The budget process needs a major overhaul. Every company that aims to survive in a competitive world (not just make money from government paper) goes through a constant process of reinventing itself. This takes the form of looking at the business processes (internal and external) and conforming to what will add greatest value to the company. We also need to take a serious look at our budget process, which is certainly not geared towards developmental activities, but rather at balancing revenues with expenses.
Strategic plan needed
What we need is a focus on a wholesome strategic plan, supported by the budget, and not the budget setting the stage for policy objectives. Wouldn't it make more sense to have the sectoral debate as the main part of the budget and then the presentation by the finance minister as the support, advising how these policy objectives are to be financed? So then the security, education, and health ministers would present their policy directions to the nation, after a strategic process where the various sectors justify the value-added of their expenditures to the finance ministry. After these debates the finance minister would present to the nation how these plans are to be financed. But much is always made of the expenditure and revenue estimates, which without the policy directions are meaningless numbers.
So at the end of the main budget presentations this year, the conversations are not about the relevance of the development plans presented (because there were none), but rather the discussions focused on (1) How are the various promises to be justified? (2) What level will the debt end up at? (3) What will the fiscal deficit end up at? (4) How much money did Mirant get for the sale of JPS? (5) What was the response of the multilateral agencies in respect of borrowings? (6) Who did what, when and where?
Is this the best that we can do after 45 years of political independence? In a time when the world is celebrating growth rates of 5 per cent and above and our neighbours show growth rates of 9 and 10 per cent, we are ecstatic with 2.5 per cent. And, as if to show our complacency with this anaemic growth rate, we present a budget that provides no direction on how we will move forward with the development of Jamaica. So we do not know what the specific plans are to consistently achieve world-class growth rates and create the environment needed for greater private sector investments.
My hope continues to be that the sectoral debate will provide some greater insight as to how we will address problems such as crime, education and health. And these policies need to be credible and not just commitments made that are not kept. We need to know how we intend to restore the public's trust in our institutions, such as the courts and police force. We need to know what we intend to do about public entities such as Air Jamaica, SCJ, and JUTC which every year remain an increasing burden on the country's resources, without any light at the end of the tunnel.
The role of the annual budget should be about providing not only an update on the state of the economy, but what the plans are for moving the country forward. If at the end of the budget the objectives are not met, then the sectors with responsibility for policy, and the prime minister ultimately, should be held accountable by the opposition and the people for any failures. Until we get to this stage, then the annual budget will be nothing more than a ceremony of parading the latest outfits and a bunch of meaningless numbers being bandied about.
Friday, April 27, 2007
Globalization and devaluation
Over the past few weeks, two significant events have happened in the global market. The first is that the US dollar has weakened considerably against major currencies, reaching record lows against the Sterling and Euro, and secondly the Dow Jones Industrial Index (DJIA) passed 13,000 for the first time. The US economy has also been steadily weakening as a result of the housing problems.
The record level of the DJIA is supported by strong earnings growth of listed US companies despite a weakening US economy. As expected under economic theory the devaluation of the US dollar has led to greater earnings for US companies, as US produced goods have got relatively cheaper, and Europeans have been buying goods in the US. What this means is that US companies sell more goods, as a result of the devaluation, thereby increasing revenues and earnings. Costs would not have been impacted at the same pace as revenue increases.
Jamaica’s uniqueness
In Jamaica, however, we have found that devaluations have not been supported by greater export earnings. In fact the data between 2002 and 2006 shown in the graph, illustrates that export has not grown at the same rate as devaluations. The data shows that even when we have had significant devaluations this is not necessarily followed by strong export growth. Similarly, 2006 showed a strong growth in exports but the rate of devaluation was relatively low.
The question then is why countries such as the US show a close link between devaluations and exports. Additionally, why does the US show strong earnings report when the US economy is showing signs of slow down? In contrast, when the Jamaican economy shows signs of weakness it affects corporate profits. In Jamaica we have seen in 2006 that export of goods have grown 27.2% (US$453M) but the trade deficit widened by 14.1% (US$816.6M) as a result of imports growing at a faster absolute pace than exports, 19.2% (US$816.6M). This trend is a continuation of 2005, where imports grew by US$699.5M while exports grew at US$62.7M, resulting in the trade deficit widening by US$636.8M.
This was not the case in 2004, when imports and exports grew at the same absolute amount thus leaving the trade deficit unchanged. It is relevant to note though that between 2001 and 2006 the trade deficit has continually worsened, moving from US$1,618.2M to US$2,944.9M (82% decline) over the period. This in my opinion is the real number to focus on, when we are discussing growth, and not just the growth in the GDP number. This is the real reason for the massive increase in our debt even though we are celebrating growth. In other words, the economy grew by 2.8% in 2006 but at the same time we saw devaluation of just under 5% and the trade deficit worsened by US$363.6M. The question then is (1) how can this occur when we have recorded the highest growth rate in over a decade; and (2) what has caused this disparity between growth and a worsening trade deficit. After all one would expect that if one’s income grows then you should be able to have greater savings not find yourself in deeper debt.
High import content
The answer to this question is the reason why (1) US companies show greater earnings when there is devaluation and the US economy is weakening; (2) why we do not benefit from devaluation; and (3) our debt level is climbing despite growth. The problem is that our economy and major companies are not geared towards export, but rather relies heavily on the internal market. In addition, much of our goods and services produced are composed of a high import content, so that the more we produce the more we import. So even though the percentage increase in exports is higher than that of imports, imports outweigh exports by such a high amount that even a smaller percentage increase is much greater than the absolute increase in exports.
Additionally, what this points to is the fact that our economic growth is not being facilitated primarily by domestic input but by imports. Thus when the Jamaican economy is vibrant, and real growth experienced, based on the present arrangements of our production input factors, the growth we experience actually causes us more pain in the long run. For this reason when we grow we actually have increases in debt, as in order to grow we need to borrow more money to facilitate the widening trade deficit. This is the situation we face that can only be changed with proper strategic planning to ensure that we not only grow but replace foreign inputs with local ones.
In the US we find that companies are doing better as a result of the strong growth experienced globally. US companies are net exporters, that is local inputs are greater than any foreign inputs. So while they grow because of increased net earnings we grow in Jamaica as a result of increased borrowing to finance foreign inputs. Therefore, if we were to re-organize our production inputs we would find that we can positively affect our devaluation issues as well as the debt problem in the long term.
In order to do this we must look at the trade numbers and identify areas where we are deficient and develop strategic policies to address them. When one looks at the trade data, it shows that the greatest opportunities lie in the areas of food, mineral fuels, chemicals, manufactured goods, and machinery & transport equipment, which shows exports being less than imports by US$380M, US$1,491M, US$606M, US$682M, and US$1,108M respectively. Further analysis of course needs to be done in these areas to determine what value added the imports bring to the country but these areas should be the catalysts for developing a national policy for growth. This should be with a view to ensuring that growth is not merely accrue from borrowing money to encourage greater expenditure but real growth of Jamaican inputs. The area of fuels stands out, and shows the importance of developing a sound energy policy and transportation system that reduces the amount of fuel consumption. If we can achieve this then we can also address the problem of unemployment and real per capita income growth.
The data therefore shows that even though we had growth of 2.8%, the benefits of this growth is going to be short lived unless we can go further to develop our local inputs for inclusion in the growth of the economy, replacing imported inputs. This is no different from living a lifestyle of luxury off borrowed funds. In the short run growth in personal assets are possible from debt, but over the long term the debt has to be repaid.
The record level of the DJIA is supported by strong earnings growth of listed US companies despite a weakening US economy. As expected under economic theory the devaluation of the US dollar has led to greater earnings for US companies, as US produced goods have got relatively cheaper, and Europeans have been buying goods in the US. What this means is that US companies sell more goods, as a result of the devaluation, thereby increasing revenues and earnings. Costs would not have been impacted at the same pace as revenue increases.
Jamaica’s uniqueness
In Jamaica, however, we have found that devaluations have not been supported by greater export earnings. In fact the data between 2002 and 2006 shown in the graph, illustrates that export has not grown at the same rate as devaluations. The data shows that even when we have had significant devaluations this is not necessarily followed by strong export growth. Similarly, 2006 showed a strong growth in exports but the rate of devaluation was relatively low.
The question then is why countries such as the US show a close link between devaluations and exports. Additionally, why does the US show strong earnings report when the US economy is showing signs of slow down? In contrast, when the Jamaican economy shows signs of weakness it affects corporate profits. In Jamaica we have seen in 2006 that export of goods have grown 27.2% (US$453M) but the trade deficit widened by 14.1% (US$816.6M) as a result of imports growing at a faster absolute pace than exports, 19.2% (US$816.6M). This trend is a continuation of 2005, where imports grew by US$699.5M while exports grew at US$62.7M, resulting in the trade deficit widening by US$636.8M.
This was not the case in 2004, when imports and exports grew at the same absolute amount thus leaving the trade deficit unchanged. It is relevant to note though that between 2001 and 2006 the trade deficit has continually worsened, moving from US$1,618.2M to US$2,944.9M (82% decline) over the period. This in my opinion is the real number to focus on, when we are discussing growth, and not just the growth in the GDP number. This is the real reason for the massive increase in our debt even though we are celebrating growth. In other words, the economy grew by 2.8% in 2006 but at the same time we saw devaluation of just under 5% and the trade deficit worsened by US$363.6M. The question then is (1) how can this occur when we have recorded the highest growth rate in over a decade; and (2) what has caused this disparity between growth and a worsening trade deficit. After all one would expect that if one’s income grows then you should be able to have greater savings not find yourself in deeper debt.
High import content
The answer to this question is the reason why (1) US companies show greater earnings when there is devaluation and the US economy is weakening; (2) why we do not benefit from devaluation; and (3) our debt level is climbing despite growth. The problem is that our economy and major companies are not geared towards export, but rather relies heavily on the internal market. In addition, much of our goods and services produced are composed of a high import content, so that the more we produce the more we import. So even though the percentage increase in exports is higher than that of imports, imports outweigh exports by such a high amount that even a smaller percentage increase is much greater than the absolute increase in exports.
Additionally, what this points to is the fact that our economic growth is not being facilitated primarily by domestic input but by imports. Thus when the Jamaican economy is vibrant, and real growth experienced, based on the present arrangements of our production input factors, the growth we experience actually causes us more pain in the long run. For this reason when we grow we actually have increases in debt, as in order to grow we need to borrow more money to facilitate the widening trade deficit. This is the situation we face that can only be changed with proper strategic planning to ensure that we not only grow but replace foreign inputs with local ones.
In the US we find that companies are doing better as a result of the strong growth experienced globally. US companies are net exporters, that is local inputs are greater than any foreign inputs. So while they grow because of increased net earnings we grow in Jamaica as a result of increased borrowing to finance foreign inputs. Therefore, if we were to re-organize our production inputs we would find that we can positively affect our devaluation issues as well as the debt problem in the long term.
In order to do this we must look at the trade numbers and identify areas where we are deficient and develop strategic policies to address them. When one looks at the trade data, it shows that the greatest opportunities lie in the areas of food, mineral fuels, chemicals, manufactured goods, and machinery & transport equipment, which shows exports being less than imports by US$380M, US$1,491M, US$606M, US$682M, and US$1,108M respectively. Further analysis of course needs to be done in these areas to determine what value added the imports bring to the country but these areas should be the catalysts for developing a national policy for growth. This should be with a view to ensuring that growth is not merely accrue from borrowing money to encourage greater expenditure but real growth of Jamaican inputs. The area of fuels stands out, and shows the importance of developing a sound energy policy and transportation system that reduces the amount of fuel consumption. If we can achieve this then we can also address the problem of unemployment and real per capita income growth.
The data therefore shows that even though we had growth of 2.8%, the benefits of this growth is going to be short lived unless we can go further to develop our local inputs for inclusion in the growth of the economy, replacing imported inputs. This is no different from living a lifestyle of luxury off borrowed funds. In the short run growth in personal assets are possible from debt, but over the long term the debt has to be repaid.
Balancing numbers and lives
Last week two significant events happened in my space. The revenue budget was presented and I attended the funeral of a young man cut down at the start of his life. This young man of course is just one of hundreds killed each year by either gunmen or the police. He was a very hard worker and very enthused about developing a productive life through his entrepreneurial assets. His crime, like many others, was being in the wrong place at the wrong time.
The day before the funeral the Finance Minister presented the revenue estimates, a part of the overall budget, which has earned the reputation of being a meaningless set of numbers in a big book each year. Meaningless because the budget does not seem to support any development objective and is really ignored when more expenditure or new taxes are needed. In fact the real budget comes at the end of the budget year, which is the supplementary estimate.
The presentation by the Finance minister, I think was good, as he seemed to identify all the issues that affect us, but in terms of anything in the budget to engage discussion about a development path forward, non-existent. His budget presentation was nothing short of a statement that it is recognized that an election is in the air and until it is over with we will be doing nothing. But even more important the budget process does not support any objective to improve the daily living conditions of Jamaicans and in particular prevent the lives of ambitious young Jamaicans from being snuffed out. Mr. Shaw’s presentation did provide some insight as to major policy actions that would be adopted by the JLP, and I am hoping to see further development of these ideas as promised to be revealed in the manifesto.
Numbers Game
While the annual budget is a numbers game, displaying the balancing skills of government, the same cannot be said about the balancing of people’s lives. So while on the one hand we argue about one or two percentage points in GDP growth or inflation, or what the debt/GDP ratio is, the lives of Jamaicans are not improving relative to the rest of the world, which is experiencing phenomenal growth. And improvement does not mean borrowing money to buy a second hand car or answering two cell phones at once. Improving people’s lives means significant improvements in per capita income; proper physical infrastructures, such as secure bridges and roads; readily being able to access health services, not having to appeal to the public for assistance on the nightly news; being able to walk or drive without wondering if you are going to be cut down by gunmen or abused by police. A better GDP or inflation number this year, over last year, means nothing if we cannot relate this to better living conditions.
If the government was thinking ahead instead of just implementing additional taxes on cigarettes, wouldn’t it be in the best interest of Jamaicans, and the health system also, to ban smoking in public places, as developed countries have done. Is it more important to earn immediate revenues or look at the future effects of smoking? This logic is difficult to understand, just as I find it hard to comprehend how an intelligent person sees clearly marked in large letters on a cigarette box “SMOKING KILLS” and still lights up. I think the next tax to be dreamt up is the one on noise pollution. Instead of banning loud playing of music in public places, the government will one day place a tax on people who play music. This is the only reason why I can imagine this public nuisance, and lack of public order, continues unabated.
Clearly though there are really no new ideas in the budget and what was not included is more important for comment. For years now there has been a call for significant tax reform, and this was recommended by the Matalon report over two years ago, which has been condemned to a life of dust and shelves in the good company of many similar reports. As usual though we have been thrown a bone in the form of the expected consolidation of payroll taxes. I applaud this effort although long overdue but as servants we must not be ungrateful and ask for more.
The budget also included another provision for the allocation of funds for small businesses. The comment I would have here is “what’s new?” The minister also suggested to financial institutions that the interest spreads were too wide and needed to be narrowed thereby joining the prestigious club that tries to reduce interest rates through moral suasion. Of course another way to do this is to fix the business environment and stick to fiscal targets, thus moderating government’s need for debt, which will (1) force commercial banks to lend money to businesses; and (2) reduce interest rates through competition.
Elusive growth
Growth is projected at 3% for 2007/08, and while achievable will be difficult. This depends on crime levels (still number one priority after years) and two factors beyond our control, the US economy and hurricane season. While we have provided $5.8 Billion more in the expenditures for disaster management we have not considered any contingencies for hurricanes in the growth or inflation estimates. It is apparent now also that the US economy is weakening, caused by a worse than expected housing market.
The minister seems to have indicated though that the need for debt will not be reduced anytime soon. In fact the budget calls for an incremental $37 Billion in debt next year, which means that we will be much closer to the $1 trillion mark. The debt level is the only record we break more times in a year than Asafa Powell breaks his record. In 2006/07 the fiscal deficit was 5.4% of GDP, a far cry from the 2.5% originally projected, and in 2007/08 is projected to be 4.5%.
For this reason Bear Sterns has considered it necessary to downgrade our bonds from market perform to under perform. The logical flow from this of course is that GOJ bond prices could fall. If prices fall then yields increase. If yields increase then it means to attract new debt interest rates will have to increase. If so then how likely will it be that interest spreads will fall? It may be a little more difficult.
If bond prices fall then financial institutions will be impacted as we now use International Accounting Standards, which calls for financial instruments to be valued at market. We also know that some of these companies have eliminated the Held to Maturity classification, thus the reduced valuations would have to be shown in equity or profits. Trading gains could go down at a time when reduced interest rates are impacting profits. The biggest sector on the stock exchange listing is financial stocks, so go figure.
This scenario of course may not play out as I am sure that business persons in the financial sector are very astute and will ensure they are protected from this but it illustrates the link between the budget process and the entire economy. So when we present a budget that does not speak to the development objectives it puts everything on stand still. As an optimist, however, I am convinced that the budget process will see a clearly defined path for development when the other contributions are made and all my fears will be laid to rest.
So while the Finance minister has laid the blueprint for the policy, by identifying the major policy issues, I expect that these will be developed and at the end of the budget presentations we will have a clearly defined plan for balancing people’s lives, and we will live happily ever after.
The day before the funeral the Finance Minister presented the revenue estimates, a part of the overall budget, which has earned the reputation of being a meaningless set of numbers in a big book each year. Meaningless because the budget does not seem to support any development objective and is really ignored when more expenditure or new taxes are needed. In fact the real budget comes at the end of the budget year, which is the supplementary estimate.
The presentation by the Finance minister, I think was good, as he seemed to identify all the issues that affect us, but in terms of anything in the budget to engage discussion about a development path forward, non-existent. His budget presentation was nothing short of a statement that it is recognized that an election is in the air and until it is over with we will be doing nothing. But even more important the budget process does not support any objective to improve the daily living conditions of Jamaicans and in particular prevent the lives of ambitious young Jamaicans from being snuffed out. Mr. Shaw’s presentation did provide some insight as to major policy actions that would be adopted by the JLP, and I am hoping to see further development of these ideas as promised to be revealed in the manifesto.
Numbers Game
While the annual budget is a numbers game, displaying the balancing skills of government, the same cannot be said about the balancing of people’s lives. So while on the one hand we argue about one or two percentage points in GDP growth or inflation, or what the debt/GDP ratio is, the lives of Jamaicans are not improving relative to the rest of the world, which is experiencing phenomenal growth. And improvement does not mean borrowing money to buy a second hand car or answering two cell phones at once. Improving people’s lives means significant improvements in per capita income; proper physical infrastructures, such as secure bridges and roads; readily being able to access health services, not having to appeal to the public for assistance on the nightly news; being able to walk or drive without wondering if you are going to be cut down by gunmen or abused by police. A better GDP or inflation number this year, over last year, means nothing if we cannot relate this to better living conditions.
If the government was thinking ahead instead of just implementing additional taxes on cigarettes, wouldn’t it be in the best interest of Jamaicans, and the health system also, to ban smoking in public places, as developed countries have done. Is it more important to earn immediate revenues or look at the future effects of smoking? This logic is difficult to understand, just as I find it hard to comprehend how an intelligent person sees clearly marked in large letters on a cigarette box “SMOKING KILLS” and still lights up. I think the next tax to be dreamt up is the one on noise pollution. Instead of banning loud playing of music in public places, the government will one day place a tax on people who play music. This is the only reason why I can imagine this public nuisance, and lack of public order, continues unabated.
Clearly though there are really no new ideas in the budget and what was not included is more important for comment. For years now there has been a call for significant tax reform, and this was recommended by the Matalon report over two years ago, which has been condemned to a life of dust and shelves in the good company of many similar reports. As usual though we have been thrown a bone in the form of the expected consolidation of payroll taxes. I applaud this effort although long overdue but as servants we must not be ungrateful and ask for more.
The budget also included another provision for the allocation of funds for small businesses. The comment I would have here is “what’s new?” The minister also suggested to financial institutions that the interest spreads were too wide and needed to be narrowed thereby joining the prestigious club that tries to reduce interest rates through moral suasion. Of course another way to do this is to fix the business environment and stick to fiscal targets, thus moderating government’s need for debt, which will (1) force commercial banks to lend money to businesses; and (2) reduce interest rates through competition.
Elusive growth
Growth is projected at 3% for 2007/08, and while achievable will be difficult. This depends on crime levels (still number one priority after years) and two factors beyond our control, the US economy and hurricane season. While we have provided $5.8 Billion more in the expenditures for disaster management we have not considered any contingencies for hurricanes in the growth or inflation estimates. It is apparent now also that the US economy is weakening, caused by a worse than expected housing market.
The minister seems to have indicated though that the need for debt will not be reduced anytime soon. In fact the budget calls for an incremental $37 Billion in debt next year, which means that we will be much closer to the $1 trillion mark. The debt level is the only record we break more times in a year than Asafa Powell breaks his record. In 2006/07 the fiscal deficit was 5.4% of GDP, a far cry from the 2.5% originally projected, and in 2007/08 is projected to be 4.5%.
For this reason Bear Sterns has considered it necessary to downgrade our bonds from market perform to under perform. The logical flow from this of course is that GOJ bond prices could fall. If prices fall then yields increase. If yields increase then it means to attract new debt interest rates will have to increase. If so then how likely will it be that interest spreads will fall? It may be a little more difficult.
If bond prices fall then financial institutions will be impacted as we now use International Accounting Standards, which calls for financial instruments to be valued at market. We also know that some of these companies have eliminated the Held to Maturity classification, thus the reduced valuations would have to be shown in equity or profits. Trading gains could go down at a time when reduced interest rates are impacting profits. The biggest sector on the stock exchange listing is financial stocks, so go figure.
This scenario of course may not play out as I am sure that business persons in the financial sector are very astute and will ensure they are protected from this but it illustrates the link between the budget process and the entire economy. So when we present a budget that does not speak to the development objectives it puts everything on stand still. As an optimist, however, I am convinced that the budget process will see a clearly defined path for development when the other contributions are made and all my fears will be laid to rest.
So while the Finance minister has laid the blueprint for the policy, by identifying the major policy issues, I expect that these will be developed and at the end of the budget presentations we will have a clearly defined plan for balancing people’s lives, and we will live happily ever after.
Monday, April 16, 2007
Children of a lesser God
The first thought about what to write this week was of course the budget, as everyone else has done. In fact I was preparing to do so, as the expenditure estimates do need some further explanation. At the time of writing the revenue estimates have not yet been presented and so would not have been a focus.
The question as to what I should comment on though was answered on Easter Sunday while at the gas station. While there I saw a young boy, aged 10, trying to sell some sweets. I called him and started to question him about where his mother was and why at his age he was on the street and not at home studying. He indicated to me that his mother was very sick and that he had to sell the sweets in order to be able to go to school the following week. I gave him some money and told him to make sure he keeps out of trouble knowing too well that this is just one of many such children who are victims of the violent culture of the streets.
I have always had a lot of respect for Andrew Holness but cannot support any call for locking up parents for wrongs done by their children. I believe they should have some civil responsibility but not criminal. Any such action would be panic management, which is one of the worst things that you can do in a crisis. Where would we stop though? Should we also lock up the child services officers that are supposed to see to the welfare of children?
This I thought was more important to comment on than a group of rowdy parliamentarians presenting and arguing over some numbers. I might add numbers that really have no meaning, as it is only presented to appease government creditors and the populace into feeling good that government is spending some money or didn’t impose any new taxes this year. Don’t get me wrong, the budget process is important from the point of view that it provides us with insight as to how the economy may be impacted but really and truly does not provide any strategic direction.
Wrong approach
This though is the way we approach many things we do, both in the public and private sectors, but more so in government because there is no market to keep them in check. Every year we go through the budget process it seems to be an exercise in balancing the books rather than used as a tool to develop the long term strategic objectives of the country, like our tax policies, but then again it does not seem as if we have any strategies at all. So because of this lack of vision for our country we have situations like that little boy who has to be on the streets at the age of 10 selling sweets in order to go to school the next week. Because of the lack of vision the nightly news always seems to have an appeal from some poor person, who cannot afford medication to save their life, appealing to the public. Instead of spending money on improving people’s lives so that we can have greater productivity, however, we find it more important to build expensive stadiums and then figure out what to do with them.
The fact is that even after we have agreed on the budget, and determine that it is the best we can do in the circumstances, what will be the result? We will as usual come with a massive supplementary estimate because the budget numbers were not practical. We will continue to spend massive amounts on off-budget expenditures such as Air Jamaica, SCJ, and JUTC, and at the end of the year we will be told what amounts were spent. We will continue to borrow more money above the projected loan receipts, resulting in the poor people having to forgo another year of basic social services. We will continue to spend the money on so called legacy investments such as the Trelawny multi-purpose stadium while people in Jamaica cry out for running water.
So at the end of the day I ask, what is the sense of creating budgets and us analysts wasting time on them if it does not guide our strategic decisions and we do not maintain fiscal discipline. It seems that proper planning is not only a Jamaican issue but extends to the Caribbean. How can the politicians in CARICOM now be saying that the organizing committee for cricket did not negotiate the terms of the host agreement correctly?
How can we now be saying, US$400 million later, that we negotiated incorrectly and gave the ICC most of the revenues? What happened to the enthusiasm with which the politicians applauded the world cup efforts while enjoying the luxuries of the opening ceremony at the expense of Jamaica’s poor? The organizers will no doubt have to bear the brunt of the criticisms though as it is obvious that there was not much consideration given to the economic environment when setting ticket prices, which I believe to be the main inhibition to greater attendance.
No proactivity
As usual though we do not proactively deal with issues for fear that we may offend a party supporter, or in the case of a company, an employee. Never worry that the cost of delaying any action is always going to be greater to the country, or company, in the long run. The West Indies cricket team, for example, proved that they are no longer in the top cricketing teams. This is actually no surprise because who in their right mind would have thought that they would have won the world cup. But even though we have known of the weakness of the team, for years we continue to blame the players. If the players for years continue to show poor results, is the problem with the players or the administration. Unless we deal with the persons running cricket then we will get no better.
It seems obvious to me that Jamaicans are children of a lesser God. I say this because if, as it is said, God is guiding this government then I cannot safely say that it is the merciful God that we as Christians have all grown up knowing. It must be a lesser God that Jamaicans in particular are the children of. I say this because the persons that have been sent to govern us from independence until now have only served to inflict pain on this country.
Instead of practically managing the country’s business we see where calls are being made for reparation. Now tell me, if we had, from 1962, managed the affairs of this country properly would we need to be calling for monies for wrongs caused on our mother’s ancestors when our father’s ancestors were the ones that did the wrong. After all our motto says “out of many one people” because it is accepted that we are a mixed up nation. How many of us can say that we are pure descendants of the slaves. The fact that most of us are mixed should we be looking for partial reparation and what is the ratio.
As far as I know, the purpose of the budget is to set out the expenditures to be undertaken by government to run the affairs of the country for a year. The budget does not support any long tern strategic objectives, however, so what is the sense of it. We have had budgets every year since independence. Have people’s lives generally got any better? I will continue, however, to provide commentary for Jamaicans so that they can understand what is presented, as it is a necessary evil we labour through each year and it gives an insight into how the government is thinking.
Never mind my rhetoric though because when all is said and done we do need to have a budget. My hope is that some day the budget will be a tool used to support strategic long term objectives for the development of Jamaica.
The question as to what I should comment on though was answered on Easter Sunday while at the gas station. While there I saw a young boy, aged 10, trying to sell some sweets. I called him and started to question him about where his mother was and why at his age he was on the street and not at home studying. He indicated to me that his mother was very sick and that he had to sell the sweets in order to be able to go to school the following week. I gave him some money and told him to make sure he keeps out of trouble knowing too well that this is just one of many such children who are victims of the violent culture of the streets.
I have always had a lot of respect for Andrew Holness but cannot support any call for locking up parents for wrongs done by their children. I believe they should have some civil responsibility but not criminal. Any such action would be panic management, which is one of the worst things that you can do in a crisis. Where would we stop though? Should we also lock up the child services officers that are supposed to see to the welfare of children?
This I thought was more important to comment on than a group of rowdy parliamentarians presenting and arguing over some numbers. I might add numbers that really have no meaning, as it is only presented to appease government creditors and the populace into feeling good that government is spending some money or didn’t impose any new taxes this year. Don’t get me wrong, the budget process is important from the point of view that it provides us with insight as to how the economy may be impacted but really and truly does not provide any strategic direction.
Wrong approach
This though is the way we approach many things we do, both in the public and private sectors, but more so in government because there is no market to keep them in check. Every year we go through the budget process it seems to be an exercise in balancing the books rather than used as a tool to develop the long term strategic objectives of the country, like our tax policies, but then again it does not seem as if we have any strategies at all. So because of this lack of vision for our country we have situations like that little boy who has to be on the streets at the age of 10 selling sweets in order to go to school the next week. Because of the lack of vision the nightly news always seems to have an appeal from some poor person, who cannot afford medication to save their life, appealing to the public. Instead of spending money on improving people’s lives so that we can have greater productivity, however, we find it more important to build expensive stadiums and then figure out what to do with them.
The fact is that even after we have agreed on the budget, and determine that it is the best we can do in the circumstances, what will be the result? We will as usual come with a massive supplementary estimate because the budget numbers were not practical. We will continue to spend massive amounts on off-budget expenditures such as Air Jamaica, SCJ, and JUTC, and at the end of the year we will be told what amounts were spent. We will continue to borrow more money above the projected loan receipts, resulting in the poor people having to forgo another year of basic social services. We will continue to spend the money on so called legacy investments such as the Trelawny multi-purpose stadium while people in Jamaica cry out for running water.
So at the end of the day I ask, what is the sense of creating budgets and us analysts wasting time on them if it does not guide our strategic decisions and we do not maintain fiscal discipline. It seems that proper planning is not only a Jamaican issue but extends to the Caribbean. How can the politicians in CARICOM now be saying that the organizing committee for cricket did not negotiate the terms of the host agreement correctly?
How can we now be saying, US$400 million later, that we negotiated incorrectly and gave the ICC most of the revenues? What happened to the enthusiasm with which the politicians applauded the world cup efforts while enjoying the luxuries of the opening ceremony at the expense of Jamaica’s poor? The organizers will no doubt have to bear the brunt of the criticisms though as it is obvious that there was not much consideration given to the economic environment when setting ticket prices, which I believe to be the main inhibition to greater attendance.
No proactivity
As usual though we do not proactively deal with issues for fear that we may offend a party supporter, or in the case of a company, an employee. Never worry that the cost of delaying any action is always going to be greater to the country, or company, in the long run. The West Indies cricket team, for example, proved that they are no longer in the top cricketing teams. This is actually no surprise because who in their right mind would have thought that they would have won the world cup. But even though we have known of the weakness of the team, for years we continue to blame the players. If the players for years continue to show poor results, is the problem with the players or the administration. Unless we deal with the persons running cricket then we will get no better.
It seems obvious to me that Jamaicans are children of a lesser God. I say this because if, as it is said, God is guiding this government then I cannot safely say that it is the merciful God that we as Christians have all grown up knowing. It must be a lesser God that Jamaicans in particular are the children of. I say this because the persons that have been sent to govern us from independence until now have only served to inflict pain on this country.
Instead of practically managing the country’s business we see where calls are being made for reparation. Now tell me, if we had, from 1962, managed the affairs of this country properly would we need to be calling for monies for wrongs caused on our mother’s ancestors when our father’s ancestors were the ones that did the wrong. After all our motto says “out of many one people” because it is accepted that we are a mixed up nation. How many of us can say that we are pure descendants of the slaves. The fact that most of us are mixed should we be looking for partial reparation and what is the ratio.
As far as I know, the purpose of the budget is to set out the expenditures to be undertaken by government to run the affairs of the country for a year. The budget does not support any long tern strategic objectives, however, so what is the sense of it. We have had budgets every year since independence. Have people’s lives generally got any better? I will continue, however, to provide commentary for Jamaicans so that they can understand what is presented, as it is a necessary evil we labour through each year and it gives an insight into how the government is thinking.
Never mind my rhetoric though because when all is said and done we do need to have a budget. My hope is that some day the budget will be a tool used to support strategic long term objectives for the development of Jamaica.
Friday, March 30, 2007
Consumerism is good for growth
I spend quite a bit of time keeping pace with what happens in international capital markets. I believe this is necessary because, operating as we are in a global environment, we must know what is happening in major markets in order to be able to predict future effects on our economy. As an example, Dr Davies explained that the decision to raise the US$350 million now was because of problems being experienced on China's equity market, and the fear of a crash of global equity markets. So raising the money now was appropriate because a later date could see investors shying away from emerging market instruments, making raising that sum that more difficult.
While I agree with that rationale, if one were following the international markets then it would be clear that this blip in the Chinese and other international equity markets was not the beginning of the end, which might come later in the year. The fact is that global equity markets have been on a prolonged bull run and any negative event can easily cause a much prophesied correction, as was what happened. Since then the China equity market has seen new highs, and the US and European markets have continued their upward trend. The fear for the dollar now is that the US economy is weakening, and this could see a reduction of interest rates. This, however, will have a positive impact on equity markets and could be beneficial for emerging market debt, which is usually at higher rates.
Less means more
One of the main issues with the US economy is the weakening consumer spending, which is its mainstay. The fact is that economic activity is based on the strength of consumer spending, as consumers are the ones who purchase homes and buy goods to support companies. Thus the argument is that the more money consumers have to spend then the more beneficial it will be for the economy. For this reason, when there are signs that the US economy is weakening, the Fed will reduce rates to encourage greater spending (through increased credit) and the government will sometimes reduce taxes to put more disposable income in the hands of consumers. In a recent interview on CNBC, Rudy Giuliani stated that when he was Mayor of New York he actually reduced taxes over 20 times in order to close the deficit they had, and it worked.
The fears of a weakening US economy are driven by a lack of consumer spending in the housing market, and this has spilled over in lower consumer confidence and retail sales. There is no doubt that strong consumerism is good for economic growth. In Jamaica's case, however, we do not subscribe to this logic, as we don't with many other rational arguments. I have long pondered whether this is an action based on ignorance or incompetence, and the conclusion I have come up with is that it is neither. It is an action based on lack of will.
It is obvious that our annual budget is not geared towards supporting the development of either the economy or the country, but rather a futile exercise to support the insatiable appetite of politicians who seek to support their constituents and hold on to state power. The problem is that the pie is constantly shrinking, and will continue to do so as we acquire greater amounts of debt, giving the mirage of greater expenditures each year, but the reality is that an increasing amount of revenue goes to satisfying debt servicing rather than the Jamaican public. Only if we have events like Cricket World Cup do we bother to seek to spend any money on Jamaica, and in that eventuality it is not primarily for Jamaicans, who are nevertheless thankful for the visitors because of the indirect benefits we get when they come to the island. So we find that while we may have emancipated ourselves from physical slavery, mentally we are still stuck in a time warp of satisfying the new master (foreigner) while the local (slave) continues to vie for the scraps left by our new masters.
We do not realise that if we were to reduce taxes then this would place more money in the hands of consumers, which would in turn generate more spending and boost economic activity. Instead taxation is used as a means to plug any hole government has in its fiscal accounts rather than as a tool to foster economic development. We also create systems to frustrate, rather than encourage, investments.
Unfavourable systems
A recent example is that I was sent a package through FedEx, who also cleared the package for me. This was educational material, on DVD, and when it came to me the duty was overstated by over 100%. Well, FedEx did not pick up on this, but I did, and when I investigated, it was discovered that the customs officer had made an error and entered the wrong code. This was after a ridiculous explanation that educational material on DVD attracted a higher rate than that in a book. So much for the technology efforts of the government. The long and short is that FedEx told me that I had to pay the full amount charged and then wait two weeks for a refund. The amount was over 100 per cent more than what should have been charged. Now I had nothing to do with the error, as it was being handled by FedEx and Customs, but I am the one who is being asked to suffer the consequences of their error. This would never happen in the US, but FedEx comes to the backward island of Jamaica where they can give less than adequate service, supported by the Jamaican government who believes that their monopoly on the wharf is licence to abuse the rights of Jamaicans. My sin, of course, is that I am Jamaican. I can solve the courier problem by never using FedEx again, but I cannot use a different Customs department. Thankfully there are well-intentioned persons in Customs, and a Mr Ewan Harvey is trying to resolve this for me so that I can try to get on with some productivity. But what of the many other Jamaicans who do not have the fortitude to call and express disgust about it?
Is it any wonder then that if our own government sets up systems to prevent the progress of the "dishonest" Jamaicans, while encouraging the "squeaky clean" foreigners, Jamaicans will find it difficult to invest in our own country? Is it any wonder that based on this attitude monopolies such as Cable and Wireless and JPS have come to Jamaica and sought to extract their pound of flesh from these Caribbean locals who have "EXPLOIT ME" written all over our foreheads?
Even the private sector has a problem understanding the power of encouraging consumerism and goes in many cases for short-term profits. Recently I bought a monitor from a computer company, and was not happy with the performance so I took it back. They informed me that if they did not find anything wrong with it that they could not replace it, even with the more expensive brand I requested and was willing to pay for. On the other hand, last year I bought something at Best Buy (in Florida) and the next day went back and changed it for another brand, without having to give a reason. The only requirement was that it was in the same condition. The moral of this is that it is best to buy as much as possible from American companies over the Internet, rather than purchase the same item for more locally. On the other hand, Customs and FedEx may make this an unpleasant experience anyway, so anywhere you turn you are screwed. So much for being a Jamaican in Jamaica. I think I might go for the CARICOM passport to see if I can get some reprieve.
If we are serious about maximising economic development then we have to realise, as developed countries do, the power of consumer spending. Consumers, of course, must include taxpayers from the government's point of view.
While I agree with that rationale, if one were following the international markets then it would be clear that this blip in the Chinese and other international equity markets was not the beginning of the end, which might come later in the year. The fact is that global equity markets have been on a prolonged bull run and any negative event can easily cause a much prophesied correction, as was what happened. Since then the China equity market has seen new highs, and the US and European markets have continued their upward trend. The fear for the dollar now is that the US economy is weakening, and this could see a reduction of interest rates. This, however, will have a positive impact on equity markets and could be beneficial for emerging market debt, which is usually at higher rates.
Less means more
One of the main issues with the US economy is the weakening consumer spending, which is its mainstay. The fact is that economic activity is based on the strength of consumer spending, as consumers are the ones who purchase homes and buy goods to support companies. Thus the argument is that the more money consumers have to spend then the more beneficial it will be for the economy. For this reason, when there are signs that the US economy is weakening, the Fed will reduce rates to encourage greater spending (through increased credit) and the government will sometimes reduce taxes to put more disposable income in the hands of consumers. In a recent interview on CNBC, Rudy Giuliani stated that when he was Mayor of New York he actually reduced taxes over 20 times in order to close the deficit they had, and it worked.
The fears of a weakening US economy are driven by a lack of consumer spending in the housing market, and this has spilled over in lower consumer confidence and retail sales. There is no doubt that strong consumerism is good for economic growth. In Jamaica's case, however, we do not subscribe to this logic, as we don't with many other rational arguments. I have long pondered whether this is an action based on ignorance or incompetence, and the conclusion I have come up with is that it is neither. It is an action based on lack of will.
It is obvious that our annual budget is not geared towards supporting the development of either the economy or the country, but rather a futile exercise to support the insatiable appetite of politicians who seek to support their constituents and hold on to state power. The problem is that the pie is constantly shrinking, and will continue to do so as we acquire greater amounts of debt, giving the mirage of greater expenditures each year, but the reality is that an increasing amount of revenue goes to satisfying debt servicing rather than the Jamaican public. Only if we have events like Cricket World Cup do we bother to seek to spend any money on Jamaica, and in that eventuality it is not primarily for Jamaicans, who are nevertheless thankful for the visitors because of the indirect benefits we get when they come to the island. So we find that while we may have emancipated ourselves from physical slavery, mentally we are still stuck in a time warp of satisfying the new master (foreigner) while the local (slave) continues to vie for the scraps left by our new masters.
We do not realise that if we were to reduce taxes then this would place more money in the hands of consumers, which would in turn generate more spending and boost economic activity. Instead taxation is used as a means to plug any hole government has in its fiscal accounts rather than as a tool to foster economic development. We also create systems to frustrate, rather than encourage, investments.
Unfavourable systems
A recent example is that I was sent a package through FedEx, who also cleared the package for me. This was educational material, on DVD, and when it came to me the duty was overstated by over 100%. Well, FedEx did not pick up on this, but I did, and when I investigated, it was discovered that the customs officer had made an error and entered the wrong code. This was after a ridiculous explanation that educational material on DVD attracted a higher rate than that in a book. So much for the technology efforts of the government. The long and short is that FedEx told me that I had to pay the full amount charged and then wait two weeks for a refund. The amount was over 100 per cent more than what should have been charged. Now I had nothing to do with the error, as it was being handled by FedEx and Customs, but I am the one who is being asked to suffer the consequences of their error. This would never happen in the US, but FedEx comes to the backward island of Jamaica where they can give less than adequate service, supported by the Jamaican government who believes that their monopoly on the wharf is licence to abuse the rights of Jamaicans. My sin, of course, is that I am Jamaican. I can solve the courier problem by never using FedEx again, but I cannot use a different Customs department. Thankfully there are well-intentioned persons in Customs, and a Mr Ewan Harvey is trying to resolve this for me so that I can try to get on with some productivity. But what of the many other Jamaicans who do not have the fortitude to call and express disgust about it?
Is it any wonder then that if our own government sets up systems to prevent the progress of the "dishonest" Jamaicans, while encouraging the "squeaky clean" foreigners, Jamaicans will find it difficult to invest in our own country? Is it any wonder that based on this attitude monopolies such as Cable and Wireless and JPS have come to Jamaica and sought to extract their pound of flesh from these Caribbean locals who have "EXPLOIT ME" written all over our foreheads?
Even the private sector has a problem understanding the power of encouraging consumerism and goes in many cases for short-term profits. Recently I bought a monitor from a computer company, and was not happy with the performance so I took it back. They informed me that if they did not find anything wrong with it that they could not replace it, even with the more expensive brand I requested and was willing to pay for. On the other hand, last year I bought something at Best Buy (in Florida) and the next day went back and changed it for another brand, without having to give a reason. The only requirement was that it was in the same condition. The moral of this is that it is best to buy as much as possible from American companies over the Internet, rather than purchase the same item for more locally. On the other hand, Customs and FedEx may make this an unpleasant experience anyway, so anywhere you turn you are screwed. So much for being a Jamaican in Jamaica. I think I might go for the CARICOM passport to see if I can get some reprieve.
If we are serious about maximising economic development then we have to realise, as developed countries do, the power of consumer spending. Consumers, of course, must include taxpayers from the government's point of view.
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 to not 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 they did was to retool their factories and spend most of their money on modernizing 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 a 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, airplanes, and poverty, in the Jamaican context. They all compete for the same resources. Of course in true Jamaican style, cricket and airplanes (Air Jamaica) get the lion’s share, while poverty continues to increase because it is deprived of resources as a result of cricket and airplanes. I can say this for the politicians, 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 whom he had to lend 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 JS$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$8 billion) in 2005. This is the same country that runs a sugar company that loses hundreds of millions each year. As the celebrated IMF report states in paragraph 14 “…the data indicate that the deficit of the JUTC exceeded planned amounts by three-folds; that of the Sugar company exceeded planned amounts by almost seven-fold; and that of Air Jamaica has been more than double the expected amount. Altogether, the excesses of these three enterprises amount to almost 1 percent of GDP this year.”
In addition to all these losses we spend J$ billions on a stadium to host an opening ceremony and some warm up matches, and may 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, airplanes, 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 ten years from now, we need it 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 they did was to retool their factories and spend most of their money on modernizing 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 a 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, airplanes, and poverty, in the Jamaican context. They all compete for the same resources. Of course in true Jamaican style, cricket and airplanes (Air Jamaica) get the lion’s share, while poverty continues to increase because it is deprived of resources as a result of cricket and airplanes. I can say this for the politicians, 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 whom he had to lend 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 JS$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$8 billion) in 2005. This is the same country that runs a sugar company that loses hundreds of millions each year. As the celebrated IMF report states in paragraph 14 “…the data indicate that the deficit of the JUTC exceeded planned amounts by three-folds; that of the Sugar company exceeded planned amounts by almost seven-fold; and that of Air Jamaica has been more than double the expected amount. Altogether, the excesses of these three enterprises amount to almost 1 percent of GDP this year.”
In addition to all these losses we spend J$ billions on a stadium to host an opening ceremony and some warm up matches, and may 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, airplanes, 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 ten years from now, we need it 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.
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.
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