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.
Friday, March 30, 2007
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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