Last Wednesday, I attended a forum put on by the Taking Responsibility group on 'Jamaica's Foreign Policy: The Economic Development Link', where a report was presented that discussed foreign policy in Jamaica since independence and sought to make a link with economic development. When the group first came on the scene and presented its paper on 'The Jamaican Economy Since Independence', I thought that this was just another academic group, that would produce mountains of paper to add to the growing pile of studies and reports we have amassed over the years. Well, after reading the report, and listening to the discussion, I no longer have a doubt, and I'm convinced that they will produce nothing more than academic information for students and to attain professorships.
One of the main problems we have had in this country is that we are brilliant at studying and saying what the issues are, but never seem to get to the point of implementing. There are many eye-opening studies (and commissions) that have been done, correctly outlining the challenges we face as a country but which are never implemented. We have even had citizens of the calibre of Douglas Orane and Peter Moses contributing their time in leading studies and making some solid recommendations. But they have never been implemented. Soon we will call for a study to determine why the studies were never implemented.
Nine-day wonder
Someone once said to me that the purpose of the various studies and commissions is never to seek solutions for implementation but to give the impression that something is being done. And in our true 'Nine-Day Wonder' style, after the reports are published and discussed for a few days in the media, then we forget about them. So we hear statements from politicians such as it's time for us to forget about the Trafigura affair, as it has been discussed enough, or that we need to stop talking about the wasted funds on the Trelawny monument to elephants, and start thinking about how we can now make money from it. Never mind the fact that billions of dollars have been wasted and the trust in public institutions has diminished considerably, as accountability is never important.
So back to the academic report from Taking Responsibility. Both reports mentioned above do not come with any concrete steps for moving forward and ensuring economic development in Jamaica. Instead, the reports outline generally what they believe got us to this point and, even more generally, what needs to be done, but propose no specific tasks and timeline needed for action.
Coincidentally, the same morning I was discussing with Ronnie Thwaites and Ralston Hyman, the ascendancy of Gordon Brown as the UK's prime minister, and what the implications for the UK were. During that discussion, Ronnie asked a question, which I think was most important, what are the implications for Jamaica? In other words, how can our foreign policy take advantage of the evident changes that will be ushered in with Gordon Brown?
The answer of course is a question I asked the forum, without getting an answer. How did we arrive at studying Jamaica's foreign policy without first addressing the real issues here at home? In other words, why do we seek to put the cart before the horse, as we do with many other things? It seems to me that before we get to studying Jamaica's foreign policy that there are some more fundamental issues to look at. After all, Jamaica's foreign policy has been nothing more than seeking debt, aid, and foreign investments. The problem, of course, is that the foreign policy is only supporting what the domestic policies are.
Economic development
Therefore, it would seem logical to me that the approach should be to first address the challenges with domestic policy, ensuring that they are properly aligned with economic development.
The truth is that our domestic policies are not geared towards economic development, but rather at keeping the status quo afloat to hold onto state power. This is the way that we have operated since independence, irrespective of who is in power. The objective of governments has never been economic development, but political power. So when we fought for, and gained independence in 1962, we were more interested in political rather than economic independence. And this objective is supported by the way our constitution was crafted. The only thing that changed for us was who was placed in the Great House, not the abolition of it.
So because of our domestic policies, our foreign policy is supporting the wrong path. Is it any wonder then that we have not achieved anything more from foreign policy than signing new debt agreements and getting some foreign investors, after giving up tax revenues? My question would be, after all the money that we have spent on the numerous embassies around the world, and trips here and there, what have we achieved? The only thing we seem to have done is sunk this country into greater debt and poverty. Wouldn't it have been better to rationalise the embassies, as recommended by Douglas Orane, and use that money for education, health, and crime? And then we ask ourselves where can we get money from to fund education and health services?
The report by this group makes five main recommendations that, from a 56- page report, take up one page. The other 55 pages are dedicated to describing the problem. Now if that is not an academic report then I don't know what is. What we need is not only the identification of issues, but specific steps to achieve these recommendations with the agreement of course, of all the stakeholders. Some of the issues described in the report also I think are not true. One such is that Jamaica, as a small state is a price taker. That may have been true decades ago but not so in an age of globalisation where information is accessed at lightening speed. Many companies and countries have demonstrated this. As a matter of fact, small means that one can be more nimble.
In a market the truth is that all players are price takers, and this is determined by product/service quality, supply and demand. We have products such as our coffee and ginger that we do not have to compete with in a strict price range because of the quality. Our tourism potential is so great that if we were to take care of it we could be demanding higher prices. We just have to look at what 'Butch' Stewart has done so successfully with Sandals. Instead of giving a tax break to local entrepreneurs such as Butch Stewart to develop the tourism product, we would much rather give tax breaks to overseas investors.
Our priority, of course, is not about economic development, so we go for the quick money from foreign investments rather than the stable money of organic growth. So business persons such as 'Butch' Stewart will have to succeed against the bureaucracy and the investigations into scandals such as Whitehouse, which will turn out to be a grand waste of time as nothing will come from it.
But such is our culture. We are great at studying and reporting, and this is the sensationalism that our citizens demand. We are more concerned with what politicians say than what they do. I bet if the question were asked of the Observer, which is the most read page daily, they would say page two. The one that shows the parties and images of well-being.
Friday, June 29, 2007
Friday, June 22, 2007
Tis the season to be silly
So I was watching the nightly news three nights ago when a thought came to me that politicians have got the media to support the silliness of the election season. This is obvious because of the nightly reports of political rallies aired in the name of giving equal air time to all. I mean I understand the concept but should we continue to air every bit of nonsense that comes from the mouth of our politicians. When I watch the news and hear the blatant promises of gifts being belted out by our politicians, and the resounding response by the crowd, I am saddened that after 45 years of independence this is the best that we can do.
After 45 years our politicians are still promising us the same deliverance from poverty they did in 1962. So nothing has changed. They still make the same promises and we still believe them. Who is more stupid, the fool or the one who continues to follow the fool? After all this time the media continues to present this display to the Jamaican people, who unashamedly show delight at every word shouted by our politicians. The media is indeed behaving like a drug addict that needs to have its daily fix of political crack. My opinion is that we need to cease the glorification of this “Paris Hilton” type of political discourse and start contributing to the building of our nation by focusing on the real issues that will move us forward.
US political campaign
When I look at the US political campaign and compare it to ours I understand why we are a developing country and they are developed. When I listen to the media coverage in the US and compare it to ours I understand why we celebrate underachievement and mediocrity. I do accept that even the US politicians have flashes of “soap opera” type performances but in the main the focus is on policies that will contribute to development. Commentary in the US surrounds foreign policy (Iraq e.g.), tax policies, health care, and immigration issues. In Jamaica of course our focus is on who said what, when, and where; who went on peace marches and who did not; who will supply piped water, fix roads, or build community centres; which poll was not published; who gave out bun and cheese; and the list goes on and on of promises to give a fish rather than teaching people to fish.
Of course the people gobble up the promises because our politicians have managed to successfully keep them illiterate in the most part, where over 80 percent of children leaving school do so without one subject. And the media, which should include educated persons, supports the propaganda by focusing on petty issues rather than the important determinants of our success. It is as if we have all forgotten that (1) while the region is growing at an average of 5 percent, we are growing at under 2.5 percent, and an average of only 1 percent per year; (2) we have official debt of almost $1 trillion; (3) we have a sugar industry and airline that is hemorrhaging $ billions per year; (4) we have a police force that is not only under equipped to fight crime but is also unable to solve murder cases effectively; (5) we have a literacy rate of 80 percent while competing countries are at close to 100 percent; (6) government bureaucracy is stifling the private sector; (7) we face challenges in a global environment, such as competition from China and global warming; and (8) how we do we plan to control our expanding energy bill and ensure consistent power supply. The list of real issues is too long for this column but we do not hear of any solution in the coverage of the rallies.
I have to conclude that our politicians do not consider us sufficiently intelligent to understand the real issues and confine us to promises of roads, water, security, and a few nights of curry goat and beer, as if we are at the nine-night preceding the burial of our country. The irony is that it seems as if this is what we enjoy. I guess it is human nature, as even internationally many people would rather watch coverage of Anna Nicole’s promiscuity and Paris Hilton’s childish fits than understand what is happening with economic development. It’s just that we seem to have a lot more of those people than everyone else. So each night the media continues to air the latest “Jerry Springer” episode of the campaign rallies.
Economic development
One of the issues I would have thought we would have focused on is how we can ensure that Jamaica continues to grow at comparable rates to the international community. Because while we continue to lose ourselves in the euphoria of promises the ship of global economic progress continues to sail past us. The region is again projected to grow at around four to five percent for this year, and we are on target to grow at two percent or less by my projections.
The PIOJ, for example, is involved in the very important task of putting together a national development plan. While this has been publicized there is no discourse from our politicians on what this should include. Is it that they don’t understand it or they do not think that those attending political rallies, or watching the nightly news, will understand it? Or maybe it’s a combination of both, because based on some of the commentary I hear coming from the mouths of those on the campaign trail I have to wonder if they really appreciate what is needed for moving their communities forward.
We need more people like Andrew Holness and Peter Bunting in representational politics, that is young and more importantly understand the issues that need to be addressed. But then again representational politics can be such a slimy issue that one’s stomach can easily turn at its produce. So if I did wear a hat I would certainly lift it to these gentlemen, who not only have the courage to represent the people, but have demonstrated to me that they understand what needs to be done to move Jamaica forward. And there are maybe a few more such persons, but the great majority fails to qualify.
Our politicians, however, are nothing more than salespersons who are trying to get state power and will tell us anything that will secure our votes. It is therefore the responsibility of all of us to demand real discussion of the issues. Let them tell us how they plan to bring sustained economic development to Jamaica. What are the policies they will embrace to move this country forward? We could possibly have election in July, and we have not yet seen any manifesto. But based on the media’s preferred coverage of the “tracings” by candidates of their opponents I wonder if this would even get adequate coverage.
In many constituencies it does not matter who the candidate is as we do not vote for candidates but for a political party, and which ever leader makes us feel best. Even if a cockroach is put to run it would not make a difference.
So I am appealing to Jamaicans, and in particular the media, not to focus on the curry goat politics that has led us to our present economic situation after 45 years of independence, but rather focus on understanding what politicians have to offer in terms of developing Jamaica and hold them to it. This is a big concern not only for me but the many responses I get to my columns and blog, from Jamaica and around the world, but it seems as if we are in the minority.
After 45 years our politicians are still promising us the same deliverance from poverty they did in 1962. So nothing has changed. They still make the same promises and we still believe them. Who is more stupid, the fool or the one who continues to follow the fool? After all this time the media continues to present this display to the Jamaican people, who unashamedly show delight at every word shouted by our politicians. The media is indeed behaving like a drug addict that needs to have its daily fix of political crack. My opinion is that we need to cease the glorification of this “Paris Hilton” type of political discourse and start contributing to the building of our nation by focusing on the real issues that will move us forward.
US political campaign
When I look at the US political campaign and compare it to ours I understand why we are a developing country and they are developed. When I listen to the media coverage in the US and compare it to ours I understand why we celebrate underachievement and mediocrity. I do accept that even the US politicians have flashes of “soap opera” type performances but in the main the focus is on policies that will contribute to development. Commentary in the US surrounds foreign policy (Iraq e.g.), tax policies, health care, and immigration issues. In Jamaica of course our focus is on who said what, when, and where; who went on peace marches and who did not; who will supply piped water, fix roads, or build community centres; which poll was not published; who gave out bun and cheese; and the list goes on and on of promises to give a fish rather than teaching people to fish.
Of course the people gobble up the promises because our politicians have managed to successfully keep them illiterate in the most part, where over 80 percent of children leaving school do so without one subject. And the media, which should include educated persons, supports the propaganda by focusing on petty issues rather than the important determinants of our success. It is as if we have all forgotten that (1) while the region is growing at an average of 5 percent, we are growing at under 2.5 percent, and an average of only 1 percent per year; (2) we have official debt of almost $1 trillion; (3) we have a sugar industry and airline that is hemorrhaging $ billions per year; (4) we have a police force that is not only under equipped to fight crime but is also unable to solve murder cases effectively; (5) we have a literacy rate of 80 percent while competing countries are at close to 100 percent; (6) government bureaucracy is stifling the private sector; (7) we face challenges in a global environment, such as competition from China and global warming; and (8) how we do we plan to control our expanding energy bill and ensure consistent power supply. The list of real issues is too long for this column but we do not hear of any solution in the coverage of the rallies.
I have to conclude that our politicians do not consider us sufficiently intelligent to understand the real issues and confine us to promises of roads, water, security, and a few nights of curry goat and beer, as if we are at the nine-night preceding the burial of our country. The irony is that it seems as if this is what we enjoy. I guess it is human nature, as even internationally many people would rather watch coverage of Anna Nicole’s promiscuity and Paris Hilton’s childish fits than understand what is happening with economic development. It’s just that we seem to have a lot more of those people than everyone else. So each night the media continues to air the latest “Jerry Springer” episode of the campaign rallies.
Economic development
One of the issues I would have thought we would have focused on is how we can ensure that Jamaica continues to grow at comparable rates to the international community. Because while we continue to lose ourselves in the euphoria of promises the ship of global economic progress continues to sail past us. The region is again projected to grow at around four to five percent for this year, and we are on target to grow at two percent or less by my projections.
The PIOJ, for example, is involved in the very important task of putting together a national development plan. While this has been publicized there is no discourse from our politicians on what this should include. Is it that they don’t understand it or they do not think that those attending political rallies, or watching the nightly news, will understand it? Or maybe it’s a combination of both, because based on some of the commentary I hear coming from the mouths of those on the campaign trail I have to wonder if they really appreciate what is needed for moving their communities forward.
We need more people like Andrew Holness and Peter Bunting in representational politics, that is young and more importantly understand the issues that need to be addressed. But then again representational politics can be such a slimy issue that one’s stomach can easily turn at its produce. So if I did wear a hat I would certainly lift it to these gentlemen, who not only have the courage to represent the people, but have demonstrated to me that they understand what needs to be done to move Jamaica forward. And there are maybe a few more such persons, but the great majority fails to qualify.
Our politicians, however, are nothing more than salespersons who are trying to get state power and will tell us anything that will secure our votes. It is therefore the responsibility of all of us to demand real discussion of the issues. Let them tell us how they plan to bring sustained economic development to Jamaica. What are the policies they will embrace to move this country forward? We could possibly have election in July, and we have not yet seen any manifesto. But based on the media’s preferred coverage of the “tracings” by candidates of their opponents I wonder if this would even get adequate coverage.
In many constituencies it does not matter who the candidate is as we do not vote for candidates but for a political party, and which ever leader makes us feel best. Even if a cockroach is put to run it would not make a difference.
So I am appealing to Jamaicans, and in particular the media, not to focus on the curry goat politics that has led us to our present economic situation after 45 years of independence, but rather focus on understanding what politicians have to offer in terms of developing Jamaica and hold them to it. This is a big concern not only for me but the many responses I get to my columns and blog, from Jamaica and around the world, but it seems as if we are in the minority.
Traveling with Air Jamaica
The Bob Woolmer mess up by the Jamaican authorities has captured most of the news headlines recently. This is not surprising, as it is possibly the most internationally embarrassing moment that I can recall for Jamaica. And while Jamaica’s image suffers it seems as if the main preoccupation is to deflect blame and not seek to suppress the really bad publicity, and possible law suits, that could arise from this. But such is the culture of Jamaica, and even imported persons will soon fall into this Jamaican trait.
One other thing about the “Bob Woolmer Foul Up” is that it could possibly be as costly to us as Air Jamaica, in terms of lost revenue. With Air Jamaica we can actually see the money leaving the bank, as if the victim of some massive Nigerian scam. The airline has not been without its fair share of media attention with the sale of the London route to Virgin Atlantic. This has culminated in a battle royal between the political parties, with the opposition JLP, supported by the JHTA, charging that the 5.1 million pounds sterling deal was not the best we could have received, and the PNP defending the shots in true West Indian batsman style.
The real deal
But what is the real deal with Air Jamaica. Let’s examine the facts we know, even without the full knowledge of the business plan. We know the following:
- it is costing us J$10 billion per annum, which could build four “world cup opening ceremony stadiums”;
- It is suggested that the London route was one of our biggest routes;
Virgin will not be increasing the number of flights to Montego Bay, to compensate for the abandoned Air Jamaica flights;
- Air Jamaica will soon begin replacing the Air Bus aircraft with older Boeing planes;
- Accumulated loss is over US$1 billion, and an additional US$125 million was recently raised and US$72 million is loaned to the airline from the PetroCaribe fund; and
- Paul Pennicooke has recently stated that the losses are decreasing, and some benefits are being noticed.
So the airline continues to cost us immensely, and if it is not profitable could see write offs well in excess of US$1 billion (J$69 billion) that could be used to fund education, health, equip our security forces, fund small business development, and build a few stadiums of course. The first four mentioned would have significant positive development for Jamaica, by creating an environment where businesses can compete and tourists will come free of harassment.
But even while St. Lucia is opting out of LIAT, and relying on free market forces to service their hotel industry, we have decided that Air Jamaica will be profitable come 2009. This is of course in the face of mounting challenges being faced by much larger airlines internationally, and rising fuel costs, which are projected to go even higher. So if by 2009 we are not profitable then it would have cost Jamaica what we cannot afford, and once again the poor people of Jamaica will be set back by maybe about J$100 billion, which they will have no choice but to will to their children and grandchildren.
Based on this risk, it is therefore very important that the powers that be do everything to ensure that the 2009 plan is not only viable but highly probable. Because after all the losses have been racked up, those responsible for taking the decisions will leave the debt for Jamaicans to bear. And so Mr. Golding is right in indicating that Air Jamaica’s future must be given much consideration. One fundamental rule of investing is that the reward must be considerably greater than the cost of the risk. If for example the cost of the risk is $100 and you only stand to gain $50 from the transaction then it is not a good investment decision. If the reward-risk amounts are reversed however then it is a good gamble, after of course considering all the technical and fundamental information.
Decision time
So the decision that must be made re Air Jamaica is, is the projected profitability more likely to occur than further losses? If the probability of the airline being profitable is 70% and the probability of losses is 35%, then it may be worth the risk. Consideration of course will have to be given to projected fuel price increases, competition expectations, any competitive advantage, and the cost to our tourism sector of no Air Jamaica. The decision cannot be based on an emotional reason such as, we need a national airline, or mistakenly trying to recoup past losses because of pride.
So my stance on Air Jamaica is that I am going to trust those in authority that the sale of the London route was the best financial decision for Jamaica, and that this is a part of the process to take us to sustained profitability in 2009. I am going to trust those in authority that pumping billions into Air Jamaica is the best use of our funds for Jamaica’s long term development. I trust these decisions simply because I do not have access to the intricacies of the business and development plans of Air Jamaica, and as the Minister states this could create a disadvantage if leaked to the competition.
While I trust the authorities to do so, and understand that the business plan cannot be revealed in detail, I also would like to understand what decision will be taken if we get to 2009 and the airline is still not profitable. I also would like to know what the accountability is in that situation. At some point in time we have to put in place what traders call “stop loss”, which is put a stop on the losses so that you can walk away with something.
At some point in time we have to stop throwing borrowed billions at projects that serve no more purpose than to sink us deeper into debt and poverty. We are fast approaching J$1 trillion in official debt. For example, included in the PetroCaribe disbursements are flood repairs and toll road routes ($3.72B); Lift Up Jamaica ($0.43B); Air Jamaica ($4.82B); SCJ ($3.72B); and JUTC ($0.20B). There are other disbursements, which I am assuming have some benefit as they mostly address debt refinancing and may be to replace higher cost debt. But these amounts must certainly be questioned as to what benefits are expected that will make Jamaica a more prosperous country.
As Ronnie Thwaites has been saying publicly for years, given the situation we are in, we must ensure that we get added value for every dollar that we spend. And this can only happen through proper financial analysis and due diligence.
One other thing about the “Bob Woolmer Foul Up” is that it could possibly be as costly to us as Air Jamaica, in terms of lost revenue. With Air Jamaica we can actually see the money leaving the bank, as if the victim of some massive Nigerian scam. The airline has not been without its fair share of media attention with the sale of the London route to Virgin Atlantic. This has culminated in a battle royal between the political parties, with the opposition JLP, supported by the JHTA, charging that the 5.1 million pounds sterling deal was not the best we could have received, and the PNP defending the shots in true West Indian batsman style.
The real deal
But what is the real deal with Air Jamaica. Let’s examine the facts we know, even without the full knowledge of the business plan. We know the following:
- it is costing us J$10 billion per annum, which could build four “world cup opening ceremony stadiums”;
- It is suggested that the London route was one of our biggest routes;
Virgin will not be increasing the number of flights to Montego Bay, to compensate for the abandoned Air Jamaica flights;
- Air Jamaica will soon begin replacing the Air Bus aircraft with older Boeing planes;
- Accumulated loss is over US$1 billion, and an additional US$125 million was recently raised and US$72 million is loaned to the airline from the PetroCaribe fund; and
- Paul Pennicooke has recently stated that the losses are decreasing, and some benefits are being noticed.
So the airline continues to cost us immensely, and if it is not profitable could see write offs well in excess of US$1 billion (J$69 billion) that could be used to fund education, health, equip our security forces, fund small business development, and build a few stadiums of course. The first four mentioned would have significant positive development for Jamaica, by creating an environment where businesses can compete and tourists will come free of harassment.
But even while St. Lucia is opting out of LIAT, and relying on free market forces to service their hotel industry, we have decided that Air Jamaica will be profitable come 2009. This is of course in the face of mounting challenges being faced by much larger airlines internationally, and rising fuel costs, which are projected to go even higher. So if by 2009 we are not profitable then it would have cost Jamaica what we cannot afford, and once again the poor people of Jamaica will be set back by maybe about J$100 billion, which they will have no choice but to will to their children and grandchildren.
Based on this risk, it is therefore very important that the powers that be do everything to ensure that the 2009 plan is not only viable but highly probable. Because after all the losses have been racked up, those responsible for taking the decisions will leave the debt for Jamaicans to bear. And so Mr. Golding is right in indicating that Air Jamaica’s future must be given much consideration. One fundamental rule of investing is that the reward must be considerably greater than the cost of the risk. If for example the cost of the risk is $100 and you only stand to gain $50 from the transaction then it is not a good investment decision. If the reward-risk amounts are reversed however then it is a good gamble, after of course considering all the technical and fundamental information.
Decision time
So the decision that must be made re Air Jamaica is, is the projected profitability more likely to occur than further losses? If the probability of the airline being profitable is 70% and the probability of losses is 35%, then it may be worth the risk. Consideration of course will have to be given to projected fuel price increases, competition expectations, any competitive advantage, and the cost to our tourism sector of no Air Jamaica. The decision cannot be based on an emotional reason such as, we need a national airline, or mistakenly trying to recoup past losses because of pride.
So my stance on Air Jamaica is that I am going to trust those in authority that the sale of the London route was the best financial decision for Jamaica, and that this is a part of the process to take us to sustained profitability in 2009. I am going to trust those in authority that pumping billions into Air Jamaica is the best use of our funds for Jamaica’s long term development. I trust these decisions simply because I do not have access to the intricacies of the business and development plans of Air Jamaica, and as the Minister states this could create a disadvantage if leaked to the competition.
While I trust the authorities to do so, and understand that the business plan cannot be revealed in detail, I also would like to understand what decision will be taken if we get to 2009 and the airline is still not profitable. I also would like to know what the accountability is in that situation. At some point in time we have to put in place what traders call “stop loss”, which is put a stop on the losses so that you can walk away with something.
At some point in time we have to stop throwing borrowed billions at projects that serve no more purpose than to sink us deeper into debt and poverty. We are fast approaching J$1 trillion in official debt. For example, included in the PetroCaribe disbursements are flood repairs and toll road routes ($3.72B); Lift Up Jamaica ($0.43B); Air Jamaica ($4.82B); SCJ ($3.72B); and JUTC ($0.20B). There are other disbursements, which I am assuming have some benefit as they mostly address debt refinancing and may be to replace higher cost debt. But these amounts must certainly be questioned as to what benefits are expected that will make Jamaica a more prosperous country.
As Ronnie Thwaites has been saying publicly for years, given the situation we are in, we must ensure that we get added value for every dollar that we spend. And this can only happen through proper financial analysis and due diligence.
Can the debt be capped?
Probably the most problematic part of the budget is the amount of money that we have to pay in servicing the debt. In 2007/08 we are projected to pay out 42 percent of revenues in interest payments, down from 59 percent in 2003/04. While this reduction is good, it has not come because we have managed to reduce the absolute amount of interest being paid, but rather because of increased revenues. Since 2003/04 interest payments have risen from $88 billion to the projected $101 billion in 2007/08.
It is good that we have managed to reduce the percentage of revenues paid out in interest costs, but 42 percent is still too high if we are to have any meaningful impact on social programmes. The focus therefore must be on looking at ways that we can reduce the amount of money paid for debt servicing. A big part of the problem of course, is that between 2003/04 and 2006/07, we have borrowed a net of $92 billion more than projected, primarily because we have not been able to meet budgeted revenue targets.
The argument has been forwarded that we must place a constitutional limit on the debt, not necessarily an absolute amount, but a percentage of GDP. But the question must remain, is it possible to actually cap the debt when we seem to depend so much on the borrowing flexibility to meet our budgetary requirements? Debt to GDP has actually been projected to increase this year because of the increased fiscal deficit projected. The size of the fiscal deficit, that is the excess of expenditure over revenues, is what determines how much debt is needed. So unless we can reduce the fiscal deficit then the debt will keep growing. The way we have been reducing the debt to GDP ratio, is not by reducing the debt servicing cost, but by trying to increase GDP value.
Debt to Equity
Despite this inability to properly manage our deficit, however, could we actually cap the debt? If we were to do so then what would be the negative effects on the country? I think that this is really the question that we need to ask. In the case of a company, for example, one of the ratios that you want to manage carefully is the debt to equity. The debt to equity ratio is derived by dividing the total debt by total equity. So if debt equal $200 and equity equal $200, then the debt to equity ratio is equal to 1. This is similar to our debt to GDP ratio, where GDP can be seen to represent the equity of the country. The debt to GDP ratio for Jamaica is 133 percent, or 1.33.
The reason why the debt to equity ratio is important is because it tells you how highly leveraged a company is, and the more highly leveraged a company is then (1) the more of the company has been pledged to creditors, who can move in and call the loan or take the security; and (2) the more expensive is the capital base of the company, which means that it may have lower returns on capital than a similar company with a lower debt to Equity ratio. The reason for (2) is that debt is always more expensive than equity.
This is one of the reasons why Jamaica has a problem with our fiscal accounts. The high level of debt to GDP ratio is playing havoc with our fiscal accounts, and ability to fund social programmes and critical sectors such as education, health, and security. What has happened is that we have managed to borrow so much debt as a percentage of GDP, that whatever we produce (GDP) is mainly being used to pay for the interest cost and principal payments of the debt. This is the same situation that a company faces, when they borrow money and have to pay it back. Say they borrow $100 at an annual interest of $10 per year and annual principal payment (paying back the amount borrowed) of $20. If they make a profit of $20 for the year, before interest, then they have to pay back $10 out of the profit leaving only $10 in profit after interest. If another company had the same profit with no debt (had only equity) then they would still have the entire $20 to put back in the business. From a cash point of view they would have to use $30 of the cash (interest plus principal) to pay back the loan, therefore, having $30 less cash to invest in working capital or research and development, putting them at a disadvantage to a competitor company with no debt.
This is what happens in the case of the country. Because we have this massive debt that we have to service then we have much less of our monies available (58 percent of revenues after interest) to spend on the country. So for each $100 collected, we have to spend $42 paying interest leaving only $58 to spend on running the country, and the poor people that we have made poor by mismanagement, which is a paradox I cannot understand. I mean if we love poor people so much then why have we, on gaining independence, mismanaged their affairs so badly that we have made them poorer so that we can make “saviour type” announcements, like free health and education, coming up to election. Shouldn’t we have managed the country in such a way that we can provide those things as a matter of course like developed countries do?
Proper management options
A proper management option I think is to put a cap on the debt, as responsible management would do in a company. We need to do so to ensure that in 2007 we do not give away anymore of our independence that we earned in 1962. We may have political independence but still have multilateral agencies and creditors dictating what we are to do. They might not do so directly, but when they issue credit ratings on our bonds, and sell off our bonds when they are uncomfortable, then they are indirectly influencing our behaviour. When the IMF issues reports on Jamaica, although we have stopped borrowing from them, it can affect the way our creditors see us, and so we better make sure that we continue to please them with our performance.
The question may be asked then, if we cap our debt then what will happen to the programmes that we usually use the debt to undertake? How are we going to expand the programmes that we use debt for and will this not affect the less fortunate amongst us? Of course this will be much more beneficial for us in the long run, as it will ensure that we do not use more than a certain percentage of revenues to pay back debt. But what of the short term thinking cycle we are always preoccupied with.
The answer to that of course is that many of the projects that we borrow money for is not geared towards national development anyway. If we were forced to use our resources more efficiently then would we be spending $10 billion each year on Air Jamaica, or hundreds of millions on the Sugar Company? Would we be spending $2.5 billion on the most expensive cow pasture in the world, the Trelawny stadium? In the case of Air Jamaica, it seems as if the argument that the benefit to Jamaica is far greater than the direct cost of carrying the tourists to Jamaica is no longer valid, after so many years of losses, as that does not seem to have been a consideration in selling the London route. And since it is a private airline being funded with public money, then we are not entitled to any further clarification on the sale amount and the process behind the sale.
So can we afford to cap the debt? Although it should not be necessary, as what is needed is prudent management of our affairs, then if we have to cap the debt to control the impulses of our politicians then we must do so. In the long run it will be better for us to do so, although we may not be able to afford things such as a national airline and propping up a dying sugar industry, when other countries have taken the decision to leave sugar. But at least the people of Jamaica may be saved from greater impoverishment so that they won’t have to wait until every five years to be considered by our politicians.
It is good that we have managed to reduce the percentage of revenues paid out in interest costs, but 42 percent is still too high if we are to have any meaningful impact on social programmes. The focus therefore must be on looking at ways that we can reduce the amount of money paid for debt servicing. A big part of the problem of course, is that between 2003/04 and 2006/07, we have borrowed a net of $92 billion more than projected, primarily because we have not been able to meet budgeted revenue targets.
The argument has been forwarded that we must place a constitutional limit on the debt, not necessarily an absolute amount, but a percentage of GDP. But the question must remain, is it possible to actually cap the debt when we seem to depend so much on the borrowing flexibility to meet our budgetary requirements? Debt to GDP has actually been projected to increase this year because of the increased fiscal deficit projected. The size of the fiscal deficit, that is the excess of expenditure over revenues, is what determines how much debt is needed. So unless we can reduce the fiscal deficit then the debt will keep growing. The way we have been reducing the debt to GDP ratio, is not by reducing the debt servicing cost, but by trying to increase GDP value.
Debt to Equity
Despite this inability to properly manage our deficit, however, could we actually cap the debt? If we were to do so then what would be the negative effects on the country? I think that this is really the question that we need to ask. In the case of a company, for example, one of the ratios that you want to manage carefully is the debt to equity. The debt to equity ratio is derived by dividing the total debt by total equity. So if debt equal $200 and equity equal $200, then the debt to equity ratio is equal to 1. This is similar to our debt to GDP ratio, where GDP can be seen to represent the equity of the country. The debt to GDP ratio for Jamaica is 133 percent, or 1.33.
The reason why the debt to equity ratio is important is because it tells you how highly leveraged a company is, and the more highly leveraged a company is then (1) the more of the company has been pledged to creditors, who can move in and call the loan or take the security; and (2) the more expensive is the capital base of the company, which means that it may have lower returns on capital than a similar company with a lower debt to Equity ratio. The reason for (2) is that debt is always more expensive than equity.
This is one of the reasons why Jamaica has a problem with our fiscal accounts. The high level of debt to GDP ratio is playing havoc with our fiscal accounts, and ability to fund social programmes and critical sectors such as education, health, and security. What has happened is that we have managed to borrow so much debt as a percentage of GDP, that whatever we produce (GDP) is mainly being used to pay for the interest cost and principal payments of the debt. This is the same situation that a company faces, when they borrow money and have to pay it back. Say they borrow $100 at an annual interest of $10 per year and annual principal payment (paying back the amount borrowed) of $20. If they make a profit of $20 for the year, before interest, then they have to pay back $10 out of the profit leaving only $10 in profit after interest. If another company had the same profit with no debt (had only equity) then they would still have the entire $20 to put back in the business. From a cash point of view they would have to use $30 of the cash (interest plus principal) to pay back the loan, therefore, having $30 less cash to invest in working capital or research and development, putting them at a disadvantage to a competitor company with no debt.
This is what happens in the case of the country. Because we have this massive debt that we have to service then we have much less of our monies available (58 percent of revenues after interest) to spend on the country. So for each $100 collected, we have to spend $42 paying interest leaving only $58 to spend on running the country, and the poor people that we have made poor by mismanagement, which is a paradox I cannot understand. I mean if we love poor people so much then why have we, on gaining independence, mismanaged their affairs so badly that we have made them poorer so that we can make “saviour type” announcements, like free health and education, coming up to election. Shouldn’t we have managed the country in such a way that we can provide those things as a matter of course like developed countries do?
Proper management options
A proper management option I think is to put a cap on the debt, as responsible management would do in a company. We need to do so to ensure that in 2007 we do not give away anymore of our independence that we earned in 1962. We may have political independence but still have multilateral agencies and creditors dictating what we are to do. They might not do so directly, but when they issue credit ratings on our bonds, and sell off our bonds when they are uncomfortable, then they are indirectly influencing our behaviour. When the IMF issues reports on Jamaica, although we have stopped borrowing from them, it can affect the way our creditors see us, and so we better make sure that we continue to please them with our performance.
The question may be asked then, if we cap our debt then what will happen to the programmes that we usually use the debt to undertake? How are we going to expand the programmes that we use debt for and will this not affect the less fortunate amongst us? Of course this will be much more beneficial for us in the long run, as it will ensure that we do not use more than a certain percentage of revenues to pay back debt. But what of the short term thinking cycle we are always preoccupied with.
The answer to that of course is that many of the projects that we borrow money for is not geared towards national development anyway. If we were forced to use our resources more efficiently then would we be spending $10 billion each year on Air Jamaica, or hundreds of millions on the Sugar Company? Would we be spending $2.5 billion on the most expensive cow pasture in the world, the Trelawny stadium? In the case of Air Jamaica, it seems as if the argument that the benefit to Jamaica is far greater than the direct cost of carrying the tourists to Jamaica is no longer valid, after so many years of losses, as that does not seem to have been a consideration in selling the London route. And since it is a private airline being funded with public money, then we are not entitled to any further clarification on the sale amount and the process behind the sale.
So can we afford to cap the debt? Although it should not be necessary, as what is needed is prudent management of our affairs, then if we have to cap the debt to control the impulses of our politicians then we must do so. In the long run it will be better for us to do so, although we may not be able to afford things such as a national airline and propping up a dying sugar industry, when other countries have taken the decision to leave sugar. But at least the people of Jamaica may be saved from greater impoverishment so that they won’t have to wait until every five years to be considered by our politicians.
2007/08 growth projection
I have commented that I do not expect the Jamaican economy to grow at the projected 3 percent this fiscal year. While I really do hope that I am wrong, an examination of the numbers, and what is happening in the economy, does not support a 3 percent target. Last year the projection was for 3 to 4 percent and we came in at 2.5 percent. And this is amidst (1) no hurricanes; (2) record levels of confidence; (3) world cup cricket preparations; (4) highway 2000 road construction work; (5) construction of the Spanish hotels; and (6) strong regional and global growth.
In addition to the fact that many of these factors will not be present, or will slow down this year, the period January to March 2007 (Q107) came out at just 2 percent. This is not to be included in the current fiscal year numbers but was a period in which we had high confidence levels reported and a lot of work due to world cup. Going forward the factors will not be as favourable as in Q107.
Inhibiting factors
The following will affect growth going forward:
1) The hurricane season is predicted to be even more active than last year’s prediction. The quiet season last year was because of the emergence of El Niño, which is not expected this year. We are expecting 13 to 17 hurricanes this season, with 3 to 5 major hurricanes, and all we need to have a disaster is a little rain or wind as we have so neglected our environment;
2) Crime has significantly increased from the downturn at the end of last calendar year, and therefore I expect that this would have negatively affected confidence;
3) This is an election year and the predictions of violence will no doubt lead to a wait and see attitude until after election, and from all indications the date is being dragged out, which is not good for the economy. Many persons are also waiting on the announcement of the date to book airline tickets. We must start having a fixed date for elections;
4) There is no more preparations for world cup, so we will find a slow down in capital expenditures;
5) Not much work is left to be done on the Montego Bay leg of Highway 2000, and I can bet that the next leg will slow down given the tight funds situation;
6) Most of the Spanish hotels have been completed and Harmony Cove construction activity may not have any significant impact on the fiscal year;
7) The regional and global economy is projected to grow at a slower rate than last year, and China’s undervalued Yuan has seen the USA buying more from China, which could negatively affect us. In addition there is a possibility that China’s equity market could see a significant correction this year that could affect global markets; and
8) The companies on the stock market will not see any significant growth in profitability overall. Most of the listed companies are financial institutions and I expect that the securities dealers especially will continue to under perform the previous year. We also see companies like Jamaica Producers showing worst results, which I expect will continue for another one or two quarters. Companies like Cement Company and Hardware and Lumber, although showing improved performance, is doing so against the background of the cement crisis last year. There is one or two companies that I expect will do better but I will keep that to myself until I have had enough time to do the analysis and buy them.
PIOJ growth numbers
When one looks also at the numbers presented by the PIOJ, it supports the argument that growth will be closer to 2 percent for 2007/08. Growth in the Q107 was driven by 2.5 and 1.5 percent growth in the goods producing and services sectors respectively. The main contributor to growth in the goods sector is agriculture. In 2006/07 fiscal year the agriculture sector was the fastest growing. But this was because it was recovering from the effects of the hurricane in the two previous years. The sector therefore stabilized in 2006/07 and growth is expected to be moderated in 2007/08, as evidenced by Q107 when growth in this sector came in at 4 percent compared to 22.9 percent the previous year.
The main contributor to growth in the services sector is Tourism, in the Miscellaneous Services category. In Q107 this sector declined by 0.8% compared to a growth of 9.2 percent the previous year. Tourism was down in the quarter even in the March when an improvement was expected as a result of world cup cricket. I believe that at best Tourism will be flat for the fiscal year, and therefore growth of the services sector will be affected. In addition, the financial services sector is not expected to see any significant growth based on the expected company performances, and government services should remain flat given the tightening in the budget expenditures.
Therefore the two main sectors that provided exceptional growth last year, when we only came in at 2.5 percent, will see a slow down. Construction may see some growth, but with no world cup activities and a slow down in the highway project, we will not see enough upswing here to make up for the slow down in these sectors. Overall the services sector, which accounts for 70 percent of the economy, grew by only 1.5 percent. So although the goods sector grew by 2.8 percent, this only represents 30 percent of the total economy. I expect that the services sector will continue to lag behind the goods sector for the reason mentioned above. For us to see 3 percent growth in the economy then we will have to see over 3 percent growth in the services sector.
As this is also election year, I don’t expect that much new investment activity will take place. It is important that the election be called earlier rather than later so that we can get on with the development of the country. Everyone seems to be in a wait and see attitude. One may argue that in an election year we should see more spending, as government and the opposition throws money around. This time it is different though, as evidenced by the no growth expenditure budget. In real terms expenditure is the same as the 2006/07 fiscal year. In fact a significant part of the capital expenditure budget relates to expenditures already undertaken, which would have been counted in the growth numbers in 2006/07.
When we are projecting numbers, we cannot put something down on paper just because it sounds like a good number but must have proper assumptions to support it. I wouldn’t mind if someone was to explain what the projects, and growth areas, are expected to be that will provide us with 3 percent growth in a year which seems like it will have less new activities than in 2006/07. Importantly also the tourism projections had to be recast because of the lackluster performance during world cup.
This is my simple logic as to why I do not think that the economy will grow at 3 percent this year. I would love for someone to disprove my logic, as I really would like to see us growing at 5 percent this year, but until then I see nothing to convince me that 3 percent growth will happen. I have a bet riding on it, and if I am right then you can catch me at Christopher’s enjoying my winnings.
In addition to the fact that many of these factors will not be present, or will slow down this year, the period January to March 2007 (Q107) came out at just 2 percent. This is not to be included in the current fiscal year numbers but was a period in which we had high confidence levels reported and a lot of work due to world cup. Going forward the factors will not be as favourable as in Q107.
Inhibiting factors
The following will affect growth going forward:
1) The hurricane season is predicted to be even more active than last year’s prediction. The quiet season last year was because of the emergence of El Niño, which is not expected this year. We are expecting 13 to 17 hurricanes this season, with 3 to 5 major hurricanes, and all we need to have a disaster is a little rain or wind as we have so neglected our environment;
2) Crime has significantly increased from the downturn at the end of last calendar year, and therefore I expect that this would have negatively affected confidence;
3) This is an election year and the predictions of violence will no doubt lead to a wait and see attitude until after election, and from all indications the date is being dragged out, which is not good for the economy. Many persons are also waiting on the announcement of the date to book airline tickets. We must start having a fixed date for elections;
4) There is no more preparations for world cup, so we will find a slow down in capital expenditures;
5) Not much work is left to be done on the Montego Bay leg of Highway 2000, and I can bet that the next leg will slow down given the tight funds situation;
6) Most of the Spanish hotels have been completed and Harmony Cove construction activity may not have any significant impact on the fiscal year;
7) The regional and global economy is projected to grow at a slower rate than last year, and China’s undervalued Yuan has seen the USA buying more from China, which could negatively affect us. In addition there is a possibility that China’s equity market could see a significant correction this year that could affect global markets; and
8) The companies on the stock market will not see any significant growth in profitability overall. Most of the listed companies are financial institutions and I expect that the securities dealers especially will continue to under perform the previous year. We also see companies like Jamaica Producers showing worst results, which I expect will continue for another one or two quarters. Companies like Cement Company and Hardware and Lumber, although showing improved performance, is doing so against the background of the cement crisis last year. There is one or two companies that I expect will do better but I will keep that to myself until I have had enough time to do the analysis and buy them.
PIOJ growth numbers
When one looks also at the numbers presented by the PIOJ, it supports the argument that growth will be closer to 2 percent for 2007/08. Growth in the Q107 was driven by 2.5 and 1.5 percent growth in the goods producing and services sectors respectively. The main contributor to growth in the goods sector is agriculture. In 2006/07 fiscal year the agriculture sector was the fastest growing. But this was because it was recovering from the effects of the hurricane in the two previous years. The sector therefore stabilized in 2006/07 and growth is expected to be moderated in 2007/08, as evidenced by Q107 when growth in this sector came in at 4 percent compared to 22.9 percent the previous year.
The main contributor to growth in the services sector is Tourism, in the Miscellaneous Services category. In Q107 this sector declined by 0.8% compared to a growth of 9.2 percent the previous year. Tourism was down in the quarter even in the March when an improvement was expected as a result of world cup cricket. I believe that at best Tourism will be flat for the fiscal year, and therefore growth of the services sector will be affected. In addition, the financial services sector is not expected to see any significant growth based on the expected company performances, and government services should remain flat given the tightening in the budget expenditures.
Therefore the two main sectors that provided exceptional growth last year, when we only came in at 2.5 percent, will see a slow down. Construction may see some growth, but with no world cup activities and a slow down in the highway project, we will not see enough upswing here to make up for the slow down in these sectors. Overall the services sector, which accounts for 70 percent of the economy, grew by only 1.5 percent. So although the goods sector grew by 2.8 percent, this only represents 30 percent of the total economy. I expect that the services sector will continue to lag behind the goods sector for the reason mentioned above. For us to see 3 percent growth in the economy then we will have to see over 3 percent growth in the services sector.
As this is also election year, I don’t expect that much new investment activity will take place. It is important that the election be called earlier rather than later so that we can get on with the development of the country. Everyone seems to be in a wait and see attitude. One may argue that in an election year we should see more spending, as government and the opposition throws money around. This time it is different though, as evidenced by the no growth expenditure budget. In real terms expenditure is the same as the 2006/07 fiscal year. In fact a significant part of the capital expenditure budget relates to expenditures already undertaken, which would have been counted in the growth numbers in 2006/07.
When we are projecting numbers, we cannot put something down on paper just because it sounds like a good number but must have proper assumptions to support it. I wouldn’t mind if someone was to explain what the projects, and growth areas, are expected to be that will provide us with 3 percent growth in a year which seems like it will have less new activities than in 2006/07. Importantly also the tourism projections had to be recast because of the lackluster performance during world cup.
This is my simple logic as to why I do not think that the economy will grow at 3 percent this year. I would love for someone to disprove my logic, as I really would like to see us growing at 5 percent this year, but until then I see nothing to convince me that 3 percent growth will happen. I have a bet riding on it, and if I am right then you can catch me at Christopher’s enjoying my winnings.
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