The following is the first of series of articles by National Democratic Movement President Bruce Golding in response to the Budget currently being debated in Parliament.
The Budget currently being debated in Parliament and the harsh realities that inform it are a stark manifestation of an economic strategy that is short-sighted, reactive and fundamentally flawed.
It reflects a lack of bold, decisive leadership and the continuing triumph of politics over economic good sense. That it has achieved some specific objectives is not to be disputed but in doing so it has wreaked havoc of such monumental proportions that it will take more than a generation to recover.
The crisis started in late 1990 when the Government allowed money supply to grow at an annualised rate of 50 per cent. There were no mitigating reasons for this explosion in liquidity - no natural disasters or emergencies that required unplanned levels of liquidity. Foreign exchange liberalisation in September 1991 without tight control on liquidity and a pool of hard currency funds to support the transition merely added fuel to the fire. The seeds would eventually lead to massive inflation, steep devaluation, crippling interest rates, collapse of the financial sector, ruination of many businesses and jobs, huge build-up of public debt and prolonged economic stagnation.
Bad as it was, the fire could have been contained had the Government had the foresight and courage to take tough corrective action. It is generally understood that excess liquidity fuels inflation and devaluation. What is not generally acknowledged is that if the fuel line is turned off and appropriate measures taken to control the fire, it will eventually burn itself out.
Some damage is unavoidable, but the losses can be contained so that repairs and rebuilding can proceed. Any good fire-fighter knows that. Only a stupid fire-fighter proceeds with axe and chainsaw to demolish the rest of the building so that the fire cannot destroy it!
Lack of courage
Money supply should have been tightened and some increase in interest rates could not have been avoided but the burden of corrective action should have been shared by strong fiscal measures. Programme expenditure should have been compressed sufficient to at least absorb the cost of mopping up excess liquidity and possibly providing some surplus to permanently retire some of the excess liquidity. This would have been painful and politically unpopular but it would have spared much of the disaster that has ensued. I quote some of what I said in the 1992 Budget Debate:
"I say to the Government forget about growth this year and we wont hold it against you next year. The number one problem is inflation - that is what you have to deal with this year. The investment must be made NOW to control inflation and create the conditions for a subsequent return to growth. What is needed now are tough decisions and the kind of courage that, in a way we have never contemplated before, puts Jamaica first. I concede that what I am talking about does not make 'good politics' but it makes good sense and now is not the time for politics."
The Government was not into that. Instead of tight fiscal measures, budgetary expenditure was allowed to run wild. Recurrent expenditure in real terms (after adjustment for inflation) and net of interest payments increased by 27 per cent in 1992/93 and a whopping 72 per cent in 1993/94. Bearing in mind that 1993/94 was a general election year, we again saw the triumph of politics over sound economic management.
The high interest rate 'solution'
With the 1993 re-election victory safely behind it, the Government now recognised that it had a problem that had to be dealt with. By February 1994 the brakes were applied with fearsome force. T-Bill rates were hiked to 52 per cent sending lending rates close to 70 per cent.
In fairness to the Government, it belatedly tightened the fiscal reigns in 1994/95 and 1995/96 when real recurrent expenditure (net of interest) actually declined by 10 per cent. However, this achievement was completely reversed in the next two years when, doubtlessly because of the imminence of another general election, recurrent expenditure increased 29 per cent above inflation levels.
What reason is there for us to expect any different behaviour as we get closer to the next elections? Indeed, Dr. Omar Davies's claim of fiscal restraint has been tarnished by the increasing use of deferred financing, the full extent and cost of which has not been publicly disclosed.
* Tomorrow: The achievements of the strategy.
Please see part two in the series
WE HAVE achieved single-digit inflation, a relatively stable exchange rate and Net International Reserves of more than US$1 billion. What must be objectively evaluated are the cost of this strategy, the destruction that it has caused and our diminished capacity to sustain it. It is important to identify these factors and to analyse their effects and implications for the future.
THE DEBT COST
Before all this started we had a heavy but manageable level of debt. What this strategy has done is to expand that debt to catastrophic proportions vastly outstripping our income ability to sustain. In the last seven years, the public debt has moved from US$4.4 billion to US$9.9 billion, from 99 per cent of GDP to 151 per cent. In Jamaican dollars, it has moved from $78 billion to $453 billion. Each man, woman and child in Jamaica now owes $174,000 compared with $32,000 in 1993. Our debt-related payments as a percentage of total expenditure have moved from 39 per cent in 1993/94 to 62 per cent this year. Interest payments alone have moved from 34 per cent to 48 per cent of recurrent revenue. In these seven years, interest costs have been growing, on average, 30 per cent faster than our revenue. For the third consecutive year, our entire revenue income is insufficient to meet our debt-related payments.
THE TRANSITION FROM STRATEGIC "MOPPING UP" TO COMPULSORY "DEBT SERVICE"
BORROWING
It can be assumed that if these heavy borrowings were purely for mopping up purposes then the money would be locked away somewhere and it would theoretically be possible to simply return the money to the people and rid ourselves of this additional debt. This would have been the case had we taken fiscal measures to absorb the cost of these borrowings. What we have actually been doing is using new loans to pay the interest on previous loans as they fall due. In the last seven years, net new borrowings (less debt forgiveness) total $350 billion. Interest payments alone during that period account for 65 per cent of this amount. What started out as a deliberate and temporary economic strategy has become a permanent and inescapable economic obligation that future generations will unfairly be forced to bear.
WEAK INVESTMENT AND ECONOMIC
STAGNATION
The government's borrowing requirements have forced it to commandeer the bulk of banking system credit that would otherwise have been available for private investment. Seven years ago the government was a net depositor in the banking system. Today, the government in one form or another takes up 80% of available bank credit. Thus, although interest rates have been trending down, there is no corresponding surge in private investment. There is simply very little money available to be borrowed! This stifling of private sector activity is reflected in the lack of economic growth over the last seven years. Indeed, with even our modest population growth, per capita GDP has fallen by seven per cent.
THE FINANCIAL
SECTOR COLLAPSE AND FINSAC
The collapse of the financial sector could have been avoided. It is deceitful nonsense for the government to blame it on corruption and mismanagement. Sustained high interest rates inevitably result in loan defaults, risky lending and portfolio misalignment with expensive, short-term deposits ending up in long-term, low-yielding investments. Government's intervention that should never have become necessary and was so badly executed led to the creation of FINSAC, the single most expensive undertaking ever made by any government. It added another $112 billion to the public debt - the equivalent of all that we have spent on education over these seven years.
BUSINESS FAILURES AND JOB LOSSES
Crippling interest rates and weak demand brought about by tight monetary policies have had a devastating effect in terms of business failures and job losses. The government's own data indicate that in the goods producing sector more than 75,000 jobs have been lost since 1973! The large closures are reported in the media. The much larger number of small businesses that have disappeared does not usually make the news. Government's claim that the unemployment rate is only 15.5 per cent is hardly relevant since its surveys define a person as being employed so long as he or she works at least one hour per week! The Jamaican people have paid too high a price for what has been achieved. What this has meant to honest, hardworking people who lost their businesses, jobs and homes and found themselves no longer able to pay for their children's education must be seen in our context as a crime against humanity.
A reality check Where are we now?
We are the only nation in the world where in the last 27 years there has been no net growth in the economy and in which we exceeded 3 per cent growth in only 3 years!
We are the only nation in the world with a debt/GDP ratio of 151 per cent!
We are the only nation in the world in which debt-related payments exceed our annual income and accounts for 62 per cent of total expenditure!
We have destroyed our capacity to respond to the genuine needs of the people. Every single dollar of non-debt expenditure has to be borrowed from somewhere.
Our investment in education, so critical to our survival and recovery, is constrained at 11 per cent of expenditure and 6 per cent of GDP - far below what is required to give us a fighting chance for the future.
We have very few assets left that can be divested to ease our debt burden.
There will continue to be a shortage of bank credit for private investment. Very few local entrepreneurs can access overseas capital and the competition for foreign direct investment, no longer influenced by our geo-political status, is more intense than ever before.
Hopelessness and despair are generating a level of social disorder that will make the country increasingly unresponsive and ungovernable. Many inner-city communities across Jamaica are devising their own social and economic systems in which crime is the engine of growth, and law, order and justice are decentralised and autonomous. Government and its agencies are seen not as constituted authority but as a nuisance with an inclination to terrorise.
The inevitable
collapse of the
current strategy
Our current debt level cannot be sustained. We remain open for business only so long as we can find new lenders to keep us going. Wilmot Perkins aptly likened this strategy to the pyramid schemes that eventually crash when new lenders are not sufficient to allow the earlier ones to be repaid.
Our reputation for always honouring our debt obligations remains intact but precariously so. International lenders and rating agencies usually concern themselves only with a country's external debt. This is so because in almost every country the domestic debt is minuscule in relation to its external debt. They will increasingly become concerned with Jamaica's domestic debt that now amounts to more than 60 per cent of our total debt. Additional borrowings are going to prove increasingly difficult to raise and real crunch time will become a real possibility.
Our net international reserves, as robust as they appear, do not represent savings in the bank that belongs to us. They can disappear overnight if people perceive that crunch time may not be far away.
Our inability to respond to social needs because of tight budgetary constraints and the paucity of job-creating investments will aggravate an already inflammable social and political environment with disastrous implications for the society and economy.
Putting a light to the darkness
Our possibilities for survival and recovery are sharply defined by both our present predicament and our historical experiences. We run the danger of believing that a change of government accompanied by a change of strategy will undo the damage that has been done and put us on the road to recover. "We did it before and we can do it again" is the frequent JLP refrain. Getting out of the straits we are in requires much, much more than that.
It is going to take a level of mobilisation of the will and energies of the people that has never been seen before.
It will require a bond of trust between the people and there government that, I submit, is not possible within the context of our traditional political relationships.
It will require a level of transparency and accountability that we talk so much about but have never been prepared to put into practice.
It will require a kind of governance that neither the PNP nor JLP has up to now been prepared to embrace.
It will, indeed, require a new covenant among the political leadership and between them and the people.
A new social, economic and political framework
THE ECONOMIC STRATEGY
We must develop a viable macro-economic strategy that must harmonise key objectives relating to debt reduction, inflation and investment.
We must agree on a debt management strategy that will progressively reduce the debt to 60 per cent of GDP over a 10-year period.
We must agree on the fiscal parameters and priorities that will sustain adequate levels of expenditure in critical areas such as education while remaining consistent with our overall objectives.
We must agree on a long-term investment strategy that can be promoted locally and internationally by government and opposition.
We must agree on the measures needed to revitalise local businesses that have been savaged by high interest rates and FINSAC indebtedness.
THE SOCIAL STRATEGY
We must forge a new partnership between government and the people that will diffuse mounting tensions, engender new confidence and inspire new hope.
Respect for human rights must be made sacrosanct and effective mechanisms put in place to protect them.
The institutions of justice and law enforcement must be supported in carrying out the law and they must, themselves, be made to conform to the law.
Corruption must be rooted out through a new regime of transparency and accountability and a demonstrable resolve that no one is above the law.
THE POLITICAL STRATEGY
This new covenant cannot co-exist with conventional political hostilities. Tribal politics cannot unite a people, motivate in them an appreciation of the difficulties that must be faced and mobilise them behind agreed strategies toward common objectives.
Warring enemies cannot share the same space or make long-term commitments that others will be prepared to rely on.
Robust democracy does not necessarily mean "fight to the death" antagonism.
The present crisis must give birth to a new political paradigm in which we redefine our political relationships and build a framework that facilitates collaboration while respecting our diversity.
It is not what happens in elections that determines our future as a people but rather what happens in between elections.
The constitutional reform proposals advocated by the NDM were designed to induce that kind of framework. But even without these reforms the same objectives can be achieved if we have the will and if leaders have the courage to lead instead of following from in front.
Greatness is not measured by longevity, the number of victories won or the intensity of the determination to win. Rather, it is the vision and preparedness to confront the challenges of the present in order to secure the fortunes of the future.
A country does invariably get the government it deserves. Leaders, equally, get a country that is prepared to tolerate them.
The following the final of a two-part series by outgoing president of the National Democratic Movement Bruce Golding in response to the Budget currently being debated in Parliament. Part one is included.
