Seaga
Opposition Leader Edward Seaga, in a recent parliamentary debate on the economy, said the upcoming Budget will be "a bookkeeping exercise". He highlighted job-creation projects and mega-investments to generate economic growth. Below is his presentation:
A CRISIS EXISTS today in the financial system and the economy as a whole.
The crisis centres on both reality and perceptions of pending disaster, as occurred in the last decade.
There is evidence to support these fears.
All vital macroeconomic indicators are moving in the wrong direction:
(1) The fiscal deficit is projected to double from the IMF agreed target of 4.4 per cent of GDP, under the staff monitored programme (SMP), to 8.4 per cent of GDP. Fifteen billion dollars of additional revenues are required to achieve the projected 4.4 per cent of GDP, an exceptionally large amount.
(2) The loan financing programme for the current fiscal year shows a huge gap of US$222 million which is not likely to be realised. As a consequence, it is projected that the debt to GDP ratio agreed with the IMF on the staff monitored programme will not decrease from 133 per cent to 126 per cent of GDP, but increase to 141 per cent.
(3) The adverse performance of the fiscal deficit and debt ratio, two of the most critical economic indices, has caused the Minister of Finance to admit publicly that, "the programme is moving in the wrong direction".
(4) The exchange rate is under pressure and depreciating. The Net International Reserves (NIR) are being drawn down significantly to protect the rate of exchange of the Jamaican dollar.
US$72 million of NIR resources have been used over the past two months alone to intervene in minimising the depreciation. But ample reserves remain by any test to support stability of the exchange rate, unless exceptional demands arise for foreign exchange.
(5) The end product of the adverse mix of monetary, fiscal and debt dynamics will be high interest rates which are unfriendly to investment. Currently, interest rates are increasing again to levels which can be prohibitive.
(6) Economic growth is the ultimate victim of these developments. The average GDP growth from 1991 - 2001 is a mere one per cent.
The economy, therefore, has been stagnant for a decade. The result has been little job creation and much job frustration.
The consequential crisis generated by these macroeconomic movements is:
Immediate - relating to the fiscal year 2002/03 ending march 31.
Intermediate - relating to the next fiscal year 2003/04, commencing April 1, 2003.
Medium to longer term the immediate problem is to close the financial gaps of:
A revenue shortfall of J$15 billion to meet the 4.4 per cent of GDP fiscal deficit target.
A loan shortfall of US$222 million to enable the budget to meet all its loan payment obligations.
Generating $15 billion of additional revenue or drastic reduction in expenditure to reduce this amount, or a combination of both, are impossible to attain in the period of two months remaining in this fiscal year, unless horrendous measures are introduced immediately which could produce awesome dislocations in the economy.
Most certainly as this will not occur, the fiscal target of 4.4 per cent of GDP will, therefore, not be met. Failure to meet this target carries severe consequences as outlined below.
The international rating agency, Standard & Poor's has issued a "caution" on Jamaica sovereign debt based on the expected failure to meet the IMF/SMP targeted fiscal deficit of 4.4 per cent of GDP by March 31. It is likely that this "caution" will be degraded to a down-grading of the rating assigned to Jamaican bonds which is a primary financing measure used to fund the Budget. This will reduce the ability to raise the required loan financing, or if financing is secured, it will be at higher interest rates, which means added revenue requirements to service higher interest payments.
The distress signals on Jamaican bonds could prevent closure of the loan financing gap of US$222 million for this year, to which must be added the over hang that will most certainly result from shortfall in failure to find the $15 billion to close the recurrent budget gap in this
fiscal year.
The Minister of Finance must therefore tell the country now how the Government expects to close the financial gap of:
$15 billion in the revenue programme
US$222 million (J$11 billion) in the loan programme, and -if it is impossible to close these gaps, will enough funds be raised to cover the inescapable payments (interest, salaries, etc.) required for this fiscal year?
The intermediate crisis relates to the next fiscal year 2003/04. The shortfalls of this current fiscal year 2002 - 03 will overhang as a first call on the new budget to be presented in April, 2003.
The new Budget will have its own IMF/SMP targets to fulfil in reducing the fiscal deficit and reduction of the national debt to a new target level under the 2003/04 programme.
As a result, there will be severe constraints on loan financing in order to meet the new target level of debt to GDP. Additionally, the financial market is unlikely to respond sufficiently to offers from the Government for loan financing because of the uncertainties in the market.
Budget financing in 2003/04 can be expected, therefore, to be a horrendous exercise of trying to balance competing financing demands. In this scenario, the next budget and beyond cannot be expected to be more than a bookkeeping exercise of closing financial gaps to meet the IMF/SMP targets.
If this fate is to be avoided, then drastic adjustments must be made to increase revenues very substantially and cut expenditure drastically to produce a viable budget in 2003/04 able to fulfil development needs in addition to meet financing requirements.
The question which arises for the Minister of Finance is whether the Government intends to take the route of heavy additional taxation and huge expenditure cuts to restore viability to the budget for 2003/04?
THE WRONG ECONOMIC MODEL
Budgetary financing has deep problems. Solutions to these problems will affect the wider economy irrespective of whatever adjustments are made to revenue or expenditure:
Imposition of new taxes for additional tax revenues will impact on the inflation rate by inducing higher prices. This in turn, will require the Government to tighten money supply to counteract the pressure of higher prices in order to maintain inflation in the targeted low single figure range.
Tighter money supply will squeeze consumer spending and dampen the demand for goods and services leading to a continuation of sluggishness in economic performance.
Tight money supply also leads to continued high interest rates which deter economic growth.
Reduction of Government budgetary expenditure will further reinforce stagnation of the
economy.
These dislocations will restrain bank lending and increase the cost of borrowings. The fear is that if this occurs on a widescale over any extensive period, the same type of financial crunch which caused the melt down of the financial system in the mid 1990s could follow.
Notwithstanding this perception, the question is will the Government pursue yet another round of heavy adjustments to put the economy on track?
The Minister of Finance must indicate in specific terms if the Government will accept the consequences of drastic adjustment and stay the course.
The medium to longer term problem involves the options for economic development which are being pursued by the current economic model.
The current economic strategy is a low inflation model. This also entails maintaining a relatively stable exchange rate with tolerable movements of the rate. Both low inflation and exchange rate stability are essential to any successful economic model. But these are not enough. The missing link in the present model which accounts for lack of economic growth, is adequate appropriate investment necessary to spur growth and create jobs.
If the low inflation model is combined with the appropriate policies which attract strong investment, then the combined strategies will produce a low inflation growth model, the real objective of development
strategies.
The missing component in the low inflation model pursued since 1996, is low interest rates leading to strong investment.
Not any investment will do. There must be strong export earning potential to provide the foreign exchange earnings needed to offset or cover the cost of any imports required for investment projects. A further requirement is significant job creation.
Without these elements the model will be ineffective in producing growth and the result will be the present low inflation model maintained at high economic cost with cycles of dislocation in the economy, as we have seen for the past dozen years.
The Minister should now advise the country on the plans in place to promote export earning, labour intensive projects to enable the Government to jump-start the economy.
The emphasis on Government intervention is a necessary element at this stage. In circumstances of uncertainty based on failed and contradictory policies, the private sector is naturally reluctant to provide the required investment. In these circumstances, the Government can either wait on appropriate investments which will not be forthcoming to the extent required, or proceed to promote appropriate joint ventures to lift the economy.
Highway 2000 and the North Coast highway together with re-development of the Sangster International airport are projects which will have some impact, directly and indirectly. But more investments with greater job creation are required to not only jump-start but move the economy.
In the mid 1980s the economy faced an even deeper crisis than at present. In the worst recession in 50 years to that time, there were severe shocks engulfing the global economy. In the case of Jamaica, the impact was particularly severe: 50 per cent of the country's export earnings, some US$500 million, were lost to the economy overnight when the bauxite and alumina industry almost totally collapsed in Jamaica. As a result, in 1985, the economy showed over four per cent negative growth through no fault of the Jamaican economy.
The Government at that time took three far reaching steps:
(1) It borrowed significantly overseas to cushion the fall-out in foreign exchange earnings;
(2) It structurally adjusted the economy urgently to eliminate the substantial fiscal deficit caused by the huge fall-out of bauxite and alumina revenue. Reliance was placed on severe expenditure cuts moreso than additional taxation to improve the revenue.
Based on these adjustments the recurrent budget which was in deficit for a long time, quickly achieved a surplus in 1985/86 and a fiscal surplus was produced in 1987/88 for the first time in more than a decade.
(3) With these corrections made, two massive investment initiatives were urgently pursued to earn foreign exchange and create jobs:
The garment export industry was fully launched;
A programme to build 3000 new hotel rooms commenced to provide accommodation for the resurgent tourism industry.
The result was GDP growth of some seven per cent in 1987 compared to 1.5 per cent in 1986, and an average of 5 per cent growth for the last half of the decade, despite the impact of Gilbert in the middle of this period.
The labour intensive nature of these projects produced a record level of nearly 100,000 new jobs in three years, reducing the unemployment rate to 18 per cent from a high of 30 per cent in 1980.
The crisis of the mid-1980s was dealt with effectively in two years. Thereafter, the economy surged based on the re-structuring of the public sector budget and the investment initiatives in the private sector.
The question which arises is the extent to which the initiatives required to create mega investments to spur growth and job creation exist at this time?
One such project exists which in part fulfils the need for job creation on a massive scale, dispersed across the island. While foreign exchange earnings would not be generated, there is a component in this project which meets the urgent demand for stabilisation in those areas which are economically disadvantaged and socially deprived.
These are slum areas with inadequate housing, poor and often non-existent infrastructure. They blot the landscape of the inner city and rural areas serving as a fertile ground for under development. Some of this under-development produces individuals who become involved in crime and others who simply never make it academically to establish a worthwhile occupation or career. but the majority of residents in the festering inner city can create a better life for themselves and families, given better opportunities, and have the potential to contribute substantially more to community and national life.
The most important opportunity which can be offered to an inner-city resident is decent housing. There is a need to respond to this call for social reasons, to rid the country of slums and provide a whole new life for thousands of poor Jamaican families who with new opportunity can contribute more to society.
It can be done. We can wipe out all slums in Jamaica in eight years by building 4,000 inexpensive houses annually to replace ramshackle dwellings.
Funding for this mega project can be found without calling on budget resources. The national housing trust has sufficient surplus funds to provide $2 billion annually and still retain a working surplus.
The project was set out in the JLP manifesto which called for eliminating all shacks by a "shack attack".
It is time to change course, by changing poverty for progress, to change the model which has persistently failed to a model which can consistently produce. The change cannot be postponed.
The economy cannot survive another adventure without knowing where it is going.
It is time for the Government to take the public fully into confidence to develop a road map for guidance to ensure that the maximum willingness will exist to chart a new and safe course for the future.
It is time to change the present model which has failed and find the right model which can succeed.
