Dawn Ritch, Contributor
THE PEOPLE'S National Party is nothing if not politically clever. The PNP Government is finally admitting to how deeply indebted our country is, confident that private sector greed will be blamed for Jamaica's economic demise.
In his December statement on the debt Dr. Omar Davies, Minister of Finance, was quick to point out that a third of the public debt was caused by FINSAC. Economist Dennis Morrison, also piously noted "that the (debt) ratio has deteriorated markedly since the large FINSAC borrowings in the late 1990s ..."
In this respect Dr. Davies failed in his obligation as Minister of Finance to state the facts clearly, and Mr. Morrison either does not understand them, or is equally as guilty. The long and deafening silence from the Department of Economics at the University of the West Indies makes one wonder.
The well-known stereotype is that only Big Men or Fat Cats do business with banks, or can own them. The indigenous financial sector quickly became the ideal political scapegoats therefore for the collapse of the Jamaican economy.
Having apparently established the Jamaican banker's guilt by repeated accusations and a welter of costly litigation at tremendous public and private expense which still continues, the PNP Government rode the unrelenting news of the Big Man's financial misfortunes straight to an election victory and a fourth term.
Small wonder then that some members of the public believe that the Big Man created the public debt and most of Jamaica's economic problems, and nobody anywhere seems to think that the man who's in charge, namely Dr. Omar Davies, Minister of Finance, had anything to do with it.
In 1991, 92, and 93 the BOJ "Monthly Statistical Digest" shows inflation was 80.2 per cent, 40.2 per cent and 30.1 per cent respectively. In those years local inflation was pushed to well over 100 per cent. The economists to whom I have spoken are convinced that this inflation was a direct consequence of the increase in money supply.
The BOJ is the only entity that can authorise the increase of money supply by the printing of new money. What is wrong is that the BOJ is not independent, and has to act in accordance with the directions of its political boss, the Minister of Finance. But that subject is a discussion for another column.
INCREASE IN MONEY SUPPLY
This increase in money supply also marked the start of the Government's stated policy of taking the country's foreign exchange reserves from negative to positive.
The inflation that ravaged Jamaica in the very early part of the decade of the nineties was a beast created by the then new PNP Government, not anybody else. The inflation rate in 1988 was 8.8 per cent. Dr. Davies is fond of saying he has tamed the beast, but only long after the destruction of the Jamaican economy was well under way.
Having injected all this cash into the system, however, the BOJ then reversed the policy in 1993 and decided to remove the cash by mopping it up. The BOJ aggressively increased the cash reserves and liquid asset reserves of banks and merchants banks and subsequently imposed an additional special deposit scheme of five per cent.
The BOJ's "Monthly Statistical Digest" shows that on December 9, 1993 the BOJ was charging the banking sector an interest rate of 90 per cent for the first three days for their overdrafts and 120 per cent after the third day in a calendar month. Readers of this newspaper will remember that these were the penalties paid by Century National Bank.
They were also the penalties imposed on National Commercial Bank, Citizens' Bank, Eagle and Workers' Bank. This exorbitant level of interest rate on overdrafts at the Bank of Jamaica continued right up until 1998.
The banks and merchant banks tried to pass on these interest rates to their customers, and predictably became faced with mountains of non-performing loans from those customers.
Despite repeated public requests that these reserves be lowered by the BOJ, Jamaican bankers got neither the time of day from Dr. Davies, nor a fair hearing even in the court of public opinion. The public thought bankers were Fat Cats themselves, imposing high interest rates on borrowers, and deserved no public sympathy. Furthermore only rich people could borrow money, it was thought, and they didn't deserve any sympathy either.
One should also not forget that prior to the demise of the indigenous financial sector, this was the very sector that was being lauded by the Government and encouraged to participate in the development and growth of the economy. The hotels that were acquired by these indigenous banks were owned by the Government of Jamaica which sold them to these indigenous financial institutions.
If it was thought by the Government that it was less than prudent for these financial institutions to acquire these assets, as the Government subsequently said, why then were they sold to the institutions in the first place?
Indeed the country was repeatedly told by the Finance Minister that the financial crisis was not systemic. In July 1996 an audit firm of high repute pointed out to the Minister of Finance that the life insurance industry (owners in the main of the acquired hotels), would face insolvency by the end of 1996. They proposed an alternative solution by lending $25 billion to the industry at two per cent, giving the companies a spread of 40 per cent which would cost the Treasury $8 billion annually. The loan would have a two-year moratorium with repayment of principal in five years. The financial crisis happened virtually overnight. Instead of lending the financial sector at $25 billion, the Finance Minister stubbornly refused to admit that there even was a crisis.
CRISIS OF NON-PERFORMING LOANS
By 1998 it was all over. The crisis of non-performing loans and assets that was not supposed to be systemic, eventually led to the collapse of the institutions themselves. The indigenous banks had fallen like dominoes. Dr. Davies had waited until the problem could no longer be ignored. A $25 billion crisis had now become a $120 billion debacle, and rising.
The Government would like us to believe that it was certain specific people who caused the demise of the domestic financial sector. This is an effort to shift the blame from themselves, where it should belong. The misleading information, therefore, that FINSAC was due in large part to the mismanagement and corruption of the private sector is misguided politics and false economics.
The hard truth is that the Governor of the BOJ and Dr. Davies would really rather not talk about this, not least because they are about to make the very same mistake all over again.
Having successfully contributed to the crash of the Jamaican Big Man Banker, Dr. Davies is about to contribute once more to the crash this time of the foreign investors who bought the Big Man's failed financial institutions by re-introducing the special deposit scheme, an additional reserve of 5 per cent on the banking sector's deposit liabilities at the BOJ. Since it was the Big Man's fault the last time around, whose fault will it be this time when the system crashes all over again?
Based on the most recent assets and liabilities of commercial banks and merchant banks as at September 30, 2002, published by the BOJ, the immediate impact of this special reserve is huge. Effective three Fridays ago the commercial banks instantly had to have on hand $6.3 billion, and the merchant banks $150 million right there at the Bank of Jamaica.
This cash was not readily available in the system. One can only conclude therefore that massive overdrafts were created that Friday to fund the new BOJ requirement. The interest rate for these overdrafts is currently 32.95 per cent. In the event the overdraft exceeded three days in any calendar month the BOJ increases the rate to 45 per cent. This is the kind of thing that drives up interest rates and imperils private borrowers and lenders alike.
All this demonstrates that it is not good to play politics with the economy. When will the Government separate these Siamese twins, and have the Bank of Jamaica operate independently of the Minister of Finance?
