Earl M. Bartley, Contributor
LISTENING TO the arguments between the Government and the Opposition about the budget and prospects for the economy, this question comes to mind: is it the best of times or the worst of times?
Not unexpectedly, the Government is saying it is "the best of prospects we have had in five years."
The Opposition claims we are teetering on the brink of crisis with an unachievable medium term adjustment programme.
Depending on where you are looking, there might be grounds for both perspectives. The Government is looking at developments in the real economy, the Opposition, at the precarious state of the public sector budget. Each is guilty of over-statement and understatement within their singular viewpoints, without achieving balance.
STATE OF THE REAL ECONOMY
There can be little doubt that the 27 per cent increase in cruise ship visitors and the seven per cent increase in stopovers in 2003, plus the US$350 million 3,500 room investment planned by the Rua Group of Spain is giving a good shot in the arm to the economy and boosting morale. In addition the 5.9 per cent increase in bauxite/alumina production in 2003 and the capacity expansion planned by a few companies in the sector is significant help that should add to revenues and foreign exchange earnings. Agriculture has rebounded by 12 per cent from flooding in 2002, construction is strengthening, and transportation and financial services continue to grow. Even manufacturing is showing hopeful signs, it is claimed, though few are willing to quantify that hope.
It is tempting to say any growth is better than no growth. But as I have noted in a previous article, our tourism dominated economy could enforce a superficial pattern of development on the country, that is, a tendency for us to specialise in the provision of basic services and retailing activities.
No country has ever developed by simply providing basic services to the rest of the world. And though Jamaica is nowhere near to maximising our tourism potential - Hawaii with about half of our population grosses US$15 billion per year from tourism compared to $1.5 billion for Jamaica. We therefore need to develop and sell higher value-added products or services to the rest of the world. But if we are now doing so, it is mostly through a migration of skills with a low return on those skills in the form of remittances. Maybe in the medium to long-term Jamaican migrants will return enriching our economy and society with their higher levels of skills and experience. But that could be a vain hope. It is better for us to develop a parallel trade of higher skilled activities like programming, bio-technology, off-shore banking and resource processing and run them in tandem with our tourism development. But the latter challenges we are yet to meet and seem to only fitfully contemplate.
FISCAL SITUATION
Finance Minister Dr. Omar Davies has been eager to proclaim the US$200 million euro-bond loan as the market reaffirming confidence in him personally, and Government policies in general. The fact, however, is that the euro-bond loan was more a vote of support for the positive developments in the real sector of the economy, which are only in the most amorphous sense related to Government policies. And, while the euro-bond loan will boost the NIR and help to steady the exchange rate of the Jamaican dollar and strengthen the hands of the Bank of Jamaica (BoJ) in pushing down domestic interest rates, it will immediately add to the debt at a higher real rate of interest than domestic rates.
What the euro-bond loan will certainly not do is reduce the yawning gap between government revenues and expenditures. The Government was hoping to have the fiscal deficit at $2.5 billion by the end of November but now admits that it is running at $5 billion above target. The International Monetary Fund (IMF) is projecting that the out-turn on the fiscal deficit for 2003/04 is likely to be 8.3 per cent of GDP or as high as 10 per cent according to the Jamaica Labour Party (JLP). Even with two per cent growth in output for this year and the expected ballooning of revenues during the last quarter, it will be extremely difficult for the government to achieve its fiscal deficit target of six per cent of GDP. The basic problem is that it is difficult to predicate interest payments at 18 per cent and then exceed that figure by four to 14 percentage points for much of the year and still expect to be on target. Looking at the figures one month later I just do not see the government being able to reduce the gap between revenues and expenditures below $34 billion or 7.5 per cent of GDP.
What is worse, unless it is able to obtain an absolute wage and expenditure freeze in the public sector in fiscal year 2004/05, plus a $20 billion growth in revenues, the objective of chopping the fiscal deficit in half come next year seems iffy at best.
The Government's medium term fiscal reduction programme therefore seems off target. A lot will depend however, on whether it is able to achieve continued reductions in interest rates which will depend on how investors weigh the strengthening in the real economy against Government's more problematic fiscal performance.
POLITICAL CONSENSUS
Having doubled their salary at the beginning of the year, the Government has been calling for sacrifice in the national interest and a social contract, while hiding behind the shield of the 'fragile' economic recovery. Having squandered its capital to use moral suasion with public sector workers, the Government is relying on the coercive threat of job losses to keep public sector workers in line. Few Jamaicans seeing our economy limping along over the past several years are keen to jeopardise this nascent recovery with social volatility. We are literally being put in the unwinnable situation of cutting off our nose to spite our face.
Yet sustaining the growth and recovery in the economy cannot be the sole basis for consensus. The Government has repeatedly abused the public trust. And it is the unravelling of the Government's manipulation of the budget figures and the electorate before the last General Elections that precipitated the nose-dive in business confidence at the beginning of 2003 which led to the run on the dollar and the BoJ's desperate spike in interest rates to contain it.
Worse, there is abundant evidence that the Government continues to spend billions of dollars of public funds without the requisite transparency and accountability. I have alluded repeatedly to the similarities between the contracting procedures under Operation Pride and those being implemented in the construction of Highway 2000 and the recently announced Inner-city Housing Development Programme. Similar to the contracting in Pride, in the latter two projects, a combined $10 billion of public funds are to be 'loaned' or advanced to two main contractors who will ostensibly have principal authority in awarding sub-contracts. Already there have been complaints of unfairness in the awards of some contracts. Given the manner in which the Government continues to operate without openness and transparency in many areas, it seems that calls for consensus in these circumstances are requests for acquiescence and quietude with irregularity and corruption.
POLITICS OVER LAW
And that brings me to an area of profound dissatisfaction with our country - the weaknesses in the rule of law and our over-reliance on politics to deal with nearly every problem. Very often, public policy objectives are outlined - openness and competition in awarding Government contracts for instance. Institutions are established supposedly empowered by law to effect these objectives. Then as was the case with Operation Pride, and to a great extent now with Highway 2000, huge amounts of public funds are spent outside the purview of that office with little legal challenge.
During the first seven years of Operation Pride the Auditor General opined that the contracts awards should comply with public sector contract rules (So did the Contractor General (CG). As the official with the legal standing the Contractor General could have asked the Courts to rule whether the broad mandate of his office over-rode the Minister of Housing's authority as a corporation to autonomously monitor these contracts. But instead of filing suit, the CG relied on moral suasion, which the Government disregarded for seven years.
The need for greater scrutiny, even legal challenge to Highway 2000 is even more pronounced. The Government has borrowed some US$108 million or approximately $6.5 billion from Jamaican pension funds for on-lending to the contractors. Interest rates will be linked to inflation, but assuming a 10 per cent rate, the road will need to generate annual revenues of $650 million just to cover interest payments before maintenance and operational costs are considered. The Government has been boasting about ridership on the road exceeding expectations by 60 per cent. With two tollgates and ridership of 350,000 per month, annual revenues are approximately $250 million per year. As the road is extended and the number of tollgates increases, so should revenues, but so also will the debt and the demands on revenue for debt service. On completion Highway 2000 will need to generate almost $6 billion annually to service its debt and that is income it seems unlikely to generate.
Given its improbable debt service to revenue ratio, Highway 2000 might not be completed in our lifetime. In the meantime, tax payers will be called upon to cough up $1 billion annually in debt service. At the very least a parliamentary or judicial review to determine if the public has been deliberately misled appears to be required. But if the construction of Highway 2000 is aborted tomorrow amidst all kinds of mealy-mouthed protestations from the main architects, chances are, all that will happen is some ineffectual political protest and grandstanding.
For the past decade there have been widespread allegations of irregularities against the Patterson Administration. And I suspect that is at the root of the desire to be rid of them. But should we sabotage our economy with political and social unrest or should we methodically collect the evidence and bring them before a court of law. I believe the latter would be far more satisfying.
Earl M. Bartley is an economist and businessman. You can send your comments to adapapa@cwjamaica.com
