THE GOVERNMENT is now facing a crisis that is characterised by an extremely high debt stock and an unmanageable debt servicing charge.
At the end of fiscal year 2003/04, the budget deficit is expected at seven to eight per cent of Gross Domestic Product (GDP) and the national debt at approximately 151 per cent of GDP.
To put it another way, the debt currently stands at almost $700 billion, which means that every single Jamaican owes approximately $260,000 to date and will owe another $25,000 by the end of 2004 if the current rate of increase continues.
In fact, more than 65 cents out of every dollar that Government spends or $170 billion of the $261 billion budget goes towards servicing debt, leaving 35 cents for roads, schools and hospitals.
ORIGINS OF THE DEBT CRISIS
The 1970s marked a major turning point for many developing countries that were on substantial growth paths continuing from the expansionary period following World War II.
The major issue for many was the inability to meet foreign exchange requirements for attaining imports after the quadrupling of oil prices in 1973 (world oil price shock) and the food price increases that followed. This led governments to borrowing from international institutions to meet the continually growing demand for imports.
In the case of Jamaica, the drastic increase in our import bill was met with a significant shortfall in foreign exchange earnings due to a decline in bauxite, primarily linked to the imposing of the bauxite levy and the completion of the investment phase of the industry; manufacturing, due in large part to the higher cost of oil; and tourism, linked primarily to world events.
INCREASED GOVERNMENT
The national debt began to accumulate more rapidly during the latter half of the 1970s, over which time the debt increased by 50 per cent to stand at above $3 billion or above 75 per cent of GDP. In large part, this was due to the State increasing its involvement in the economy, in an attempt to stimulate growth through the public investment programme.
This resulted in the public sector wage bill increasing significantly due to the enlargement in the labour force and increases in wage rates and, to no avail of policymakers, led to an overall economic decline measured by a 10 per cent decline in real GDP, and no relief in debt servicing, which stood at 23 per cent of GDP by 1980.
During the first half of the 1980s, the debt continued to increase at a rapid pace. This was due in large part to a massive fallout in the bauxite sector, where revenues fell by 50 per cent and a major revaluation of the dollar due to International Monetary Fund (IMF) policy requirements, which demanded sound monetary policy, liberalisation and deregulation inter alia.
In the latter part of the 1980s, the economy did, however, experience some of the benefits from restructuring the public sector, such as economic growth measuring between four to six per cent per annum and a huge reduction in the fiscal deficit, which only stood at 1.1 per cent at the end of 1989.
The track laid for the economy in the 1980s provided substantial results in the early 1990s. The national debt decreased appreciably during the early to mid-1990s and by the end of 1995 the debt stood at approximately 87 per cent of GDP.
FINSAC
In 1996, the country was hit by a major financial sector crisis affecting a number of domestic financial institutions. This crisis was in large part due to rapid liberalisation pursued by the Government, in the context of inadequate regulation and enforcement resulting in non-performing loans and bad investments by financial institutions.
To address the problem, Government created a 'bailout company' called FINSAC. The bailout is estimated to have increased the debt by 40 per cent, as such the Government recorded a high fiscal deficit of 7.5 per cent of GDP in 1996.
It continued in this region until 2000 when the Government recorded a surplus. By this time the national debt had expanded to 124 per cent of GDP, with debt servicing equalling 32 per cent of GDP.
The surplus of 1.2 per cent in 2000 came as a result of the sale of licenses and Government assets, including some held by FINSAC.
However, since then the fiscal account returned to negative due in large part to increases in the public sector wage bill. There was an increase in employment in the public sector of 28,300 persons from 1996 to 2002 and a resulting increase in salaries as Government made a commitment to bring civil servants salaries to within 80 per cent of the private sector.
THE PRESENT
The budget for 2003/4 included a $13.8 billion tax package targeting both consumption and production. It also included a widening of the General Consumption Tax (GCT) net, a cess on imports, and an increase in interest rates. The net effect is that Jamaicans were forced to pay higher prices for goods and services, with no signs of new economic expansion and opportunities.
In fact, after examining the budget and its implications for both producers and consumers, one has to wonder whether the pre-budget preparation gave any consideration to expanding the productive base of the economy, a priority, particularly in the context of a country that has seen extremely limited net economic expansion over the last decade.
It did not. It only resulted in an erosion of confidence, impacting the exchange rate, with over 20 per cent devaluation and inflation of more than 14 per cent.
Additionally, there was a massive increase in the fiscal deficit, now projected at between seven to eight per cent and an equally major expansion of the country's overall debt, now at approximately 150 per cent of GDP or approximately 700 billion dollars.
CHANGE
There is a need for new revolutionary thinking to bring about the change. It must involve a change towards Government to cut spending; reform taxation; create a climate for investment; and develop a long term strategy for growth that is inclusive of all agents of the economy, and does not discriminate based on political considerations.
But importantly, also, there must be a change of attitude. A change in the way Government conducts its affairs. For too long our system of governance has been loose, without honour, lacking in transparency and accountability. This is why we have waste, corruption and why the entire process lacks credibility.
The process of reform must begin and the restoration of the legitimacy of Government is a precursor for successful economic management. This is not just about changing a Government but it is fundamental to the process that MPs are accountable to their constituents, and that ministers are accountable to parliament and to the people. Governance should be based on systems, not men!
The United Nations Conference on Trade and Development (UNCTAD) in 2002 conducted a survey to determine the main factors deterring investment in Lesotho, Maldives, Mali and Tanzania. The survey revealed that legal system, crime, public sector bureaucracy and corruption were the main factors.
THE INVESTMENT CLIMATE
Similarly, Trinidad and Tobago, which enjoys the second largest receipts of foreign direct investment per capita in Latin America, conducted a survey to assess its investment environment. It found that investors were most concerned about political and economic stability, costs of doing business, having access to a skilled labour force and the availability of competitive local financing.
Whereas these countries growth rate demonstrate that they have found a way to guarantee this sort of environment, it seems to have eluded Jamaican policymakers. Let us draw parallels from these countries in an attempt to suggest a few recommendations.
First, a long-term development policy (such as Trinidad's Vision 2020 or Tanzania's Vision 2025) devoid of partisanship and developed with the consensus of civil and corporate society is necessary. This is why we support the concept of a partnership.
Second, the creation of a single agency that efficiently assists investors through all stages of the investment process, from inquiry through to how to deal with the Inland Revenue Department, is critical towards removing encumbering bureaucratic red tape.
Third, crime needs to be managed as 'crime affects businesses not only because of the risk involved but also because of the higher costs that are associated with the precautionary measures required to reduce or deter its incidence' (TIDCO 2002).
Fourth, the compilation of the relevant data and development of a tracking system for investors is necessary to understand their concerns and build relationships.
Many of these successful economies conduct annual surveys to evaluate the perceptions of investors on the impact of a wide variety of factors that influence their investment decisions, thus giving them the ability to address concerns and further strengthen the investment climate.
While it might be true that in Jamaica we conduct periodic surveys in this area, there is little evidence that we act decisively on these findings. Finally, due diligence on all investors seeking opportunities and assistance should be carried out in order to assess their ability to manage projects. This minimises waste of State energy and resources. These ideas are neither novel nor original. Our failure seems to lie more in our ineffective implementation rather than knowledge on what needs to be done. What is clear is that Government's role in aiding national development must involve assisting and facilitating the success of private enterprise.
Generation 2000 is an organisation aligned to the Jamaica Labour Party. Send comments to g2k@anngel.com.jm
