LATIBEAUDIEREAl Edwards, Business Co-ordinator
DESPITE THE several challenges facing the nation, the first quarter of 2004 has started on a largely positive note characterised by the Bank of Jamaica's (BoJ) lowering of interest rates last Monday. This is the fourth reduction this quarter and the tenth since April 2003.
So said the Governor of the BoJ, Derick Latibeaudiere at last week's press briefing to review the October to December 2003 quarter.
The question of a monetary policy committee has gained ground and the Governor took the opportunity to address the issue. He said that monetary policy committees can significantly enhance the effectiveness of monetary policy. For this to be achieved he stressed that it was important that pre-conditions must be established.
"International precedents have demonstrated that the two most important pre-conditions are an independent central bank enshrined in law, and the absence of fiscal dominance.
"Now let's take a look at what happens around the world. At the Fed for example there are no 'outsiders' so to speak on the monetary policy committee. It is chaired by Mr. [Alan] Greenspan and so it is totally inside the Fed. At the Bank of England there are four people who are not permanent bank members but they have been made into bank members. Why? Because the BoE understands that to contribute meaningfully to the implementation of monetary policy they have to be on the ground, they have to be knowledgeable, they have to be available and most of all they have to be confidential. Most of the monetary policy committees are meant to be a check and balance against the Government to ensure that the objective of price stability is not compromised. There are only two manadates that central banks have use: 1, is to ensure price stability and 2, to ensure financial sector stability.
"A fiscal deficit is a difficult thing to cope with in any environment and I don't think any sort of committee or whatever can cope with a huge fiscal deficit. A pre-condition for the implementation of this committee would be the removal of the fiscal deficit, that's the first thing and second, is that the central bank operates independently."
CONSTITUTION
There has been a call to have a central bank enshrined in the Constitution and a report was prepared for Parliament to that effect. A report on the pros and cons of a monetary policy committee has been prepared by the Governor and sent off to the Minister of Finance.
The Governor said that attaining a single digit inflation figure would be challenging but required both the Ministry of Finance and the Bank of Jamaica giving the task at hand its best shot.
To alleviate the present high interest rate regime and heavy debt burden it is necessary that interest rates continue to fall and the stock of open market operations is reduced . "Interest rates have been coming down so for next year our cost of open market operations should go down. Looking at the BoJ's bottom line last year despite what took place things have been pretty good."
He said that the commercial banks were slow in following the central bank's lead in continuing to reduce interest rates. "We could use this opportunity in asking the commercial banking sector to join us in general reductions of interest rates."
Commenting on the recently signed Memorandum of Under-standing (MoU) with the unions, he said that it can only be in the country's best interest.
"My concern with all this is that for this issue to be effective, it cannot just be down to public sector wage restraint, it needs to be right across the board. My point is that we should have general reduction in aggregate demand and that is what is going to help the country in the final analysis. I am glad that that sector has taken the initiative but all players must be involved in the process. What do I mean by that? The private sector is a significant player and the central bank can hardly maintain its commitment to lower interest rates and stability when there are forces outside of the central bank that are actually acting, for example, to cause for a less than favourable foreign exchange market. It's a commitment all of us has to give. We will deliver if the environment is conducive to it. If the environment is not conducive to it, the central bank will have to take action to counteract market behaviour that is not consistent with stability.
"What I am urging is for all players in the market to consider themselves to be an active part of the process."
He said that he commended the unions for giving their commitment to the MoU but the private sector's response, particularly in the foreign exchange market and generally speaking, is going to be very important. He said that the private sector has given an indication that it intends to respond positively.
THE COMING FISCAL YEAR
Casting his eye over the coming fiscal year and the Government's efforts to finance the budget he said that it would depend on how favourable the international capital markets are.
"I must commend the Govern-ment's efforts to access funds on the capital markets. I think if we can access on or about the amortisation payments during the coming year, we have a very good chance of balancing the budget in the following year."
CREDIT RATING AGENCIES
Last week, international rating agency, Moody's, sounded an encouraging note on the Jamaican economy by affirming its stable outlook on the country's sovereign credit rating, (Government bonds foreign currency: B1/stable; Government bonds local currency: Ba2/stable; country ceiling fx currency debt: B1/stable; country ceiling local currency debt: B1/stable).
Moody's assessment contrasted with the more sombre view of Standard & Poor's (S&P) when it decided to lower its long-term local currency sovereign rating on Jamaica to 'B' from 'B+' and revised its outlook on its long-term ratings to negative from stable.
It also affirmed its 'B' long-term foreign and 'B' short-term sovereign credit rating on Jamaica.
Commenting on the two different outlooks, Mr. Latibeaudiere said: "I can't predict what the credit rating agencies will do anymore. I honestly didn't believe that the circumstances existed for the last S&P downgrade. By the time that they got around to making their assessment conditions in Jamaica had improved, and I fear they may have been working on old data."
CORE INFLATION
"The reason why we didn't have a boom in core inflation in a time when government expenditure was high (particularly last year) was because the central bank had to act aggressively to sterilise the proceeds of increased liquidity. That's the role of the central bank and it will always be the role of the central bank whatever liquidity impulse there is , the central bank is going to respond aggressively to absorb it to maintain stability and that is what we did last year and it almost went unnoticed.
The Governor used the occasion to elucidate on the role and purpose of the central bank. He said that he does not sit with the Minister of Finance to make fiscal policy, rather he implements monetary policy given a fiscal deficit and I try to urge a fiscal direction given the overall macroeconomic circumstances. This is not unique to the BoJ, it is what central banks do or are suppose to do that is why it is important for us to understand the role of a central bank rather than see it as one big part of the public sector."
wage bill will therefore reduce this appetite for cash, reduce
the interest rate, reduce the interest cost and reduce the fiscal deficit. If
this sounds basic, it is because it is basic.
This leads to the following questions: What will be the real
outcomes of this MoU and in whose interests do the outcomes of this MoU serve?
Let me be clear: I have no problem with two key partners working together. However,
if the outcomes of the partnership are not in the best interest of the majority
of Jamaicans, then I have a
problem.
Senator Nelson said in effect that the MoU was intended to prevent
the Government from reducing the size of the public sector workforce without
any scientific analysis done by the Government to support this reduction. This
analysis would determine which ministry/ department/agency was overstaffed and
by how much. While this is very sound reasoning, it doesn't take a rocket scientist,
or for that matter a trade unionist, to conclude that the thing to do is for
Government to conduct these scientific analyses, determine how it should be
restructured and then restructure accordingly. Rather, the consenting partners
to the MoU have chosen the opposite route: maintain the status quo with regards
to the size of Government, thereby maintaining the high wage bill, albeit with
less than normal increase, thereby maintaining Govern-ment's relatively high
demand for cash, thereby maintaining the high interest rate and the high interest
cost, but somehow expect to magically reduce the fiscal deficit.
VOLUNTARY REDUNDANCY
During discussions on the radio programme, Breakfast Club, on
Tuesday, February 17, Norman DaCosta of the National Workers' Union (NWU) suggested
that instead of freezing wages and freezing the size of the workforce, Government
should request voluntary redundancy while reserving the right to accept or reject
offers of redundancy. Mr. DaCosta's proposal appeared logical, as it would reduce
the wage bill while securing jobs for those wishing to remain.
While there would be additional redundancy costs in the first
year, this should be more than offset by reductions in the wage bill. His suggestion
was summarily dismissed. This leads to more questions: Why would the unions
not support voluntary redundancy? Why would the unions support the protection
of jobs, which are really unproductive as demonstrated by the increase in the
wage bill while expenditure on Programmes and Capital Initiatives have been
substantially reduced? Could it be that the flow of union dues into their
coffers is the driving force behind the unions' stand? After all, a union is
a business and a business must protect its revenue. In other words, the outcomes
of this MoU are in the best interest of the unions.
Are the outcomes of the MoU also in the best interest of the
Government? The Minister of Finance, Dr. Omar Davies, stated that this MoU will
save the Government $5 billion in each of the two years of the agreement. This
figure simply represents the amount of increase on the wage bill had there been
no wage freeze and while concurrently retaining all jobs. What the technocrats
have failed to advise the Minister on are the opportunity costs to the Government
and to the people of Jamaica of delaying the inevitable restructuring which
I propose has the potential to be substantially higher than $5 billion annually.
Therefore while on the surface $5 billion is saved annually over the next two
years, the opportunity to save a greater figure is being lost. By entering into
this MoU, the Government has spared itself from making the necessary tough decisions,
which although unpopular, will prove to be the correct decisions in the long
run. The substantive savings can only be realised if the restructuring is scientifically
developed and implemented in a timely, participative and inclusive fashion.
There are more than enough studies on, and successful examples of, restructured
public sector entities to assist the technocrats at the Ministry in quantifying
the opportunity costs.
Firstly, the 1999 Orane Task Force Report suggested that approximately
$6 billion of waste could be saved in the public sector. However, a recent report
out of the Ministry of Development indicated that with 80 per cent implementation
of the Task Force recommendations, the Government had saved $200 million. This
is a perfect example of the 80/20 principle being used in reverse. It suggests
that Government has focused on the easy, but unimportant, 80 per cent of the
recommendations that has yielded less than 20 per cent of expected results.
AGENCIES
Secondly, in 1999 the Ministry of Finance commissioned a study
on the "Rationalisation of public sector agencies" to look at the then 186 agencies,
statutory
bodies and wholly-owned Govern-ment companies outside of central Government.
This exercise involved five consulting firms with lots of data gathered, analyses
done and recommendations made.
However, very few significant recommendations coming out of that
process were ever adopted and implemented. One of the exceptions was the Bureau
of Standards, which developed and implemented a strategic plan that transformed
the organisation. The results at the Bureau, as indicated in their annual report
for 2002-2003, have been instructive, as the organisation reorganised and downsized,
with staff count moving from over 240 to below 140 while increasing its effectiveness.
Annual compensation was reduced from $171 million to $122 over the period, translating
into annual savings of $49 million with a one-off redundancy cost of $36 million.
Import clearance was reduced from five days to 24 hours, test results from 21
to five days and compliance on labelling increased from 50 per cent to 80 per
cent. Financially, this resulted in the improvement of a $(70) million deficit
in 2000/01 to a $91 million surplus in 2002/03. In fact, during 2003 the Bureau
of Standards returned some $200 million to the Consolidated Fund!
Thirdly, the transformation from the Public Works Department
to the National Works Agency in 2001 resulted in a substantial reduction in
staff accompanied by an increase in effectiveness.
Fourthly, following the charges of corruption and waste at the
National Housing Development Corporation (NHDC), there was a change of Minister,
Permanent Secretary, board of directors and managing director. The new leadership
of the NHDC, deciding that such changes did not go far enough, developed and
implemented a Strategic Plan commencing in late 2002, which is currently ongoing.
The Minister of Water and Housing, the Hon. Donald Buchanan recently announced
the completion of the restructuring exercise with over 45 persons being made
redundant, including 18 who volunteered to be made redundant. While there was
a net reduction of posts, the technical and legal departments were actually
strengthened to reduce the dependency on external attorneys, engineers and other
professions with a projected savings of over $300 million annually. Moreover,
the re-engineering of the mission-critical business processes to allow the NHDC
to be more effective, efficient, transparent and accountable is now well under
way.
Very tough decisions had to made in order to achieve the maximum
benefits under restructuring and re-engineering. These tough decisions were
made by the leadership of the various entities mentioned above and given the
full support of the respective portfolio minister. In 2001, Minister the Phillip
Paulwell supported the tough decisions made at the Bureau of Standards. In the
same year, Minister Peter Phillips supported the tough decisions made with regards
to the Public Works Department. In 2002, Minister Donald Buchanan supported
the tough decisions made at NHDC. Results are there for all to see.
TOUGH DECISION
What is required to effectively restructure the overall public
sector at this time is the leadership to make the tough decisions to scientifically
analyse and, where deemed necessary, to close, merge or privatise ministries,
agencies, statutory bodies and other entities; to re-engineer (rationalise,
outsource, delete and merge) functions. Those entities remaining will become
more effective, efficient, transparent and accountable resulting in an economic
environment more conducive to investment and a social infrastructure, which
allows for increased quality of life. To be successful, the process must begin
by defining the purpose and role of Govern-ment, then reorganising itself accordingly
to achieve its purpose and its role. Sadly, the MoU has ensured these will not
be achieved in the near future.
THE MAJORITY
The outcomes of the MoU are clearly not in the best interest
of the majority of the Jamaican people, as maintaining the public sector employment
status quo will increase rather than decrease Government's interest costs and
fiscal deficit. The outcomes of the MoU are not in the best interest of the
public sector workers as they continue to be demotivated due to inadequate tools
being provided to them for the service delivery required. The outcomes of the
MoU are not in the best interest of the private sector, as the economic environment
will not become adequately conducive to investment for output expansion and
for productivity increases.
The outcomes of the MoU are however, in the best interest of
the unions as there will be maintenance of the current levels of union dues.
The outcomes of the MoU are also in the best interest of the Government as it
has been let off the hook to make the necessary tough decisions required at
this time.
Robert C. Wynter is a Partner
in the firm Growth Facilitators, a member of the Jamaica Employers Federation
and the Private Sector Organisation of Jamaica (PSOJ). Mr. Wynter is a member
of the PSOJ's Economic Policy Committee. He can be reached at robwyn@cwjamaica.com
