Earl M. Bartley
THE $328 billion expenditure budget presented by Finance Minister Omar Davies last Wednesday comes at a time when the economy seems interestingly poised on a knife-edge.
The economy is positioned between continuing in the vicious cycle of debt, high interest, and slow growth or breaking into the virtuous cycle of shrinking debt, lower interest rates, more
dynamic growth and development. Assuming revenue intake of J$150 billion, the Government will need to borrow approximately J$178 billion from the domestic and international markets to finance the budget. The sources and terms under which it obtains this money will greatly influence the course of the economy over the next two years.
VIRTUOUS VS VICIOUS CYCLES
If we hitch a ride on the virtuous cycle, in the next year or two the debt to GDP ratio will be going down. So also will the fiscal deficit and debt service as a portion of the budget. Government expenditure as a proportion of GDP would also be going down, the revenue expenditure ratio would be approaching equality, and interest rates, which are now back to where they were in September 2002, would be slipping into single digits. All of these factors would lead to a cumulative build-up of confidence resulting in increased investment, growth and take-off.
Some of these positive trends are in evidence now. In addition to the weak but persisting growth over the past three years and a fallback in interest rates, our most onerous bugbear over the past two decades the rate of growth of the debt seems to be slowing down. On March 31, 2003 the stock of internal and external debt stood at J$601 billion or 21 per cent above the J$497 billion where it stood on March 31, 2002.
In March 2004, though $80 billion had been added to the debt, the rate of growth slowed to 13.3 per cent. If the Government is able to hold interest rates steady in 2004/05, after subtracting amortisation from new borrowing, the debt stock at the end of March next year would stand at J$715 million a five per cent increase over the J$681 billion where it stands now. If nominal economic growth exceeds the rate of growth of the debt, then the debt to GDP ratio will start declining which would be the biggest boost to virtuous development in Jamaica in two decades.
Virtuous development, however, is far from assured because the economy could just as easily slip deeper into the vicious cycle. This could happen if interest rates are pushed higher as a result of increased borrowing on the domestic market, which would worsen the fiscal deficit. More borrowing could also lead to a continuation or worsening of the debt/GDP ratio; confidence would start to flag, real investment slacken and growth lag.
Either card can play depending on a number of domestic and international factors. Inter-national factors seem controlling in the present circumstances and a key one appears to be how the international market reacts to the Government overtures for new loans. The arguments the Government will make to overseas creditors are that investments and growth are picking up in the Jamaican economy, and the rate of growth of the debt and the debt to GDP ratio are falling. It will also stress that a social consensus is emerging, and it would have to convince that its high domestic borrowing - about J$140 billion this year - won't push-up short-term interest rates and cause it to overshoot the deficit reduction target. The Government will assure that this wont happen, especially if it can receive some loans from foreign friends.
Indications are that the Government is likely to seek about US$100 million from the multilaterals, and about twice that amount from the banks, and is hoping to raise US$300 million from the international bond market - mainly Jamaicans overseas. Whether the Government is able to raise that money will depend on the presence or absence of a recessionary mood in the world economy. This in turn will depend, among other things, on the relative success or failure of United States disengagement from Iraq and whether the upward trend in oil prices are contained or reversed.
To the extent that the government is able to obtain US$500 to US$700 million abroad it will reduce the pressure on local interest rates and reinforce confidence. This will accelerate the shift of investment from government paper to equities, and possibly, to renewed investment in the real sector, and thus begin the virtuous cycle. Odds on this scenario are 3 out of 10.
THE WORSE CASE SCENARIO
The persistence of the vicious cycle could result from continued rise in international oil prices, and the breakdown of Iraq into internecine strife after the US scales back its occupation in June initiating recessionary conditions in the world economy. Such conditions might make it difficult for the Government to receive the overseas loans it desires, especially on the bond market, since people prefer to hold their money closer to them during recessionary times. If recessionary conditions were to ensue, forcing the Government to seek more, rather than less, of the J$178 billion it needs to borrow on the local market, it would certainly continue the vicious cycle of high interest rates, unsustainable deficits and slow or no growth. Even without recession, the odds on this outcome are at least fifty/fifty.
WHAT CAN WE DO?
Though international conditions are controlling, there is always a lot we can do for ourselves, and will need to do. As helpful as the foreign investments in tourism and mining are, spotty and lumpy investments in one or two sectors of the economy cannot impart a sustained momentum to the economy without broad-based and sustained, small, large and medium investments by Jamaicans.
The main problem is interest rates. Interest rates are still too high and the business environment that exists in the country is still largely unsupportive of business and retarded by red tape.
I do not know on what basis the recent World Bank Report ranked Jamaica among the top 10 "easiest countries in which to do business." But in terms of the essential requirements of business -the availability of capital, support for product development, and the ease with which companies can become legally incorporated, operate, import and export - Jamaica remains a country that is not a "friendly environment for business" as former Minister of Trade and Industry Phillip Paulwell once pronounced.
ACCESS TO CAPITAL
Take availability and access to capital. Venture capital is almost non-existent and we are still in the throes of impossibly high interest rates. Supposing an entrepreneur is crazy enough to borrow money at such high rates to start a business, then in addition to collateral that is three times the amount being borrowed you need to have 30 to 40 per cent of the money you are borrowing as equity. One Government agency that lends at the community level requires that the 40 per cent equity be deposited with them for six weeks before they even begin to consider your application. Another one has three interest rates ranging from 30 per cent to 22 per cent to 14 per cent but require a three months waiting period before reviewing applications at the lowest rate.
Lending policies like those seemed designed to trick and frustrate, not support business. And as I mentioned a few weeks ago, the premier development credit provider in the country -the Jamaica Development Bank appear to have no strategic priorities and has been missing in action over the past 15 years in terms of providing loans for agro-processing and small business development. It seems that the commercial banks are quite content to profit from making car loans and personal loans to supplement their fattening on government paper and that public sector credit institutions are mainly there to provide employment for their staff. Furthermore, going by the performance of MIDA -the agency with the most loosely accessible credit requirements- it would appear that the Government's concept of entrepreneurship is to dole out a $5,000 - $10,000 to their assortment of political followers with the admonishment "gwan go hustle."
PRODUCT DEVELOPMENT
Most products today require a level of scientific and technological finesse that is often outside the competence and resources of the average person with a rudimentary product desiring to get into business. At the same time the Government institutions responsible for product development like the Scientific Research Council and the Bureau of Standard often appear to be short-staffed and are incongruously the areas of Government that have suffered savage staff cuts. They generally have a limited agenda of projects and a long-waiting time -sometimes as much as two to three years, before they can provide assistance with your product development.
They are expensive too. Possibly due to the expensiveness of their formulations and processes the SRC has several formulations that it has developed and standardised with no purchasers to commercialise their production.
No wonder in a global economy in which the mantra of survival is the development of new, innovative and high quality products Jamaica has mainly become the dumping ground for the products of even the smallest CARICOM country with little to sell in return. Over the past 40 years the country has developed only a handful of dynamic and innovative products.
ESTABLISHING AND DOING BUSINESS
I once registered a company in the United States. It required me to fill in a half-page form with five questions -name and address of the company, my name and address and that of two other directors. I paid US$15. There was a quick check of the computer to make sure my company name was not deceptively similar to any other and a week later I got my registration certificate.
In Jamaica to register a company one has to pay a lawyer $50,000 to $60,000 to draw-up 10 to 15 pages of boiler-plate called articles of association and memorandum of understanding. Despite the efforts to streamline import and export procedures these remain so cumbersome and time consuming that custom brokers continue to earn a good income in Jamaica, while Government coffers continue to be short-changed partly because the procedures are too bothersome. And just imagine the no CXC welder or mechanic with his two or three workers computing five statutory deductions every month for each worker? It won't be done. For business to play their part in moving the economy out of the vicious cycle of debt and slow growth onto the virtuous path of increasing investment, employment and development they need more than empty exhortations.Earl M. Bartley is an economist and businessman. You can send your comments to adapapa@cwjamaica.com because the economy could just as easily slip deeper into the vicious cycle. This could happen if interest rates are pushed higher as a result of increased borrowing on the domestic market, which would worsen the fiscal deficit. More borrowing could also lead to a continuation or worsening of the debt/GDP ratio; confidence would start to flag, real investment slacken and growth lag.
Either card can play depending on a number of domestic and international factors. International factors seem controlling in the present circumstances and a key one appears to be how the international market reacts to the Government overtures for new loans. The arguments the Government will make to overseas creditors are that investments and growth are picking up in the Jamaican economy, and the rate of growth of the debt and the debt to GDP ratio are falling.
It will also stress that a social consensus is emerging, and it would have to convince that its high domestic borrowing about J$140 billion this year won't push up short-term interest rates and cause it to overshoot the deficit reduction target. The Govern-ment will assure that this won't happen, especially if it can receive some loans from foreign friends.
Indications are that the Government is likely to seek about US$100 million from the multilaterals, and about twice that amount from the banks, and is hoping to raise US$300 million from the international bond market mainly Jamaicans overseas. Whether the Government is able to raise that money will depend on the presence or absence of a recessionary mood in the world economy. This in turn will depend, among other things, on the relative success or failure of United States disengagement from Iraq and whether the upward trend in oil prices are contained or reversed.
To the extent that the Government is able to obtain US$500 to US$700 million abroad it will reduce the pressure on local interest rates and reinforce confidence. This will accelerate the shift of investment from government paper to equities, and possibly, to renewed investment in the real sector, and thus begin the virtuous cycle. Odds on this scenario are 3 out of 10.
THE WORSE CASE SCENARIO
The persistence of the vicious cycle could result from continued rise in international oil prices, and the breakdown of Iraq into internecine strife after the US scales back its occupation in June initiating recessionary conditions in the world economy. Such conditions might make it difficult for the Government to receive the overseas loans it desires, especially on the bond market, since people prefer to hold their money closer to them during recessionary times. If recessionary conditions were to ensue, forcing the Government to seek more, rather than less, of the J$178 billion it needs to borrow on the local market, it would certainly continue the vicious cycle of high interest rates, unsustainable deficits and slow or no growth. Even without recession, the odds on this outcome are at least 50/50.
Though international conditions are controlling, there is always a lot we can do for ourselves, and will need to do. As helpful as the foreign investments in tourism and mining are, spotty and lumpy investments in one or two sectors of the economy cannot impart a sustained momentum to the economy without broad-based and sustained, small, large and medium investments by Jamaicans.
The main problem is interest rates. Interest rates are still too high and the business environment that exists in the country is still largely unsupportive of business and retarded by red tape.
I do not know on what basis the recent World Bank Report ranked Jamaica among the top 10 "easiest countries in which to do business." But in terms of the essential requirements of business the availability of capital, support for product development, and the ease with which companies can become legally incorporated, operate, import and export Jamaica remains a country that is not a "friendly environment for business" as former Minister of Trade and Industry Phillip Paulwell once pronounced.
ACCESS TO CAPITAL
Take availability and access to capital. Venture capital is almost non-existent and we are still in the throes of impossibly high interest rates. Supposing an entrepreneur is crazy enough to borrow money at such high rates to start a business, then in addition to collateral that is three times the amount being borrowed you need to have 30 to 40 per cent of the money you are borrowing as equity. One Government agency that lends at the community level requires that the 40 per cent equity be deposited with them for six weeks before they even begin to consider your application. Another one has three interest rates ranging from 30 per cent to 22 per cent to 14 per cent but require a three-month waiting period before reviewing applications at the lowest rate.
Lending policies like those seemed designed to trick and frustrate, not support business. And as I mentioned a few weeks ago, the premier development credit provider in the country, the Jamaica Development Bank, appears to have no strategic priorities and has been missing in action over the past 15 years in terms of providing loans for agro-processing and small business development.
It seems that the commercial banks are quite content to profit from making car loans and personal loans to supplement their fattening on government paper, and that public sector credit institutions are mainly there to provide employment for their staff. Furthermore, going by the performance of MIDA the agency with the most loosely accessible credit requirements it would appear that the Government's concept of entrepreneurship is to dole out a $5,000- $10,000 to their assortment of political followers with the admonishment 'gwan go hustle'.
PRODUCT DEVELOPMENT
Most products today require a level of scientific and technological finesse that is often outside the competence and resources of the average person with a rudimentary product desiring to get into business. At the same time the Government institutions responsible for product development like the Scientific Research Council and the Bureau of Standard often appear to be short-staffed and are incongruously the areas of Government that have suffered savage staff cuts. They generally have a limited agenda of projects and a long waiting time sometimes as much as two to three years, before they can provide assistance with your product development.
They are expensive too. Possibly due to the expensiveness of their formulations and processes the SRC has several formulations that it has developed and standardised with no purchasers to commercialise their
production.
No wonder in a global economy in which the mantra of survival is the development of new, innovative and high quality products Jamaica has mainly become the dumping ground for the products of even the smallest CARICOM country with little to sell in return. Over the past 40 years the country has developed only a handful of dynamic and innovative products.
ESTABLISHING AND
DOING BUSINESS
I once registered a company in the United States. It required me to fill in a half-page form with five questions name and address of the company, my name and address and that of two other directors. I paid US$15. There was a quick check of the computer to make sure my company name was not deceptively similar to any other and a week later I got my registration
certificate.
In Jamaica to register a company one has to pay a lawyer $50,000 to $60,000 to draw up 10 to 15 pages of boiler-plate called articles of association and memorandum of understanding. Despite the efforts to streamline import and export procedures these remain so cumbersome and time consuming that custom brokers continue to earn a good income in Jamaica, while Government coffers continue to be short-changed, partly because the procedures are too bothersome. And just imagine the no CXC welder or mechanic with his two or three workers computing five statutory deductions every month for each worker? It won't be done. For business to play their part in moving the economy out of the vicious cycle of debt and slow growth onto the virtuous path of increasing investment, employment and development they need more than empty exhortations.
* Earl M. Bartley is an economist and businessman. You can send your comments to
adapapa@cwjamaica.com
