Earl M. Bartley
JAMAICA'S DEBT dynamics are improving in important respects. As I mentioned in my article last week, the rate of growth of the debt stock has been slowing down over the past two years and is projected to continue in the coming year. This will open the possibility of stabilising the debt stock and even beginning to reduce it.
This was not always the case. As Bruce Golding pointed out a few weeks ago, the stock of public debt the total amount owed to foreigners and nationals by the Jamaican state increased from $150 million in the late 1960s to $3 billion at the end of the 1970s. That is an average annual increase of 200 per cent. Then at the end of the 1980s the debt stock stood at $13 billion - growing at an annual average rate of 33 per cent. At the end of the 1990s the debt stock had grown to $288 billion - or at an annual average rate of 210 per cent.
Of course, we have rarely experienced a year in which the debt grew by 200 per cent in one year. And those growth rates reflect the effect of exchange rate depreciation blowing-up the external component of the debt in Jamaican dollar terms. Then too, given the tricky way in which numbers behave in the lower orders as against in the higher ranges a ten-fold increase in the debt from say $10 million to $100 million in ten years does not seem like a lot in absolute terms, but still represents a whopping rate of 100 per cent annually. A doubling of a $350 billion debt to $700 billion in ten years on the other hand, seems horrendous in absolute terms, but averages out at only 10 per cent when calculated as a rate.
Notwithstanding these perceptual tricks of numbers, over the past two years, and projecting into 2004/05, the rate of growth of the debt stock has slowed in absolute terms and as a percentage rate. As I noted last week, in 2002 the debt stock increased by $105 billion or 21 per cent above the $497 billion level where it stood in 2001. In 2003 it grew from $601 billion to $681 billion, that is, by $81 billion or 13 per cent. This fiscal year, after principal repayment is subtracted from new borrowing, the stock of debt is projected to grow to $715 billion, that is, by $34 billion or five per cent.
WHY THE SLOW DOWN?
The question is what accounts for this slow-down in the rate of growth of the debt stock? Especially in light of the fact that the Government seems to be borrowing more - an estimated $178 billion this year, and we are also paying out a lot for interest and principal repayments a combined $228 billion or 69.5 per cent of the 2004/05 budget.
Considering that we have being borrowing for years to repay debt, there is an element where the debt stock seems to have reached a 'critical mass', where what we are borrowing to repay and service debt is now approaching equality somewhat independent of our control.
But we should not overstate the role of random dynamics or merely fortuitous circumstances. The main reason why the rate of growth of the debt is slowing down is that the Government's Debt Management Strategy appears to be working. Since fiscal 1998/99 the Ministry of Finance (MoF) has had a very coherent and sophisticated debt management strategy. The strategy did not expressly target reducing the 'rate' of growth of the debt, though it set as its overreaching objective "reducing the debt". In terms of tactics, the MoF strategy sought to extend the maturity structure of the debt; increase the amounts of fixed rate as against variable interest rate debt; and to diversify the currency mix of the debt among other measures. The result, the share of fixed rate debt in the domestic portfolio, which stood at seven per cent in 1999/00, climbed to 48.4 per cent in 2002/03. To extend maturities, the Govern-ment also successfully issued inaugural 15 and 30 year Local Registered Stocks in 2002, which prior to then were typically issued for seven years. Now it seems, these strategies, working within the mass of the debt stock, are bearing fruit in reducing the rate of growth of the debt.
BENEFIT OF REDUCED
DEBT GROWTH
A main benefit of the reduced rate of growth of the debt, projected at five per cent this year, is that it brings within achievable range the possibility of actually reducing or 'managing down' the stock of debt. It is conceivable that next year (2005/06) the rate of growth of the debt could be deliberately reduced to two or three per cent. Then in the following year the rate could be further reduced to zero if new borrowings are made equal to debt repayment. In subsequent years, if borrowing is less than principal repayment we can begin the process of managing down the debt to more desirable levels.
A second important benefit of reducing the debt stock is that it will reduce the debt to GDP ratio with, or even without, modest GDP growth. So long as nominal GDP growth does not fall below the absolute level of debt reduction in any year, the debt to GDP ratio will decrease.
Of course, the most significant benefits of reducing the debt stock are greater savings in debt service, lower interest rates, more investments in business, and improved public services, many of which we are now denied because of the overhang of public debt in the economy.
CONSOLIDATING
THE NEW DIRECTION
The main challenge now is to effectively grasp the opportunity for reducing the debt stock and consolidating the new direction. Among the steps that should be taken:
The MoF should seize the opportunity for reducing the rate of growth and reducing the debt stock with as much tenacity and fixity of purpose as it has pursued single digit inflation over the past decade. After all, the ballooning debt stock is as destabilising on the economy as inflation was.
Concurrently, the MoF needs to graft certain more definitive targets to its debt reduction strategy. On 'The Breakfast Club' on Tuesday morning, Mr. Golding suggested the internationally acceptable target of 60 per cent of GDP, but a more intermediate goal of 100 per cent in five years seems like a less distant goal. The suggestion of Professor Persaud on the same program regarding the Pakistani tactic of reducing their debt by two per cent of GDP annually might also be a useful approach for us to adopt.
Lastly, the Government needs to address the huge gap between revenue and expenditure as its main fiscal priority, since it is from that gap that the debt emanates and grows. The tendency is for most persons to focus on the fiscal deficit - the gap between recurrent expenditures and revenues. But because amortisation, which is a significant expense of Government, is computed below the fiscal deficit/surplus line in the accounts, the tendency is to overlook or under-emphasise the real extent of government borrowing. But it is quite possible, as is happening now for the fiscal deficit to be diminishing while the gap between expenditures and revenues is opening even wider. Thus, debt reduction strategy should be focused on narrowing the expenditure/revenue gap rather than overwhelmingly on the fiscal deficit.
The Government has pretty much tied its hands in cutting expenditures by signing the Memorandum of Understanding with the trade unions. Given our highly taxed population, the MoF has rightly ruled out new taxes on the population. Increased revenues, therefore, are mainly to come from improved compliance and increased business activity.
But this Government does not have a good record of promoting business development; and this is not only due to the fact that it has presided over an inhospitable macro-economic environment. Indeed, since the inauguration of liberal economic policies in the early 1980s, no Jamaican government has really crafted a facilitatory role for the State that addresses Jamaica's development needs. Both the JLP before, and the PNP now, have focused on providing a 'level playing field', paying less attention to getting more of our people and would-be entrepreneurs onto the field. Too many of our people are relegated to the sidelines trying in vain to get onto the field. Nor are they being helped much by our risk averse profit-motivated commercial institutions, who are supposed to be the prime investment boosters, to get onto the field.
I firmly believe that with the limitations on the role of the State in a free-market economy, the approximately $2 billion that public sector credit institutions loan annually to private businesses should be used strategically and primarily to provide venture capital for deserving projects, and to assist two or three year old companies finance their expansion. But public sector credit institutions continue to behave, in only a slightly less generalised way, like commercial banks.
What I do know is that the government needs to increase revenues to close the yawning gap between expenditures and revenues now running at more than a 2:1 ratio. Reducing that gap is the surest way to reduce the debt and ease the burden on present and future generations.
Earl M. Bartley is an economist. You can send your comments to adapapa@cwjamaica.com
