Dennis Chung, Contributor
CHUNG
RECENT EVENTS and reports point to the fragility of Jamaica's budget. The projection for the 2005/6 fiscal year is for a balanced budget, which simply means that expenditures will equal revenues.
In order to achieve this we have made certain projections surrounding inflation, exchange rates, interest rates, etc. In addition, these projections have been made barring any shocks, such as Hurricane Ivan and increased crime. We all saw the impact Ivan had on our inflation and GDP growth projections in the last fiscal year, and the effect crime is having.
The lesson from this is that Jamaica's budget is still in a very fragile state. There are many factors that could cause us to miss the targets and so there has to be very careful and prudent management. In this regard there are a few factors that Government needs to be wary of, in order to ensure that our targets do not become pipe dreams. This is in the context that achieving a balanced budget is going to be critical in this year on our road to economic recovery.
FISCAL YEAR INFLATION
The budget forecasted single- digit inflation of nine per cent for the current fiscal year. In the first month of the current fiscal year, April 2005, we have recorded inflation of 1.9 per cent. In the first month we have almost achieved 25 per cent of the total inflation target. The factors that contributed to the high April rate would have been the (1) continuing effect of Hurricane Ivan on food prices; and (2) the impact of increased GCT and reclassification of items from zero-rated to exempt GCT status.
The fact is, however, that GCT increases were necessary to achieve the targets but the other side is that it must affect inflation, even more than a gas tax would have. In addition, we are expecting increases in electricity rates and bus fares, which will fuel even greater inflationary pressures. In light of these developments we have to seriously ask if a nine per cent inflation target is realistic. If not, then, we must face this reality and deal with it.
MOU AND POLICE WAGES
The recent threats to the Public Sector Memorandom of Understanding (MoU), as well as salary demands of the police, could also threaten the budget targets. A recent report highlighted that overseas investors are watching carefully the developments surrounding the MoU threats. This is because any disruption could cause significant negative variations in the budgeted expenditures, as wages and salaries form a large part of the expenditure total. Of a total recurrent expenditure of $187.2 billion, wages and salaries account for $61.4 billion, or 33 per cent of recurring expenditure and 18 per cent of total expenditure.
This high expenditure component means any increases, above projections, could have a serious negative impact on the budget. Already wages and salaries projected this year are $2.1 billion less than last year, which shows that there is no slack in this area. Each additional one per cent increase equates to $610 million, and this would go directly to causing a budget deficit.
This means that Government must ensure that the MoU is kept intact and that there is no fallout caused by the salary demands of the police. The dilemma the Government faces is that crime is at an all-time high, policemen and women are working under deplorable conditions with low compensation, and there is no money to meet the demands as well as our fiscal targets. Government must find a way to juggle this very carefully, as we need to not only keep the police happy but also motivate them in an environment where they are targets of criminals.
I am disappointed that electricity rates and bus fares are to be increased in a year when the MoU is in jeopardy. If it is truly a partnership for progress then the 'holding strain' cannot be with workers alone and they must see some very clear signs of what the private sector and Government are to contribute, and this includes "holding strain" on utility and bus fare rates.
The Government will have to coopt the private sector in solving this problem. The current 'Stand for Jamaica' action by the private sector is an indication that they are ready and willing to act and contribute to a solution. If we do not solve crime then all our efforts will equal to nil. It is up to all of us individually to deal with the crime monster, however, and this means ensuring that we do not pay for the motor vehicle fitness, disobey traffic laws, bribe public officials, try to avoid GCT on purchases, etc. We cannot stand up credibly and speak out against crime if we do not put an end to these types of behaviour.
HURRICANE SEASON
Hurricane Ivan showed us how vulnerable our budget is to external shocks. This season is predicted to be more active than last year, and they expect 13 storms with seven becoming hurricanes. Last year we did not even get a direct hit and we suffered much damage. The fact is that we are still recovering and it caused us to revise our budgetary targets. Inflation was projected at nine per cent and ended up above 13 per cent; GDP growth was projected at 2.5 per cent and ended up at just over one per cent; and the deficit ended up some
$3 billion - $4 billion more than projected.
The question is, what can we do about natural disasters? The answer is that we cannot prevent them, but we can certainly minimise the effect through proper planning. I remember last year the pleas of Kingston Mayor Desmond McKenzie to get the drains cleared, and the hustle of Mayor Lee to do the same for Portmore. If this did not happen then we would have seen much greater damage physically and in dollar terms.
What the government must do, through its disaster planning strategies, is identify the areas of greatest risk and look at what can be done to minimise the damage in these areas. We cannot prevent natural disasters but we can certainly minimise the impact with proper planning.
EXTERNAL INTEREST RATES
Finally, I would like to mention the Gleaner report on Wednesday May 25th, 2005, referring to the vulnerability of Jamaica to external interest rate rises. The United States Federal Reserve has been increasing rates and no doubt this will impact us in terms of the cost of future borrowings, as well as the portion of the external debt that is at variable interest rates. This could have the additional impact of slowing down our own interest rate declines.
These are the main factors that the Government must 'surgically' manage to ensure that our budget targets are met this year. There is no doubt that achieving a balanced budget is very important for Jamaica this fiscal year, and all of Jamaica needs to be aware of what consequences our individual actions can have so that we can act in Jamaica's best interest.
Email: dra_chung@hotmail.com
