Keith Collister, Business Writer

(Left)Finance Minister Dr. Omar Davies says the multilaterals are more inclined to 'wean' Jamaica off its programmes. (Middle)Opposition Spokesman on Finance Audley Shaw urged a return to multilateral pro-grammes. (Right)Opposition Leader Bruce Golding criticised the fiscal deficit as a circuitous problem. -File photos

The budget debate once again highlighted the critical issue of Jamaica's huge debt, one of the highest as a percentage of GDP among rated sovereigns, and the consequent severe difficulty Jamaica faces in balancing its books.

"The Government spent two years (1990 -1992) unbalancing the books, running with it and in the process, ruining many lives," said Opposition Leader Bruce Golding in his Budget speech, in a look back at the current administration's fiscal performance.

"Then it spent the next 10 years trying to balance back the books, ran with it again in 2002 and then went back to trying to balance the books again."

The latter part of Golding's comment refers to the first three fiscal years after the October 2002 election, when the fiscal deficit as a percentage of GDP was more than cut in half from a high of nearly 8.0 per cent at the end of the year in March 2003 to 3.5 pr cent in 2005/06, largely driven by falling interest costs and a near freeze in public sector wages agreed under a memorandum of understanding (MoU).

medium-term socio-economic framework

But even with this relatively good performance, Jamaica did not meet the target enunciated in the 2004-2007 medium-term socio-economic framework for a balanced budget in 2005/06.

Last year, the positive trend for both of these key drivers of expenditure, wages and interest, was reversed, and according to the Government's figures, this negative trend will be repeated this year.

Overlooked in the Budget Debate was the wage bill,which is projected to increase by 40 per cent over the two-year period to March 2008, or twice the 15 per cent and five per cent that we were told had been agreed by the minister of finance for the new MoU, and a percentage increase, analysts, including Bear Stearns, appeared to have relied on in projecting the deficit.

Bear Stearns had projected a revised deficit of four per cent of GDP, but the outturn was 5.4 per cent. The original target had been 2.5 per cent.

"Moreover, the budget for FY2007/08 calls for a deficit of 4.5 per cent of GDP, with the balanced budget target now pushed out to FY2009/10," as quoted from the the investment bank's last report on Jamaica by Opposition Finance Spokesman Audley Shaw in his Budget contribution.

"This is a significant deviation from previous medium-term targets that will ensure that, barring unforeseen positive surprises, the debt:GDP ratio will remain above 100 per cent beyond 2010," Bear Stearns said.

Finance Minister Dr. Omar Davies had originally projected a balanced budget by 2006.

Moreover, despite a further, albeit small, fall in interest rates over the past fiscal year, with interest on Jamaican dollar government paper declining from 13.18 per cent in March 2006 to 11.65 per cent in March 2007, interest costs are expected to rise further to a massive $101.5 billion in the current year from last year's outturn of $97 billion.

The latter outturn was itself $4.6 billion above the $92.4 billion originally budgeted.

Last year's increased interest costs appears to have been driven by a greater-than-anticipated rise in debt, which increased at twice the rate of the fiscal deficit.

At Davies' post-Budget press conference, it was also confirmed that the projected rise in interest costs for this year would also be driven by increased debt, despite the view of most analysts that interest rates would fall slightly again this year.

While in his Budget presentation the minister stressed the fall in debt service costs to 53.5 per cent of total expenditure, on the back of falling debt repayment this year, interest costs are still a very high 42 per cent of the 'true budget' of $278 billion, which excludes debt repayment of $102 billion.

This appears to be the context in which Shaw described the debt situation as "dangerously unstable", with 50 per cent linked to foreign currency and almost 50 per cent due to be paid in the next five years.

"This means that we have put ourselves in a position where even a mild devaluation would lead to billions more to service our debt," said Shaw.

dependent on short-term trends

"This means that we have put ourselves in a position where we are totally dependent on short-term trends in the capital markets just to meet our basic needs as a nation." This assessment appeared to drive his call for what he described as "a credible debt-management strategy."

One plank of Shaw's seven-point strategy appears to have drawn the special ire of the Ministry of Finance, namely "the possibility of borrowing from a consortium of multilaterals at rates significantly below what Jamaica can access in the capital markets", the goal being "to refinance expensive instruments and further lower borrowing costs."

Davies noted as he closed the debate Wednesday that Jamaica cannot borrow for balance of payments support, and does not qualify for concessionary loans, for example, through the IMF's Poverty Reduction and Growth Facility.

However, there was no mention of borrowing from the IMF in Shaw's written speech, and it was reported that he had in mind financing from the World Bank, Inter-American Development Bank and Caribbean Development bank.

Davies advised that such loans are only "available for programmes/ projects", but it should be noted that Jamaica successfully borrowed US$350 million in the early part of this decade to finance its adjustment after the financial crisis.

Whether such a consortium would be prepared to make another loan of a similar size, or the much larger loan required to significantly reduce financing vulnerability andinterest costs, can probably only be determined through negotiation as to what qualifies as a programme.

Loan financing

At the time, leading representatives of the multilaterals that I spoke to fully recognised that their loan only financed a small percentage of the cost of the financial crisis, so perhaps a case can be made that we need additional help to deal with the continuing burden of that event.

In any case, Shaw seems to be on firmer ground when he argues that: "Funds from multilaterals will be accessed to finance special programmes such as the Educational Transformation Programme."

Having outlined our dangerously high debt situation, huge fiscal deficit and continuing vulnerability to a change in the current extremely favourable environment for emerging market financing, it was not sufficient for Davies to simply say that "we are committed to financing the Education Transformation Programme - not from new debt, but rather from our own internally generated resources."

Money is fungible, meaning that a reduced need for internally generated resources in one area can release resources for another area of need.

Moreover - while one should not underestimate the difficulties involved - on her recent visit here, it did not appear unreasonable to Nigeria's well-respected former Minister of Finance (who had just negotiated a very substantial debt relief under her watch) that Jamaica should explore with the IMF and other multilaterals whether its unique circumstances would warrant a softening of their current policy stances, perhaps as part of the broader international lobby for greater debt relief.

keithcollister@gleanerjm.com