By Lavern Clarke, Staff Reporter
THE MINISTRY of Finance has cited exchange rate shifts as a primary reason for its miscalculation on how much the national debt would have grown in the latter half of the fiscal year, but its explanation does not gel with the facts.
Finance Minister Dr. Omar Davies had projected that the debt would have climbed to $569.4 billion between October 2002 and March 2003, but latest figures show that at the end of December 2002, the country was already indebted to the tune of $572.7 billion - split 61 per cent domestic and 39 per cent external.
"A major development was the movement in the exchange rate (of) the US dollar against the Jamaican dollar and the euro," said the Ministry, in a written response a week and a half after The Financial Gleaner initially requested comment on why the debt was running so far ahead of target.
Based on the projections given by Dr. Davies in December, the Government was anticipating that the debt would have increased by an average $5 billion monthly. Instead, the first three months grew by an average of more than $10 billion per month, sufficient to signal that a key element of the Ministry's debt control strategy, that is, to replace high cost borrowings with cheaper debt, has not been working well.
Some 8.9 per cent of the external debt is in euro denominated bonds. The Ministry buys euro with US currency to service those obligations.
"At the time of the Supplementary Estimates (presented in mid-December) the exchange rate being used was US$1:$51.50," the Ministry further explained.
But if anything, the latter development should have worked for the Ministry, not against it, since the Jamaican currency was running between $49.22 and $50.97 when the debt was actually generated, according to Bank of Jamaica figures.
At a rate of $51.50, the external debt stock of US$4.35 billion as at December would have amounted to $224 billion, whereas it comes in at $221.7 billion when converted at $50.97 - the rate that the Ministry's Debt Management Unit actually used to determine the total public debt.
Economist Dr. Omri Evans says a more reasonable explanation would be the increased borrowings to meet obligations on wages, and the higher than programmed interest expense.
"The projected interest cost was 14 per cent, but came out in the high teens," said Dr. Evans.
"What you are going to find from January to March is that the additional cost on the external debt will be attributable to exchange rate adjustments," he told The Financial Gleaner.
In relation to the external component of the debt, which was projected to round off the fiscal year at US$4.26 billion but was already US$4.35 billion by December, the Ministry said it overshot that mark because of the developments with the euro relative to the US dollar.
"Any changes in the US$-euro exchange rate impacts on the stock of debt when converted to Jamaican dollars," said the Ministry reasonably.
"More specifically, the US dollar moved against the euro from US$0.87:1 euro at the start of the fiscal year to approximately US$1.033:1 euro at the end of December, to US$1.075:1 euro at the end of January 2003."
Based on those figures, the dollar would have lost 46 cents against the euro between April and December.
However, within the relevant period to which The Financial Gleaner's query referred, the US dollar was 0.9772 to the euro in October and 1.0460 as at December, according to figures quoted by the BoJ's foreign exchange department - a nominal decline of only seven cents.
In addition, the movements would only have impacted $387 million of the total $221.7 billion external debt.
