By Don Wehby, ContributorThe following are excerpts from an address at a recent investors forum organised by Mayberry Investments.
I DON'T think anyone can predict at this stage exactly how our businesses and Jamaicans will be affected. How many of us can confidently predict today what our nation will be like next year this time, what type of budget we can expect in 2004 and what will the foreign exchange rate be? In other words, it is difficult, if not impossible to plan.
Let us take a look at some key indicators in our economy for the past eight years:
Net international reserves
Annual inflation rate
Year-end Exchange rate
Interest Rates
The Jamaica Stock Exchange year-end indices
We were able to raise approximately US$1.6 billion on the international market.
The following are a series of announcement and events:
Announcement of deficit at over 8 per cent - projected at 4 per cent
Standard and Poors down grade from stable to negative
Moody's recent rating
Interest rates over 30 per cent
Devaluation of the dollar
All the hard work over the last couple of years seems to have to put us back to where we started.
In the article, "Jamaica will meet fiscal targets no matter what Davies" from the Financial Gleaner dated 23 May 2003, the Minister said "We reaffirmed our resolve to do whatever it takes to maintain the fiscal targets" reporting to Parliament on his overseas visit. The article went to say, "Government is targeting for a 5-6 per cent deficit, down from 7.37 per cent; a primary surplus of 12 per cent; debt ratio of 150 per cent; and growth". " ...the Minister said he intends to borrow US$350 million on the international market this year to service the external debt."
PSOJ Economic Policy chairman, Colin Steele, made the following point in a recent presentation: "The budget has been developed within the context of a medium term plan with the intent to deliver a surplus in two years. The Government needs to limit wages and salaries in line with inflation, reduce debt servicing costs and increase the tax revenues by broadening the tax base without necessarily increasing tax rates. Consequently the government must introduce greater economy and efficiency in its operations." This is not a recent quote. This statement is taken from the Orane report and was made in 1999, with the plan for a balanced budget in 2001. What has been the outcome?
"Roughly 50 per cent of the domestic debt is fixed at 14 per cent. The domestic debt represents 61 per cent of the total debt stock. The minister stated that new calculations would have to be done to assess the impact of the recent exchange rate movements on the budget targets, but said it is unlikely to have affected the fiscal targets."
Wages and salaries grew by 10 per cent in 2000 and 21 per cent in 2001, both years significantly greater than inflation and instead of a surplus we had a deficit of $14 billion in 2001. Where are we in 2002? The initial budget estimate was a deficit of about $10 billion, which was revised to about $16 billion and ended up at $30 billion. Wages and salaries were over budget by $6.5 billion or 21 per cent after growing by 20 per cent the year before. We are all painfully aware of the revenue side of the budget. Existing tax revenues are projected to grow by approximately 18 per cent, compared to 2002, which grew at almost 14 per cent. Some of the additional revenue enhancing measures proposed have met with strong resistance as it is believed that they will stifle productivity and growth. Major concerns include:
The four per cent cess on imports would have a significant negative impact on cash flow and would therefore penalise legitimate businesses.
The objection to the four per cent advance income tax was on the basis that it was an inequitable tax, could not be carried forward and was non-refundable. Advance income tax, that is a two per cent across-the-board customs processing fee be charged on all imports. There was overwhelming support for the two per cent fee.
Following on the recent meetings between members of the private sector and senior government officials, the Government proposed, that in place of the four per cent for exporters, the ywo per cent cost can be recovered on exports via a drawback feature, to ensure the continued competitiveness of this sector. We will seek to have this customs fee reviewed on an annual basis as we view this charge as a temporary measure and not a permanent cost to businesses.
Widening the GCT base may result in inflation at a time when the poverty level has increased from 16.8 per cent to 18.2 per cent.
The measure to eliminate credit on bonus shares would effectively increase corporate taxation.
The integrity of the tax compliance system and the TRN needs to be strengthened to ensure a fair playing field for all. We cannot continue to overburden legitimate companies, while the large informal economy benefits from 'bandooloism'. Based on private sector lobbying, in addition to the drawback feature granted to all exporters, new manufacturing companies have been granted relief for their first three years of operations as these new operations have greater financial requirements during their start-up years. The relevant certification will be provided by JAMPRO.
Given the need to have a balanced budget by 2005/2006 and given the fact that tax as a percentage of GDP is already fairly high, expenditure restraint is clearly the preferred policy measures. There have been several studies on the rationalisation of the public sector. No more studies are required. What is required is an agreement to implement those recommendations, which are agreed as being feasible, by a combination of the best public and private sector minds. However, the greater difficulty is that there are mindset changes which we all need to make in order to ensure that we make the business of government much more efficient. If we take the tough decisions, the capital markets will reward us with lower interest rates and greater access to capital, which will lead to significant levels of growth.
GROWTH INCENTIVES
Where are the growth incentives in the budget announced in April? Where are the initiatives to stimulate economic growth? High rates of growth are our only path to ex-change rate stability, foreign ex-change earnings, job growth, wealth creation, peace and social harmony.
We continue to consume more than we produce, and the Government continues to spend more than it earns. We must address both these issues with a great sense of urgency if we are to survive and compete in the global market. The Government continues to borrow more, spend more and tax more. The productive sector is crippled by high interest rates. Today, I want to share with you a story of an island with a host of problems:
Negative growth in the economy
High inflation, interest rates and unemployment
Ever decreasing living standards
A national debt in the billions
Mass migration by our youth
Fifteen years later this island boasts the following impressive statistics:
National debt stabilised
Government borrowing massively reduced
Creation of jobs
Improvement in living standards
Low inflation and interest rates
Increased competitiveness
Return of overseas migrants.
The negatives outlined could easily be attributed to Jamaica, but the island in question which listed these problems as affecting their economy is Ireland in the 1980s. The positives is where we would like to be and where Ireland is today.
SOCIAL CONTRACT
The first major step in their transformation included the signing of a social contract between the government, the opposition, the employers and the unions. The state of the economy was so bad and its outlook so uncertain, that radical measures were required. The relationship of the private sector and government was influenced by mistrust, which did not contribute to the nation's welfare. The Irish economy was at a cross-roads and they seem to have taken the right road. Today, Jamaica is also at a cross-roads and we need to find the correct road.
The Irish economy today is still managed on a social partnership basis, and it is generally agreed that it was this solidarity which has made their economic and social development so successful. They have reduced industrial unrest and improved the level of education of their citizens dramatically.
The PSOJ does not believe there is any quick fix for what ails the Jam-aican economy, but we must start somewhere and start today. Not tomorrow. Today. We continue to push for a smaller, efficient government, better management of resources, and a reduction in the public sector agencies.
The Government has pledged to continue its consultation with the private sector, and we look forward to frank discussions on steps to improve the competitiveness of Jamaican companies, to identify new markets, to adjust Government's spending patterns, to reduce our deficit and restore our confidence in the Jamaican economy.
We can recover our economy only if there is unity of purpose and policy between all stakeholders in the society. We all must accept that there needs to be a change, which requires all of our support. All our livelihood and lifestyles are at stake. If we do not join together as a country now to implement changes, then we will have missed the road to success. We need to stop blaming each other for the problems, to seek solutions, and more importantly, accept the prospect of increased hard times, but with the joint vision of achieving the necessary changes to growth and prosperity for our nation, for ourselves and our children.
