Vantage Point With KEITH COLLISTER

Finance Minister Omar Davies has estimated expenditure for the coming fiscal year of around $380 billion.

While this is only marginally above the revised estimates of $372 billion, it is significantly above the original estimated expenditure for last year's budget of $358 billion. However, just looking at the budget in this fashion is highly misleading, and potentially detrimental to an investor's wealth.

First, it is important to note that this figure is the grand total of $239.3 billion in recurrent expenditure (including $101.5 billion in interest), and $141 billion in capital expenditure (which itself includes $102 billion in debt repayment), all less appropriations in aid.

Apart from interest, the rest of recurrent expenditure is a combination of wages and salaries, spread across the various ministries.

While the estimates of ex-penditure just tabled in Parliament do not break this out for us into those two categories, we note that last year's original (not the recently revised) recurrent expenditure budget was for $211.7 billion, of which interest alone was $92.4 billion. Non-interest expenditure in last year's original budget was $46.5 billion for programmes and $72.7 billion for wages.

The revised estimates for recurrent expenditure of $224.6 billion were thus significantly higher than the original budget. The increase over the 'revised' estimates for recurrent expenditure of approximately 6.5 per cent is only just above expected inflation of five to six per cent, an increase which investment bank Bear Stearns describes "moderate" in their Emerging Markets Sovereign weekly journal of March 30.

Increase in interest costs

Drilling down further, much of the projected increase in recurrent expenditure for the new fiscal year (which ends in 2008) is due to a highly unwelcome increase in interest costs. These are projected at $101.5 billion, of which $70.5 billion is interest on internal debt and $31 billion is external. This compares with around $97 billion for the revised estimate and only $92.4 billion for interest costs for the original budget of 2006. As bear notes: "Unfortunately, interest payments are not falling, and continue to consume over 40 per cent of current expenditures".

However, non-interest recurrent expenditure has also increased significantly in this year's budget. Last fiscal year, it rose from an estimated $119.3 billion in the original 2006 budget to a revised $127.6 billion on the back of the front-loaded wage deal with the unions, which gave them 15 per cent in the year 2006/2007.

As Bear Stearns notes, this large increase was "a key reason why last year's fiscal target was missed by a large margin".

Increased allocations

Much of the further increase in non-interest recurrent expenditure of just over $11 billion to $138.8 billion in this year's budget will be due to the further five per cent increase already agreed for this fiscal year as part of the two-year memorandum of understanding with the unions a quick review of the ministries reveals that some of them have also received significantly increased allocations for programme expenditure.

It is, however, the central governments projected capital expenditure, which, excluding debt repayment, is at its highest ever level of around $39 billion, which is most noteworthy. While at the micro level I very much agree with Bear's position that "we view this as a welcome increase and much more appropriate level for a country at Jamaica's level of development than the two-three per cent level prevailing in previous years", at a macro level, such a large increase raises the question of the sustainability of the finances of the budget.

Much of the increase in ex-penditure appears to be for roads, while a significant $4.375 billion appears to be a reimbursement to the Consolidated Fund for expenditures that appear to have already incurred, apparently a form of "deferred financing" though the Venezuela Investment Fund and PetroCaribe fund.

We should also note in passing that this year's debt repayment of $102 billion is sharply below projected debt repayment of $117.6 billion in 2006's original budget, which is why just looking at the increase in total expenditure to $380 billion is highly misleading as it doesn't take into account the fall in debt repayment. When the $39 billion in 'real' capital expenditure is added to recurrent expenditure, it produces the 'true' combined budget of just over $278 billion.

Bear Stearns themselves raise concerns over the likely rise in the debt-to-GDP ratio (in their view from about 133 per cent to 135 per cent), arguing that if revenues only rise a "realistic" 10-15 per cent, then the deficit for fiscal year 2007/2008 would be in the 3.4 per cent - 4.8 per cent range".

Market confidence

I share their view that it is critical that the deficit be seen to be falling for domestic and international financial market confidence. While like Bear I don't see a tax package as likely in an election year, I would note that since the end of the original MOU (at least partly inspired by a vision of social partnership), all the areas seem to be going in the wrong direction again including debt interest cost, non-interest expenditure, the fiscal deficit as a percentage of GDP and recently even the debt-to-GDP ratio.

While this mainly shows the extreme fragility of Jamaica's financial situation, it is relevantthat business confidence has also been depressed since late 2005, coinciding with the failure to sign a social partnership agreement in August 2005.

While some of this 'bad news' has already been reflected in the stock market, there is further cause for concern as we await the financing side of the budget.

The one positive that I can see is that debt repayment is relatively low this year, and with our recent Eurobond deal, we have already pre-funded the majority of our external borrowing requirements for the new fiscal year, making Jamaica less vulnerable to an increasingly risk averse international capital market.

Practically speaking, we may have to wait for the election to achieve the long-awaited programme of a shared national vision.

It must be hoped that we can achieve this without requiring another crisis, as in 2003, to concentrate everyone's minds.

Without a rise in business confidence, I expect the stock market to continue to meander, with a risk that things become worse in the short term as the market tries to digest the budget.

keithcollister@cwjamaica.com