Sabrina Gordon, Business Reporter
President of the Caribbean Policy Research Institute, (CaPRI), John Rapley, and Latoya Richards, CaPRI research officer at a forum on Jamaica's debt hosted by the think tank on Wednesday. Richards presented on the study that analysed the national debt over a seven-year period, 1996 to 2003. - Rudolph Brown/Chief Photographer
Sustained economic growth, of between three and seven per cent a year, as well as tax reforms along the lines of the Matalon recommendations, offer the Golding administration its best chance of meeting the target of a balanced budget in three years, according to a study by the Caribbean Policy Research Institute (CaPRI).
At the same time, the strategy would have the benefit of reducing Jamaica's crippling debt-to-GDP ratio, now the world's fourth highest at 132 per cent, to less than 80 per cent within five years, CaPRI says.
"A suitable policy option for Jamaica, therefore, consists of two important strategies which the Government can easily access: tax reform and higher growth," said the report unveiled on Wednesday at the Mona campus of the University of the West Indies.
Former finance minister under whose hands the debt climbed close to a trillion dollars said at the forum that he had hoped for deeper analysis of contributors to the debt stock, including Finsac.
Economic growth
CaPRI is an independent think tank, substantially comprising UWI professors, and its March 2008 study of Jamaica's debt problem and its impact on economic growth was led by Dr Damien King, a senior lecturer in economics at Mona.
At the end of last year, Jamaica's debt was $991 billion - it has since edged over the trillion dollar mark - and looked at in per capita terms, each Jamaican owed US$7,920.
Approximately 40 per cent of Jamaica's national debt is owed to foreigners, with the remainder contracted on the domestic market.
While Jamaica has in the past, in the 1980s and early 1990s, had sharp upticks in its national debt, what many analysts consider the current dangerous and debilitating trajectory is largely a product of the mid to late 1990s, during the financial sector meltdown when the Government intervened to bail out bank and insurance companies.
Said Davies: "I stand by that decision, although it was costly to the Government, but it was a decision taken with eyes wide open."
Separately, during this period the Government assumed as contingent liabilities the debt of several loss-making state-owned companies.
High point
So, between 1996 and 2003 Jamaica's national debt grew from 76 per cent of GDP (gross domestic product) to its high point of 147 per cent.
Finsac, the agency established by the Government as its vehicle for the financial sector bail out, accounted for the bulk of expansion of the national debt during its seven-year period of rapid expansion.
Overall, the rescue cost taxpayers around $140 billion, with the biggest outlays being in 2000 and 2001, when the Finsac bill was estimated at 11.6 per cent and 22.7 per cent of GDP, respectively.
But public sector agencies, particularly Air Jamaica, which racked up losses of US$1 billion over a 10-year-period, and the National Water Commission (NWC), have weighed on the debt. So, too, as the multibillion rescue of the financial sector.
During the seven years captured in the CaPRI study, the Government assumed $15.8 billion of debt from public enterprises, equivalent, on average, to one per cent of GDP annually.
"That the absorption of the liabilities from outside of central government are the root cause of the doubling of Jamaica's debt puts Jamaica in a unique position within the Caribbean, where the six other countries that are heavily indebted all become so as a result of fiscal slippage - the failure to generate sufficient tax revenue to cover non-interest expenditure," the CaPRI study pointed out. "At the same time, the absorption of such contingent liabilities is a common cause of public debt growth in the wider Latin American region."
Even if with the fall back of the debt-to-GDP ratio from its 2003 peak, debt-servicing still account for about 70 per cent of the annual budget. And government borrowings to meet its capital and recurrent obligations, experts say, keep interest rates high, crowd out the private sector and undermine economic activity.
Balance the accounts
CaPRI's study comes as the Bruce Golding's Jamaica Labour Party (JLP) government, in office since last September, prepared to table its budget for the 2008/09 fiscal year and unveil plans to balance the accounts by 2011.
The administration says the fiscal deficit for the year ending Monday, March 31, will be 5.5 per cent of GDP, one percentage point higher than when former finance minister Omar Davies delivered the budget last April.
New Finance Minister, Audley Shaw's projection is a deficit of 4.2 per cent of GDP in the coming fiscal year.
Although CaPRI does not offer specific policy prescriptions for going about it, it says that Shaw has his best chance for reaching his balanced-budget target and lose relative debt by promoting robust growth.
If the country hobbled along at the current growth rate, which has averaged 1.5 per cent in recent years, maintain tax compliance at 36 per cent of GDP and held non-central government liabilities at around $14 billion a year, CaPRI estimates that the fiscal account would drift into balance after seven years while the debt would fall to below 80 per cent of GDP after 11.
Switching the mix of the debt, from 40 per cent to 60 per cent external, to take advantage of lower interest of foreign borrowings would not reduce the time it would take to either balance the budget or lower the debt-to-GDP ratio.
The situation would improve if the administration was able to bring no new contingent liabilities to the books: six years to a balanced budget and nine years to bring the debt-to-GDP ratio to the 1996 range.
The better options, CaPRI concluded, rests with tax reform and robust growth.
Four years ago, a committee headed by Joseph M. Matalon, which was set up by Davies, proposed sweeping tax reforms, including lowering corporate income tax to the level of personal income tax (25 per cent) and substantially raising the threshold before individuals have to pay. The Matalon committee also proposed a range of incentives for businesses and an overhaul to simplify tax procedures and encourage tax compliance.
Not far enough
A handful of the Matalon recommendations have been implemented, but critics say that they have not gone far enough.
Now, CaPRI argues that if fundamental reform was undertaken, leading to an increase in the tax take of between four to seven per cent of GDP, the budget would be balanced in three years.
However, this strategy, on its own, would require three years longer, a total of eight years, to bring the debt to below 80 per cent of GDP, than would be case if the country was able to achieve significant growth.
CaPRI, therefore, advocated the dual strategy of tax reform and other policies to encourage growth, thereby reducing the size of the debt relative to the value of output in the economy.
Said the think tank: "Finally, debt management distracts policy-makers from more constructive reform. The inimical effect of debt on growth is more significant where the level of debt is over a certain threshold."
sabrina.gordon@gleanerjm.com
Dr Omar Davies, former finance minister, speaks at a Caribbean Policy Research Institute (CaPRI) forum on Jamaica's debt, Wednesday. In the background, at left, is CaPRI vice-president Dr Damien King. - Rudolph Brown/Chief Photographer
In per capita terms, each Jamaican owes US$7,920.
