Dawn Ritch, Contributor
LAST MONTH, Dr. Omar Davies, Finance Minister admitted for the first time that the economy was "going in the wrong direction", and that the Government was "going about it the wrong way" in reducing Jamaica's debt burden.
Is the minister therefore reversing his direction and that of the Government's policy of protecting the Jamaican dollar at all costs?
The Jamaican dollar has had a very chequered career. Before the general election last October it had been devaluing, then it eased off after that and revalued a bit. It started running once again in December, however, at a time when the Jamaican dollar historically would be stabilising. Winter purchases were over, and tourism receipts were now expected to begin.
PRECIPITOUS DECLINE
Instead there was a precipitous decline in the value of the Jamaican dollar in December, and particularly in the last two days of the month. The weighted average selling rate on December 31, 2002 was $50.97, and the dollar traded at a high of $51.60 to US$1.
This end-of-year date is a very important one in the calendar of the Bank of Jamaica (BOJ), because this is the day on which the Government must make good BOJ losses if any. Readers will remember that in previous years the BOJ made profits of between J$4 billion and J$5 billion annually, and which were transferred to the Government's purse at the end of each year. These BOJ profits came from charging banks interest rates of 90 per cent, and up to 120 per cent, which the banks then passed unto their customers who of course, could not sustain such payments and went under. Last year the BOJ started making huge losses which they tried to hide from the public in their fortnightly financial statements until this column forced them to put a note in their Balance Sheets, admitting to operating losses of J$1.68 billion for the first 11 months of the current financial year to November 27, 2002.
On New Year's Eve the Government of Jamaica would therefore have had to write a cheque for J$1.6 billion to the BOJ. But on this New Year's Eve, they didn't. The devaluation of the Jamaican dollar to J$51 to US$1 on the same day made the BOJ record a profit on the translation of foreign exchange in the Net International Reserves. The NIR has about US$1.6 billion in it. The BOJ has in effect therefore inflated away their operating losses, with any excess or profit being payable to the Government to lose or waste in any way they wish.
It is therefore highly unlikely that the dollar will revalue to J$49 to US$1 as some individuals are predicting, or hoping. Were that to happen the BOJ would immediately record a loss of $3.2 billion during January 2003 and the Government would be required to write a cheque for that amount, plus all the other losses incurred between now and December 2003. Funds may be fungible, but tax revenues have declined so the Government isn't finding it easy to write cheques of that magnitude.
The International Monetary Fund and now Standard and Poor's, the prestigious credit rating firm, have warned about Jamaica's ability to service its debt and downgraded it to a "negative rating". Jamaica's debt is now in excess of 150 per cent of gross national product and rising every day. This level is both unmanageable and unsustainable.
Unfortunately it will be the holders of the Government's domestic Jamaican debt who will be the first to feel the pain of our inability to pay. On New Year's Eve a significant chunk of the value of that debt was deflated away with the devaluation of the Jamaican dollar. The Government will next draw down on our artificially high NIR to try to first pay off the foreign debt.
BLIND ADHERENCE
Blind adherence by Government to a policy of protecting the exchange rate has been completely disastrous. It was achieved by excessive borrowings locally and overseas, accompanied by prolonged periods of high interest rates. This led to the collapse of the productive sector, which contributed in no small way to the crisis in the financial sector. These interest rates have crippled the export sector to the point where Jamaica can't compete any longer in the protected CARICOM market, where we are experiencing increasing trade deficits each year.
We are now the laughing stock of the entire Caribbean. Their financial entities have marched right into Jamaica and taken over, or better stated, been given the life insurance industry, the source of any country's long-term savings. This is the result of the farce perpetrated by Dr. Davies, described by him as the "successful" management of the Jamaican economy, and which the PNP Government has asked the Jamaican people "to log onto".
It would be hard to find any example internationally where there was such a wholesale handing over of this fundamental area of the economy to foreign-based financial organisations.
Yes, Dr. Davies pumped money in to protect depositors and pensioners, but only after having contributed to the ruination of the same financial sector by his high interest rates. He did not, however, rehabilitate the sector. He just sold it out to overseas-based interests, and Jamaicans will never again have any voice in this critical area of our economy.
For the past several years Dr. Davies had maintained that economic growth was just around the corner, and that the country was on track. Then after the PNP won a fourth term in office, we were finally told by him that Jamaica is going in the wrong direction, and the Government is going about its management in the wrong way. This column has maintained exactly that, and was like a voice crying in the wilderness.
UNCERTAINTIES OF IRAQ WAR
What Jamaica needs to think about now is that the price of oil is up, and not coming down in the short term. The uncertainties surrounding possible war with Iraq and North Korea mean that the price of oil may not fall for some time to come. As a consequence further damage to our economy is inevitable, and to all emerging economies worldwide. Against this background of grave international crisis can we continue with a Finance Minister who made an unmitigated disaster of the Jamaican economy when times were good?
The fact is that Jamaica is in a deep and worsening fiscal crisis. It's like a time bomb waiting to go off sometime in the near future. The officials responsible for creating the crisis cannot be expected to solve it. I have no choice therefore, but to stand by my earlier assessment of Dr. Davies, that he is the worst Minister of Finance this country has ever seen.
If Prime Minister P.J. Patterson is serious about turning around the economy and avoiding an implosion, he should act now by appointing a new Minister of Finance and a new Governor to the Bank of Jamaica.
These appointees should not seek to hide the truth from the people, nor hope we're too distracted by Christmas to notice the moves they make. And they must have the guts, the ability and the mandate to sort out the economic mess created by their predecessors.
