Oct 2008 Financial News

Jamaica's debt has quadrupled over the last decade

Oct 10, 2008

In what was an extremely timely review of the state of the Jamaican economy, Finance Minister without portfolio Don Wehby used the forum of a Pan Caribbean investor breakfast Jamaican Government's to give a comprehensive update of Jamaica's "Fiscal and Debt Sustainability Programme".

He began by noting that the Government debt, at approximately J$1 trillion dollars Jamaican, had more than quadrupled over the past decade, and now represented $354,000 for every man, woman and child in Jamaica.

The debt to GDP ratio had also increased sharply over the period, from 83.9% in 1997 to 130.7% in 2007. Servicing the debt now took 54 cents out of every dollar "before you could spend a dollar on education, health or crime".

Over the same decade, Jamaica had seen anaemic growth averaging roughly 1% per year, when our only option was to grow our way out of the debt.
Wehby noted that Jamaica had successfully raised US$350 million at an 8% coupon so far this fiscal year out of a planned external borrowing requirement of US$600 million. Whilst he didn't think the timing of their fund raising efforts "could have been better", accessing the international capital market "was now near to impossible".

Fortunately, he believed that the new Government's vigorous engagement of the multilaterals (he and Minister Shaw had been to Washington four times over the past year, and he was making a further trip there that same day) were now paying dividends.

He described Jamaica as "almost there in getting the US$250 million" required to meet this year's remaining financing needs through a combination of World Bank, IDB and CDB financing, and noted that "if things go our way, we could get our external requirements for the next two years" from the same sources as policy-based loans for general budget support. Net international reserves of almost US$2.3 billion at the end of August were also comfortably above the level of a year ago of US$1.877 billion.

Responding to criticism of the Government's budget targets as over - optimistic, particularly with respect to inflation, Minister Wehby noted that the forecasts were prepared from the best estimates of their key economic technocrats based at the Planning Institute of Jamaica and the Bank of Jamaica.

He noted that "because of the uncertainty in the world" one of the key technocrats involved in the preparation of the inflation target, the Governor of the Bank of Jamaica, had had to revise his inflation target many times over in the course of the fiscal year so far. In his presentation, Minister Wehby outlined four of the changes in the target range for inflation, based largely on the changed assumptions for the average price of oil and some key food commodities, namely rice, corn and wheat.

Inflation estimates had varied from an inflation range of 8-11% on February 14 (based on an oil price of $96), peaked at estimated range for inflation of 15 -18 % on the 10th of July (based on an oil price of just under $139) and was further revised on September 18 to a range of 15-17% (based on an oil price of just under $119).

Wehby believes however that the finance ministry's current projection for fiscal year inflation of 15 to 17 per cent inflation will be met, with inflation of 12% for the first half of the year being followed by a sharp fall in inflation to 5% in the second half.

Wehby noted that he was closely monitoring the effect of the international crisis on remittances, an industry he knew well from his time at GraceKennedy. He advised that the government had originally projected that remittances would grow 6-7%, and that so far they had grown 10-11% this fiscal year. However, because of the crisis, they currently projected that the overall growth in remittances would fall back to the original 6-7% projection.

He noted that Jamaicans overseas "are having a tough time of it" even though a lot of them don't work in construction, but in the more stable service areas of the economy such as teaching and nursing.

Fiscal Deficit
Jamaica's fiscal deficit of J$19.1 billion to the end of August was significantly better, by about J$6 billion, than the budgeted J$25.2 billion. Encouragingly, Wehby noted that while it was true that they had spent less on capital expenditure than budgeted, so far they would have still met their fiscal target even if they had spent everything budgeted for capital expenditure.

He emphasised that he had not said "that there would be no supplemental budgets" but that whilst external factors could require a supplemental budget "any supplemental budget must be genuine and not due to mistakes in budgeting". He cited as an example the situation when he had arrived at the Ministry of Finance, where he had been given a J$16 billion list of items that had not been budgeted for, which "at GraceKennedy would have got him fired".

Tax Reform
Answering the question of why Jamaica was pursuing comprehensive tax reform, Wehby noted that he was tired of hearing about the good old days, and that it "cannot be business as usual or we [meaning younger people] are not going to have any good old days".

Jamaica's high public debt, and the consequent lack of fiscal space, meant that without tax reform there was no money to deal with schools, or to make the investment to achieve stronger economic growth. One per cent of companies paid 78 per cent of corporate tax, with approximately 40% outside the tax system. He planned to make it very difficult to stay outside the tax system, through administrative reforms such as integrated data base and a single tax identification number. The amnesty had worked well, bringing in $6.5 billion in new taxes, and most importantly, 3,000 new taxpayers.

Wehby finished his presentation by noting "that we are going to go through a very difficult time" and that it was time for all Jamaicans "to put aside the politics and say what we want to do as a nation".


Source:
Keith Collister
The Jamaica Observer
Friday October 10, 2008
http://www.jamaicaobserver.com/magazines/Business/html/20081009T2300000500_141165_OBS_JAMAICA_S_DEBT_HAS_QUADRUPLED_OVER_THE_LAST_DECADE.asp