Sep 2009 Financial News

Golding's challenges and opportunities

Sep 08, 2009

The range of challenges now faced by Bruce Golding's administration is almost unprecedented in its scope and complexity. The only comparable period in Jamaica's modern history was in 1980, when a totally bankrupt country faced what was then the worst international economic downturn since the great depression.

Between 1980 and 1982, the challenges faced by the world economy included a severe recession, a second oil shock, and exceptionally high international interest rates to combat what was for the developed world, if not a country like Jamaica, extremely high inflation. Among the unintended consequences of these overly high interest rates was the triggering of the third-world debt crisis, which began in 1982 and lasted for the rest of the decade.

A few decades later, what has been hailed as the worst international financial crisis since the great depression began, shortly before Golding entered office. The crisis has now morphed into a global economic crisis of unprecedented severity. Any so-called "green shoots" are only the result of unprecedented fiscal and monetary stimulus by the world's major developed economies. The only developing countries able to implement stimulus packages have been those, such as China, which had taken advantage of the good times between 2003 and most of 2007 to self-insure their economies through the accumulation of vast foreign exchange reserves, which they are now able to spend in the bad times.

In light of these severe challenges, Tuesday's Observer luncheon hosted by Gordon "Butch" Stewart, was a welcome opportunity for the prime minister to get some feedback on the way forward for Jamaica, and to outline in frank discussion the many challenges he and his team face.

The issue of Interest Rates

In response to a question on interest rates, the PM correctly noted that the governor's mandate was to maintain domestic price stability, and that the main tool that the governor had to achieve this was via interest rate adjustments.

However, in Jamaica's current economic situation, it needs to be recognised that the gap between fiscal and monetary policy is shrinking almost to irrelevance. For example, if the recent high level of interest rates had been sustained, leading to an even higher fiscal deficit, then, as in 2003, it can be argued that a partial monetisation of the deficit could have become the least unpleasant option. As the prime minister also noted on Tuesday, the government cannot fail in raising the money it needs from the market.

The recent rise in net international reserves to approximately US$2 billion, announced by Minister of Finance and Public Service Audley Shaw on Tuesday, provides a golden opportunity to engineer a further sharp fall in Bank of Jamaica (BOJ) interest rates. The PM himself noted that, "The money from the IMF will create some space for the Bank of Jamaica to move more aggressively" to further reduce rates. He argued, however, that any good economist would advise against droping rates by 500 basis points, or five per cent, in one go, suggesting the BOJ will take a cautious approach, cutting rates gradually. He also noted that to achieve sustainably lower interest rates, or in his more colourful language, to avoid being a "captive prisoner" to the market, would require a lowering of the budget deficit. This, in turn, requires cutting expenses and growing the economy.

Taxation

The PM committed to looking at not just the existing duty structure, but the "rationalisation of taxes generally". However, despite what he described as a personal preference for more of a "big bang" approach than the current incremental change, Golding argued he couldn't rationalise taxes at the moment due to budgetary difficulties. He revealed, however, that he had already asked both Ministers Shaw and Karl Samuda to conduct a review of Jamaica's existing incentives, "some of which have been there since Bob Lightbourne days". Bob Lightbourne, of course, was Jamaica's famous minister of industry and commerce in the 1960s, deemed responsible for Jamaica's moderately successful attempt at import substitution industrialisation. However, as Golding himself noted, the Bob Lightbourne days are over as you "can't seal off domestic market".

Export-Led Growth

The business leaders present at Tuesday's luncheon cited the need for a level playing field for Jamaica's manufactures, exports and services. In practice, this means that where possible, taxation should avoid raising the market price of products competing internationally "up front", otherwise Jamaican business will lose out to cheaper foreign competition.

A good example of the competitive situation can be gained from looking at the tourism industry. Many American consumers are likely to be indifferent between a US$1,000 package to go on a cruise ship, or paying the same money to go to an all-inclusive hotel. However, in addition to lower labour costs and economies of scale, the cruise shipping industry can structure its business to minimise taxation. Unsurprisingly, over the past couple of decades, the Caribbean cruise business has shown tremendous growth while land-based Caribbean tourism has, for the most part, shown weak growth. As Sandals' chairman, Stewart noted that the taxation component of a cruise vacation could be several hundred dollars less than a land-based vacation, giving it a potentially unbeatable advantage in today's super-competitive travel market. The key point is that Jamaica needs to move away from seeing its competition as other Caribbean Islands, but to seriously analysing the competitive dynamics of its real competition, the international cruise lines. A much bigger land-based tourism industry, could, for example, be the key driver in reviving local agriculture.

Redevelopment of Downtown Kingston

At the luncheon, Pan Jam Chairman Maurice Facey continued his decades-old campaign to get the government to prioritise the redevelopment of downtown Kingston. In response, the prime minister noted that his Cabinet had on Monday approved a new package of tax incentives to stimulate the redevelopment of Downtown Kingston. A critical remaining issue was the location of the proposed cruise ship pier, with Facey arguing for downtown Kingston rather than a Port Royal "enclave". Facey acknowledged, meanwhile, that a cruise line such as Carnival would not touch downtown "in the present condition of the city". In a related aside, Stewart noted the critical importance of shopping in promoting a revival of downtown, as "people don't go to Panama for tourism, but for shopping".

Energy

The most important issue discussed was the issue of energy diversification. Industrialist Barclay Ewart argued passionately, as he has since the 1970s, that Jamaica needs to look carefully at moving towards coal, rather than what seemed to be a rush towards liquefied natural gas (LNG). He observed that the environmental argument for LNG over a modern coal plant did not take into account all the energy costs associated with liquefying, compressing, shipping, and reversing the process at the power plant. All this makes it a quite different product than the natural gas typically burned in US power stations. He noted that both Rusal and JPS had been in favour of coal on cost grounds, and that there were issues related to economies of scale with the huge capital costs involved in LNG. Finally, he suggested the need to have a top energy engineering firm evaluate Jamaica's energy strategy before making such a momentous decision.

Some of the other issues discussed included a more direct involvement in lending by the development bank, the need for venture capital, the reform of our secured collateral framework, which has finally been submitted to Cabinet, and the timeline for the implementation of the "blueprint" for taxation reform, prepared as part of the National Planning Summit process.

Article By: Keith Collister
Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20090905T220000-0500_159062_OBS_GOLDING_S_CHALLENGES_AND_OPPORTUNITIES_.asp
Published: Sunday, September 06, 2009