Jamaica's Bumpy Road To Recovery

James Ogunleye
First published: January 1995

Like British Rail in the mid-1980s, the minister seems to be "getting there" - albeit in an epileptic manner.

Dr. Davies, who relieved Hugh Small at the Treasury in August 1993, came out seven months ago with a budget that seemed perfect for recovery, and perfect for growth. But mid-way into the fiscal year much of the government macroeconomic forecasts have remained what they were: mere forecasts. With less than five months to go, the chances of hitting any of the targets is growing slimmer by the day. So what went wrong?

The 1994-95 fiscal budget was anchored on: low inflation, a stable exchange rate, and higher savings to raise investments. These were not quite achieved. Take inflation. The budget forecast for the fiscal year was 15 percent - it is currently running at 30 per cent - a little higher than the 1993 average. Again, examine the progress of the plan for a stable exchange rate. The Jamaican dollar fell for much of the first half of 1994 even though foreign currency inflow as at June 1994 stood at US$532.7 million.

There are more worries for Dr Davies. Real GDP growth, projected at 2.5 - 3 per cent by the end of the fiscal year (March 1995) is likely to settle around 1 percent - barely enough to feed new mouths. External debt, although steadied over the past three years, at US$3.7 billion in 1993, would gulp a whopping 25 per cent of the foreign exchange this fiscal year. And there is likelihood of a deficit in the current budget. Last July, Carlton Davies, the Cabinet Secretary, told a stunned public that the J$7 billion proceeds the Government had been anticipating from the previous year's sale of four Sugar mills would not be forthcoming after all. Reason? The liabilities of the mills' had been under-reported! Since the debts had now turned out to be greater than had previously been thought, the Government had no choice but to kiss the anticipated jackpot goodbye. Stripped of commercial jargon: the owners of the new mills are to use the J$7 billion to off-set all pre-privatisation debts. That is not all. The J$1 billion earmarked for similar commitment on the partially-privatised Air Jamaica, was an under-estimation. The Government is coughing up an extra J$1.5 billion for this bungling.



Perhaps the one monetary policy instrument that is, more than any other, set to torpedo the Government's 1994/95 budget is high interest rate. Dr Davies argues that this is necessary to raise savings and by extension investment. However the dilemma facing the minister is how to maintain a balance between high interest rates for the said reasons and lower lending rates to nurture manufacturing growth. Already business leaders have begun to cry out. And they have reason to be concerned: Of J$13.1 billion provided by banks to the private sector in 1993 a chunky 53.7 per cent went to the services sector, leaving manufacturing, agriculture and other sectors of the economy to pick up the crumbs.

Tough times too for equity dealers, who have seen their fortune plummet. They have watched the stock market crushed by high interest rates, as equity investors flee the island. The market's 202 per cent growth in 1992 tumbled 152 points by December 1993. "If the stock market does not change we will not be able to (source funds) locally," complained Peter Thwaites, president of the property giant Dyoll, last August. Ironically the budget theme for this year is "Equity and Growth!"

Yet there are more impediments to recovery - most notably the inadequate economy-supporting infrastructure, which is driving up business costs. Although a chunk of the J$122.2 million the Government currently spends on capital expenditure is being used to address this problem, it remains to be seen if this will make much impact in the short-term.

Nonetheless, Jamaica's economic liberalisation has come a long way, and Her Majesty's Government (The Queen is still the constitutional head of state!) is determined to pull through. Perhaps it is already doing so. For one, Jamaica, to the envy of its neighbours, last year turned in a positive Real GDP growth for the eighth year running - 1.2 per cent. Its Balance of payments current account is relatively healthy - US$239 million in 1993; so is the Island's external reserves: it stood at US$240 million in September 1994. External debt of US$3,647 million in 1993 was actually 18 per cent down from the 1992 figure (although there is concern over increasing trade debt in recent months). Economic structure, by Third world standards, is diversified. In the productive sector, manufacturing alone contributed a tidy 21 per cent of the GDP in 1993, and employed 11 per cent of the island's population.

On the subject of population, the Island's growth rate is pretty favourable at only 1.2 per cent per year. This is especially as population growth is a clog in the wheel of many developing economies. On foreign exchange instability, one reason for the depreciation of the Jamaican dollar earlier this year is that a US$25 million foreign-currency bond is about to be floated while a new foreign



exchange system (cambio) is in vogue - and so far the foreign exchange (market) volatility has been subdued. And there's good news on another front - employment. The unemployment figure is down as more people are being absorbed by the informal sector. As regards inflation, a high-powered committee has now been charged with monitoring and analysing general price levels in the economy.

Notwithstanding the above, there must be no complacency. Percival Patterson's government still has a job to do to achieve a stable macroeconomic environment without which market enterprise cannot flourish. For one, the 21.1 per cent increase in Government spending in the current year definitely cannot be helpful for an economy still tottering on the edges of recovery. A permanent vigil on public expenditure is thus vital to get the economy back on the path of high growth. Although the recent World Bank-backed tax reforms are timely, the Government should not stop at this: more efforts should be made to weave the informal sector into the mainstream economy. the latter must be seasoned with the former since the resilience of Jamaican economy is derived from its unofficial arm.

Also important is the need to improve fiscal management, nay, efficiency in the public service. The aforementioned increase in Government spending this fiscal year arose largely because of slackness in the administration of public finance - the same reason for the loss of J$7 billion on the sale of the Sugar mills. It is high time the Government pulled out its chain-saw and cut through the jungle of bureaucratic deficiencies inherent in the allocation of scarce resources. If the people are being asked to make sacrifices for a better tomorrow, the Government, on its part, must be seen to be frugal in its spending.

Business leaders too deserve a caning. Some are still suffering from pre-liberalisation fatigue, when inefficiency was the norm. That is why for many, adapting to the new orientation has become an uphill struggle. This is not good enough. The industry must raise efficiency, and strive to compete with the best in the international market. The era of government pampering must be accepted as over, for good.

A day after he read his budget on April 28, a confident Omar Davies threw down a challenge to business leaders: "I have put my thing (funds to boost exports) on the table; let's see the reaction of the people who say they have projects (to finance)." Seven months on, business chiefs are still not in a hurry to pick up the gauntlet. With a stance like this Jamaica's road to recovery is a slippery road. Pity.