Sun | Apr 23, 2017

Economy faces moment of truth

Published:Sunday | March 8, 2015 | 3:00 AM
A section of the Petrojam oil refinery in Kingston.

The spectacular collapse of oil prices in the last seven months has dramatically altered the global economic landscape. For the most part, oil-exporting countries have been badly hurt. Net oil-consuming countries have benefited greatly.

The 55% reduction in oil prices since July last year has lowered economic costs everywhere in the oil-importing world. In what might otherwise have been seen as effective economic management, Jamaica is likely to see inflation below 5% at the end of this fiscal year. But the real reason for this decline is the same reason both the Eurozone and the USA were pushed into sub-zero inflation territory in the first months of this year and why many of the world's leading economies are now struggling to stave off economically debilitating deflation.

Jamaica is certainly not threatened by deflation. Our real challenge is ensuring that the economy realises the full benefits of this oil price windfall in lower inflation rates. Given the significance of oil to our economy, a 55% reduction in its cost should create a substantial downward pull on inflation. Not taking into account other factors such as exchange-rate movement, a cost reduction of this magnitude should lower our inflation rate, by as much as 4%. But this can only happen if the Government takes appropriate steps to ensure that the reduction penetrates all layers of the economy to impact production costs and retail prices in the country.

Like most oil-consuming countries, the steep reduction in the price of oil has been an unexpected boon for Jamaica. It should dramatically increase the economic value retained in the country from the same economic output and give a corresponding boost to our GDP.

However, despite this economic windfall, which has lifted economic performance in net oil-consuming countries around the globe, Jamaica has continued its pattern of economic decline. According to the recently released PIOJ figures, for the last two quarters of 2014, our economy performed below 2013 levels. This is despite the fact that we are approaching the halfway mark of an IMF reform programme that was billed as the best approach to boosting our economic performance.

Without knowing Petrojam's buying practices, I cannot be sure how much of the potential oil price windfall has benefited Jamaica so far. However, if the full benefit were received, other things being equal, it should boost the country's GDP by up to four percentage points.

 

NO SIGN OF GROWTH

 

But the favourable oil prices have not improved Jamaica's miasmic economic performance. While countries around us like the Dominican Republic, Costa Rica, and even Haiti are showing relatively robust growth, Jamaica, according to the latest data, continues to show no sign of growth.

It should be deeply concerning if the lowering of the price of a critical, commonly used commodity like oil results in better economic growth for our competitors than it does for us. That is what is frightening about the information coming from the PIOJ last month.

In today's open world economy, it is our relative cost competitiveness that will determine our economic health. The fact that world oil prices have fallen gives Jamaica no advantage if every other country enjoys the same or greater benefit. The resultant decline in inflation is meaningless if the decline is not greater for Jamaica than for our trading partners.

The Government's acknowledged inability to achieve the required public-sector wage bill of 9% of GDP on time is the first indication that its economic reform programme entered into with the Fund will ultimately be unviable.

A programme promoted to result in economic growth, which almost at the halfway mark fails to show any sign of growth, is unlikely to achieve its goal at the end. The targeted reduction in the public-sector wage bill would have been based on projections of a reduced workforce, lower real cost because of inflation, and a growing GDP.

The finance minister's resoluteness to manage the size of the workforce could be counted on. Inflation has already eaten more than 12% of the real value of public-sector wages. However, economic growth has not materialised. The IMF programme was predicated on achieving 2% GDP growth by 2016-2017. But almost halfway through, there has been none.

 

OPTIMISTIC EXPECTATION

 

It is becoming increasingly clear that Government's expectation of economic growth relying on mega projects was, at best, overly optimistic. And there is little likelihood that these vaunted projects will contribute anything to the hoped-for 2% growth in 2016-17. Growth must, therefore, come from an economic policy environment that attracts capital to production and is conducive to increased productivity of both labour and capital. Regrettably, these are areas that have attracted little attention in the Government's economic programme.

IMF chief, Christine Lagarde, recently said that creditors don't want their clients to collapse; they want them to pay. And in commenting on the new Greek government's desire to change its economic programme to reflect its objectives of making the rich pay more taxes, eradicating corruption and improving social and economic equality said they only need to demonstrate that these changes can work in practice, to improve their economy and pay their debt.

This has, essentially, been the IMF's recent position in dealing with governments that seek its help. The Jamaican Government had the opportunity to make the case for combining fiscal discipline with growth-inducing policies to improve our economy and honour debt. But chose not to do so.

The failure to reduce the public-sector wage bill in line with its own timetable, the continuing need to reduce critical investments in the social and economic infrastructure, and having to return to the taxpayer for more taxes to finance this year's Budget are early signs that the Jamaican Government's IMF-supported economic programme has arrived at its moment of truth.

- Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.