Sat | Apr 20, 2019

Editorial | Capital expenditure and economic growth

Published:Monday | March 25, 2019 | 12:07 AM

The 2019-20 Budget presented by Finance Minister Dr Nigel Clarke on March 7, 2019, has a capital budget of $72.1 billion, which is an increase of five per cent over the revised estimates for the previous fiscal year. This, according to the minister, more than doubles the figure for 2015-16.

This impressive growth in capital expenditure would have been facilitated by tremendous sacrifices made to improve Jamaica’s fiscal accounts since 2011 under the various agreements with the International Monetary Fund (IMF). This improved fiscal position not only allowed the Government to increase capital expenditure, but also fund a $14-billion stimulus, or giveback. The easing of the primary surplus target by the IMF from 7.5 per cent of gross domestic product (GDP) down to 6.5 per cent contributed greatly to the Government’s ability to fund the giveback.

To get a full picture of the total capital expenditure by the public sector, one needs to add the $71.9 billion that is projected for the public bodies, including the National Water Commission, National Housing Trust, Port Authority of Jamaica, and Petrojam. The capital budget increase for the public bodies is 23 per cent above the figure for 2018-19.

The combined projected capital expenditure for central government and public bodies for 2019-20 is $140 billion. This impressive run-up in planned capital ­expenditure is reflected in the Government’s priorities: security, ­infrastructure, growth and job creation. However, there is need for a closer examination of the whole capital ­budgeting process before declaring victory.

LOWER EXPECTATIONS

Minister Clarke did not spend much time speaking about the slow pace of project implementation due to lack of capacity, the procurement maze, and the general malaise in the public sector. The citizens suffering the ill effects of the current roadworks in the Corporate Area may well add incompetence. Much of the projected capital budget represents ­previous allocations from previous years which were not fully disbursed due to slow project implementation. We must therefore lower our expectation about the actual expenditure that will take place during the year.

An example from last fiscal year tells its own story. The Ministry of Finance gave the Petroleum Corporation of Jamaica (PCJ) a loan of US$100 million, or J$13 billion, to upgrade the Petrojam refinery.

The project was aborted, representing an example of poor capital budgeting. Based on testimony to the Public Administration and Appropriations Committee of Parliament, the project was not even fully designed and was not shown to be viable. The budget ­allocation and the loan were therefore premature.

As a result, the PCJ significantly impaired its finances meeting interest charges, before returning the US$100 million to the Ministry of Finance. Fiscal space for other ‘shovel-ready’ critical projects would have been used up to accommodate the Petrojam aborted project. The financial secretary and the board of the PCJ should, at least, have been questioned about this shoddy affair. The ­mismanagement at the Petrojam refinery has ­consequences beyond those already revealed.

The underlying hope of the Government is that the stimulus package, along with the increases in capital expenditure, will drive faster economic growth in 2019-20. Although it is logical to conclude that there is a positive link between capital expenditure and growth, the very high import dependence of the local economy makes it difficult to draw definitive conclusions without empirical research.

The import dependency can be readily seen in the national security budget. Of the $20.2 billion for capital ­expenditure allocated, some $11.8 billion will be used to import coastal surveillance, telecommunications and cybersecurity equipment, along with aircraft and ships for the security forces. A further $1.8 billion will be used to import cars. These imports will represent close to 70 per cent of the national security capital budget.

An evaluation of the capital budget of most other ministries will show a similarly high import content in their expenditure plans. This has been the pattern over the years, and provides some of the explanation for the slow GDP growth, despite high levels of capital expenditure in both the public and private sectors.

Significant long-term growth will only come from sustained improvements in productivity, along with substantial private sector-led investment. Improvements in productivity must be driven by a transformation of the science, technology and ­innovation base of the country. This is the next frontier of reform to which Minister Clarke and colleague Minister Fayval Williams, in charge of science and technology, should turn their attention in the quest for transformation.