Wed | Aug 23, 2017

JLP rebate would crash economy

Published:Sunday | February 7, 2016 | 2:00 AM
Ralston Hyman
The growth proposals of JLP leader Andrew Holness (right) and finance spokesman Audley Shaw have been ridiculed as "half-baked" by financial analyst Ralston Hyman.
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The Jamaica Labour Party's (JLP) growth proposals are flawed because they would cost the Treasury some $32 billion in revenues, leading to a widening of the fiscal deficit, increased debt burden, higher interest rates, a run on the dollar, and a derailment of the country's relationship with the International Monetary Fund, the World Bank, the Inter-American Development Bank, the European Union and the international investing community for the second time in four years.

The plans for multigenerational mortgages would also damage the finances of the National Housing Trust and, by extension, the Jamaican economy, similar to what took place in Japan during the last 20 years and to what is now happening in Australia.

FANNIE MAE

This is why US housing agency Fannie Mae says it is treading cautiously with these mortgages because frequently the family members whose incomes are added to qualify for the mortgages but who are not on the titles move out. The upshot: The person whose name is on the title but whose income is insufficient to service the mortgage is left holding the bag. This often leads to default, prejudicing the viability of the mortgage institution.

The JLP, therefore, needs to tell the country where multigenerational living and mortgages have worked successfully.

These proposals represent emotional and politically popular undergraduate theorising and a general misunderstanding of Keynesian-style fiscal policy and its applicability to the current local and international economic environment.

The Jamaican economy has been operating below potential for the past 40 years, with average annual growth rates of 0.7% mainly because of the massive debt-to-GDP ratio, which requires that a significant portion of the revenues collected be consumed by debt-servicing charges.

The country's debt is mainly driven by a combination of 45 years of fiscal and current account deficits and the assumption of the liabilities of loss-making public sector enterprises, such as Air Jamaica, the Sugar Company of Jamaica, and the National Water Commission, the Jamaica Railway Corporation, the Jamaica Urban Transit Company, to name a few.

The country's debt-to-GDP ratio soared to as high as 262% in 1989 before falling to 115% in 2007, despite the financial-sector crisis, which cost $140 billion, or approximately 40% of GDP, which was addressed without any international assistance. The debt burden, which climbed back to 147% in 2011 because of the misdiagnosis and mismanagement of the Great Recession of 2008, is now down to 125% because of the recent buy-back of the PetroCaribe debt.

Additionally, the high levels of criminality that destroy almost 7% of GDP annually is also a major factor behind the poor performance of the economy, in conjunction with the cumbersome tax system and the lack of Schumpeterian innovative capacity on the part of the local private sector.

During this 40-year period, Jamaica has had a 39-year love-hate borrowing relationship with the IMF. Jamaica became a member of this multilateral lending agency on February 21, 1963 and entered into its first borrowing agreement in 1976-1977. Since then, the country entered into 13 borrowing agreements with the agency or one every three years.

Seven of those agreements were cancelled because the terms and conditions were said to be too harsh, two were completed with waivers, and only three were successfully completed. The country is now well on its way to completing another successfully.

The 2010 agreement that was terminated after only two reviews resulted in significant damage to the country's international credibility, leaving it teetering on the brink of bankruptcy.

Foreign direct investments fell to US$218 million in 2011 from US$1.7 billion in 2007 as investors lost confidence in the management of the economy. During this period, the country also endured 14 consecutive quarters of economic decline as real GDP - that is GDP adjusted for inflation - fell from $762 billion to $730 billion.

FISCAL DEFICIT

Meanwhile, the fiscal deficit was running at 7% of GDP and the debt-to-GDP zipped to 147%, while unemployment jumped to 13.7% and Jamaica declined to 109 in the World Bank's Global Doing Business Index.

Additionally, inflation was running at more than 7%, while the exchange rate was pegged at J$86 to the US$1, which means that it was overvalued by about 20%. This overvalued currency contributed to a steep fall in merchandise export earnings from US$2.7 billion in 2007 to US$1.5 billion in 2011 and the massive current account deficit aforementioned.

The current administration had to pull out all the stops to re-engage the multilateral agencies in the current extended fund facility and has so far officially navigated 10 consecutive reviews successfully. Investor confidence is returning and growth is accelerating, moving from 0.4% during the first quarter of 2015 to 0.7% during the second quarter and to 1.5% during the third quarter. Foreign direct invest inflows are now back up to US$1 billion, as investors pump more money into the tourism, energy, beverage manufacturing and construction sectors.

Remittance flows are also back up to US$2 billion as the American economy is now functioning at full capacity with unemployment down to 4.9%. There is a positive correlation between a reduction in America's unemployment rate and remittance flows to the Jamaican economy. These flows amount to 15% of GDP annually.

Unemployment is falling with some 22,600 new jobs created between October 2014 and October 2015, although the labour force climbed by 15,000 persons to 1.325 million from 1.310 million. Inflation fell steeply to 3.7% last year - a 48-year low - while net international reserves climbed to US$$2.43 billion in December of last year.

The pace of exchange rate depreciation has now slowed because the inflation rate differential - the difference between Jamaica's inflation rate and that of its major trading partners - the USA, China, United Kingdom (UK) and Canada is narrowing, although these economies are deflating, on the back of tumbling global energy prices and weak consumer spending, despite heavy bouts of quantitative easing - the printing of trillions of US dollars.

The Government will now be able to provide more fiscal and monetary stimulus in order to boost growth because the IMF recently reduced the primary surplus target to 7% of GDP this year as the Budget is now balanced and the debt-to-GDP ratio has been reduced faster than originally programmed for.

This means that the Government will now be able to spend more to strengthen the country's infrastructure such as roads, schools, drains and water supplies. This additional spending will help to augment that being done on the country's road network by China Harbour Engineering Company and the residential and commercial construction being carried out by the private sector.

The Government will also be making some J$62 billion in National Debt Exchange payments next week Thursday, and this will help to provide further monetary stimulus, leading to a lowering of interest rates and more investments into the stock market.

Consumer spending is driven by growth and job creation and business and consumer confidence are now at their highest levels in 15 years. The JLP's half-baked growth proposals would derail the IMF agreement and take us back to where we are coming from in 2011 in a difficult and volatile global economic environment characterised by the decelerating Chinese economy, the deflating Japanese and Eurozone economies, tumbling commodity prices, and the slowing US and United Kingdom economies.

- Ralston Hyman, a leading economic and financial analyst, is a member of the Economic Programme Oversight Committee; host of 'Real Business'; and the holder of multiple local and international journalism awards in the fields of business, economics and finance. Email feedback to columns@gleanerjm.com andrealbusiness@power106-ja.com.