Nigel Clarke | Private-sector foundations for Jamaica 2.0 – Part 3
In this third column in my multi-part series on the “Rebuild Jamaica” COVID-19 Economic Recovery Task Force Report, I want to highlight the key role of the private sector in supporting Jamaica’s robust recovery from COVID-19 and beyond. The task force report includes a number of recommendations to enable the private sector as the engine of growth for Jamaica, and the role of the financial sector in providing the necessary support to realise this vision. Reference to the term “private sector” should be understood to include every economic entity in Jamaica outside of those in the public, voluntary, and diplomatic sectors. The term includes micro, small, medium, and corporate enterprises in addition to households.
First, a quick recap. In the first of my two columns, I reflected on the imperative of maintaining macroeconomic stability as the foundation for Jamaica’s sustained economic recovery while also noting the need to concurrently address the various structural bottlenecks that continue to impede growth. In the second column, I wrote about the need to address Jamaica’s social challenges, including pursuing economic formalisation, strengthening the social safety net, and digitising public and private-sector services.
A critical pillar of economic growth is, of course, the private sector. While Jamaica has the broad strokes of a market economy where private sector should drive growth, various hurdles have muddied the ability of the private sector to attain what is truly feasible. The reasons are well documented — crime, weak business environment, financial exclusion, weak competitiveness, and historical fiscal dominance, to mention a few.
The task force considered and made several recommendations to enable a strong private sector as the way forward to support a dynamic and flourishing economy. Note that crime was not part of the task force’s terms of reference. There are separate ongoing efforts in that dimension.
PRIVATE AND FINANCIAL-SECTOR INVOLVEMENT
The private sector, including the financial sector, is the cornerstone of economic growth. For an economy to thrive with economic opportunities and fulfilling jobs, the private sector needs to thrive.
In a simplistic way, there are two arms to the private sector: the real sector and the financial sector. The real sector comprises, inter alia, corporate Jamaica and MSMEs, including manufacturers, producers, farmers, entertainers, retailers, BPOs, mining operators, distributors, craftsmen, repair garages, personal-service providers, restaurants, tourism-attraction operators, hotels, etc. They constitute the heartbeat of the Jamaican economy.
But sole traders, companies, and MSMEs don’t operate in isolation – there is a very large support network that works together. The financial sector is a critical part of that support. Without financing, there is not much scope for businesses to grow.
A significant push is needed on both fronts for the Jamaican economy to sustainably reach a higher potential growth.
EXPANDING PRIVATE-SECTOR OPPORTUNITIES AND COMPETITIVENESS
The GOJ is committed to expanding opportunities for private-sector investment by, among other things, advancing public-private partnerships (PPP) to develop public infrastructure. For example, there is scope for PPPs in water, e.g., storage and treatment plants; roads, e.g., various north coast bypass projects; healthcare, e.g., centres of excellence for oncology and nephrology; sewerage, e.g., Soapberry; and waste management, e.g., NSWMA. Likewise, the GOJ could catalyse private-sector run private-equity vehicles that have the goal of recapitalising and investing in companies affected by COVID-19. If conditions allow, GOJ’s capitalisation could come in the form of a first-loss tranche, with commensurate return on investment for this risk designed to incentivise further private subscription.
Jamaica’s competitiveness needs a shake-up, which we cannot achieve until some of the deeply entrenched structural hurdles are resolved. Competition drives technology investment and innovation, and vice-versa, which, in turn, improve productivity and economic growth. Among other pre-conditions, competition thrives when information is readily available and accessible by market participants.
The task force recommends the creation of a transparent GOJ land bank where all investors – local and overseas – are aware of opportunities for land purchase or lease for investment. There should be a strong and effective claw-back mechanism that is applied if such land is not developed within a specific timeframe.
Furthermore, the task force recommends a comprehensive GOJ land-divestment policy that is transparent, simple, and applies across all government agencies rather than just the National Land Agency, thereby enhancing predictability of the process around purchase, sale, lease, and other land-related transactions with Government.
The task force also recommends the accelerated completion of the National Business Portal that would host a multitude of business-to-Government (B2G) transactions, allowing MSMEs, local corporates and foreign investors to i) submit applications online for various licences, permits, and other approvals; ii) have them reviewed by the relevant government entities; and then iii) obtain decisions online, all in a timely manner that can be transparently tracked. This single-policy achievement would greatly enhance competitiveness and productivity of the Jamaican economy.
In addition, Customs reform would greatly simplify procedures, creating a level playing field for large and small businesses, and reforms to the government electrical regulatory system will improve access to and speed of obtaining electricity.
FINANCIAL DEEPENING AND INCLUSION
The COVID-19 pandemic has exposed economic impediments that result from low levels of financial inclusion. The interface between the CARE Programme and the banking sector exposed the large number of persons who have bank accounts that they do not regularly use. These accounts often lapse into dormancy, making them ineffective. Another factor rendering tens of thousands of accounts ineffective is the needed “Know Your Customer” (KYC) documentation. In addition, access to credit is constrained, leaving MSMEs hungry for capital and slowing growth.
Pursuing reforms in these areas could be transformational for Jamaica. So, what exactly can be done?
• Streamlining KYC requirements would make it easier for Jamaicans to open bank accounts. Digital and portable KYC and remote onboarding for low-value transactional accounts would help, including allowing financial institutions to collect and share digital identities.
• Fintech – which refers to technological innovations in the delivery of financial services — offers huge opportunities to modernise Jamaica’s economy, deepen financial inclusion, and lower the cost of financial services. The BOJ’s Fintech Regulatory Sandbox, within which fintech innovations offered by fintech companies in partnership with regulated entities will be tested, including payment solutions and central bank digital currency, is an encouraging start.
• Accelerating private credit growth will also benefit from further building the existing collateral registry to increase the attractiveness of asset-related products (e.g., mortgages, leasing, receivables finance) and ensure that the same collateral is not being used for cross purposes. Sharing of credit information could also be mandated through regulation to remove information asymmetries. Financial information sharing platforms could support this objective. Calculations for loan-loss provisions, which are currently based on a conservative rules-based approach (automatic triggers for loan classification, minimum provisioning percentages for each category) could also be reconsidered.
• All lenders should be required to include transparent, understandable, and comparable information in their product listings and documentation such that customers can easily choose between financial providers. Such information must reflect the true cost of lending, including the annual interest plus any fess, charges, etc, to enable informed decision-making.
• Finally, initiatives are needed to promote greater financial literacy in schools and through partnerships with community-based organisations.
DIVERSIFY THE ECONOMIC BASE
Jamaica’s economic vulnerability to natural disasters and commodity price shocks is exacerbated by its narrow economic base. A few sectors account for a majority of economic output. Greater emphasis must be placed on further diversifying the Jamaican economy. This, of course, is not an overnight operation. But we need to begin to push for achieving higher output and value-added from logistics, agro-processing, animation, medical-supply manufacturing, music and entertainment, sports, among other sectors and subsectors.
The COVID-19 pandemic has undoubtedly set us back. However, it also offers the opportunity for us to build back stronger. By embracing reform with ambition in our macro-economic institutions, our social infrastructure, and our business environment, Jamaica can endure this pandemic, absorb its adverse social and economic effects, restore lost jobs and output, and not only “rebuild Jamaica”, but reset to a Jamaica 2.0 that attains even higher levels of economic and social development in the years to come.
The COVID-19 Economic Recovery Task Force Report is available at: https://www.mof.gov.jm/documents/documents-publications/document-centre/....
- Dr Nigel Clarke is minister of finance and the public service, member of Parliament for St Andrew Northwestern and serves as chairman of the COVID-19 Economic Recovery Task Force. Send feedback to firstname.lastname@example.org.