Davies says: We are on the right path...
"I developed an excellent working relationship with Stanley Fisher, who literally ran the IMF operationally. He came to respect and has
publicly commented on the fact that our
programme is good."
His critics say he has presided over the devastation
of major sectors of the country's economy...
But Finance and Planning Minister, Dr. Omar Davies, is proud to have brought stability and proper regulation to an economy over which he has presided during most of the 12 years in which the People's National Party (PNP) administration has been in office.
The Gleaner's Staff Reporter Andrew Green and economist Errol Gregory jointly interviewed the Minister whose party has just ended its fourth year since winning the December 18, 1997 general election and is about to end its 12th year in Government.
The following is the first part of the interview with Dr. Davies.
The second half will be published in the Financial Gleaner on Friday.
Q: What are your guiding principles in your personal life and as Minister?
Davies: Simplicity; no trappings, and ethics. What I am is what I have always been.
Q:. What have been the main achievements of the economy in the last decade?
Davies: The last decade is a mixture. The major achievement would have been the liberalisation of the foreign exchange market as part of a broader objective of liberalising the economy. Perhaps the single most important policy steps to have been taken because of what was a heavily regulated economy: removal of price controls and controls on a whole range of things and secondly the extent to which liberalisation went. The Jamaican foreign exchange market is perhaps one of the most liberalised in the world now. It is a significant step that had a lot of negative implications and I believe only Michael Manley's political leadership could have guided us through that period.
The second major thing was because the liberalisation in the first instance led to a rapid devaluation. The exchange rate for an extended period was a fictitious exchange rate. But liberalisation took away the facade. I think we had in the 1991/92 fiscal year inflation of over 100 per cent and if you just look at 91 calendar year, it was something like over 80 per cent. So the second major achievement I would like to identify would be the bringing inflation down rapidly.
That was the first major challenge I faced. I took the view that there could be no long-term sustainable economic growth within the context of inflation rates of that level. The instability, the psychology, the distrust between labour and management meant you would have had continuous instability feeding on instability. Bringing inflation under control somewhat more quickly than we had projected and then bringing it into single digits. The decrease subsequently, not surprisingly, hasn't been down to the levels that we would want and there are some structural reasons for that.
The third is the bringing greater order to the foreign exchange market following liberalisation. And with that the build-up of the NIR (Net International Reserves) and I think there is now a general appreciation of having an NIR of that size.
The fourth is the increased fiscal discipline. In Jamaica now there is a major debt problem, but Jamaica has run a primary surplus, which is revenue minus non-debt expenditure. Stanley Fisher (IMF First Deputy Managing Director) tells me Jamaica's primary surplus is the highest for a country in a democratic form of government. He says some military regimes have imposed primary surpluses. We are running primary surpluses of about 12 per cent in recent years.
It is not just in terms of accounts but is also in terms of the presentation of our Budget of estimates the first week of April, completion of the Budget debate in April to get business on hand. It is not a spectacular thing, but I consider it as a major achievement.
Breaking into the private capital market is significant, not just for the government, but for the country. It has changed the whole notion of accessing resources by virtue of the fact that the government is diversifying its lines of credit means that the domestic capital market has had to adjust. The crowding out of the private sector is lessened to the extent that we access the external private capital market.
But also players in the domestic capital market have been pulled into the international market by the government action. It is no secret that some of the major purchasers of Government of Jamaica bonds are domestic companies. It is part of a modernisation of the economy.
Another success is the recovery of the financial sector and the intervention and the manner in which we dealt with it. We essentially cleaned up the insurance sector in a period very few persons would have anticipated. In a three-year period, we have dealt with the banking sector.
Generally I think FINSAC has been a success. There are now just two issues to be dealt with. The sale of majority interest in NCB and the sale of the bad loan portfolio. This not just our assessment but the international assessment.
Q: What kind of time-frame do you think you will be able to get an NCB sale in?
Davies: A sale comes about when a willing buyer and a willing seller agree. I am a willing seller. There are a couple of offers. There is one specific offer, but we don't have a deal yet. I want it sooner rather than later, because I don't want the government in banking. I have a lot of other things doing. I can tell you what I want, but that is not the timetable. I had a bad experience with Union Bank when we explicitly said we would sell it by... and the buyer just dug his heels in. I want it sooner rather than later, that is my time-frame.
In the meanwhile perhaps the most important part is the monetisation of the FINSAC bonds. That is apart from the interventions (in the financial sector). The taking on board of the FINSAC debt while keeping a budget going, very few persons, including present company, did not feel everything was going to crash. It is going to be tough, but we have done it and the markets have accepted that.
Q: Can you say what the Budget implications will be?
Davies: Just run through some numbers with me. The FINSAC bill of $120 billion, lets say you can convert that to 15-year paper. On an average, it means amortisation (paying back the principal) is $8 billion per year. Let's say, this is optimistic but not impossible, that you get a loan at 10 per cent. On an average that is $12 billion per year for interest. This means an additional $20 billion in debt servicing per annum for the next 15 years. Saving NCB is the single biggest project undertaken by the Government, ever. To spend $40 odd billion on NCB that is what we were doing. I don't think the country understands the full cost, the fiscal cost, of that. That we carried that out is a major success story.
Another success is the repair and improvement of our relations with the multilaterals, particularly the IMF. It is a success because we completed an Extended Fund Facility (EFF) in 1995 and said we are on our own. Because we had certain fundamental differences, most notable of which was the question of the exchange rate. We took a position that devaluing was not the way to economic growth because of what we argued were the consequences in terms of inflation. We took the position that we would reduce inflation and build from that position. That was not a very popular view then but I think the crisis in south-east Asia convinced the IMF to adopt a more flexible view. I would think that our relationship with the IMF now is the best that relationship has ever been.
Partly, this is because I developed an excellent working relationship with Stanley Fisher, who literally ran the IMF operationally. He came to respect and has publicly commented on the fact that our programme is good. So the improvement of our relationship with the IMF and the fact that we invited them to work with us in the Staff Monitored Programme (SMP), has facilitated our relationships with the other institutions which are reassured by that. I think it is unprecedented that the revamping of the SMP in light of the problems faced, we did it in about three days with the IMF.
Q: Could you give us some of the negatives of the past 12 years?
Davies: The downside is that the sharp adjustments in terms of the monetary policy then created a higher interest rate regime. This affected firms, particularly those that were heavily dependent on credit. In terms of the financial sector, those which had been offering high interest rates based on the prevailing inflationary situation, as the inflation was brought under control, difficulties resulted, because many of their assets were real estate. Both assets they held for themselves as well as the collateral they held for clients were real estate which were in several instances, non-performing in that their values only kept moving because of inflation. So you had difficulties there. That was a major problem which had affected not just businesses, but the financial sector for an extended period.
A failure, which is not just an economic failure, because I am both Minister of Finance and Planning, is that because of a variety of factors, we have not made the dent on the socio-economic conditions of the lowest income groups which we would have liked to have done. This is partly the commitment of resources of significant magnitude to healing the financial sector. But our ability to invest, particularly in health and education to the level we would have wished, has been hampered and it must be seen as a downside in moving forwards toward stability.
There was a failure in terms of the regulatory framework. Not in terms of the regulators not doing their jobs but the legislation and regulations to give them the muscle. Their teeth were missing.
Another failure is that during the period of high dependence on the multilaterals, and absence of any foreign exchange, we agreed to certain loans to the multilaterals which were counterproductive. They were loans which linked agricultural interest rates to market. There is no legal crop which you can produce with a 40 per cent interest rate. That was clearly a failure.
Q: What are the policy adjustments to address that issue?
Davies: Policy number one is that interest rates have come down. More importantly, we have taken, initially, unilateral decisions which were then endorsed, to bring those interest rates down. Those interest rates were not needed for the viability of the banks. It was the argument of the multilaterals that arbitrage would be permitted in the sense that if you lent a man at 15 per cent, he could take that and move the money around. We have also worked with the commercial banks in terms of the use of funds or part of the funds released through the reduction in the cash reserve ratio.
Q:. I thought that one of the failures with agriculture was the rapid liberalisation?
Davies: I can't concede that as a failure. Liberalisation is inevitable. The failure would be in terms of our domestic agriculture not being prepared to face that. But the failure is not per se the elimination of tariffs. So if you want to position it that adequate preparation was not made, that is one thing. Or adequate preparation was not made to prevent dumping... But there is a flip side to that. You have to be intellectually honest from the government's position in that part of the control or reduction of inflation is also related to the access to cheaper imported commodities. Food has a 56 per cent weighting in the CPI (Consumer Price Index) basket.
The reduction in unemployment levels particularly with regard to young people (represents another failure). Unemployment has plateaued at 16 per cent.
There are good explanations, but it is a failure. One explanation must be related to the educational system. Because many of these persons, it is not that they have not been exposed to schooling, but they have not been made ready for jobs. They have no marketable skills. And even now for example, one of the problems faced by the call centres is that there are jobs but they don't have people with the communication skills. It is a failure. Govern-ments are supposed to deal with problems. I am not trying to hide behind the explanation. It happened on our watch.
Q: I think there is a qualitative issue about the type of employment that has been generated which is more in the informal sector. Pearnel Charles speaks of more part-time jobs being created and people now working on limited contracts.
Davies: The reality is that there has to be a change in mindset and it is worldwide. That 'good' job people have come to expect for the future is going be less and less there. The unions are going to have to face it. The man going in at 8.30 and leaving at 5 o'clock with a lunch hour and three weeks vacation: You are going to have a core of that, but increasingly, employment is going to be self-created or activities without any specific time-line. So there is nothing wrong with those activities if it is legal, and increasingly in what you call the informal sector, the issue is how then do you bring them into the mainstream. There has been a failure of all of society, including government to recognise the changing patterns.
