By Edward Seaga, Contributor
THERE IS a budgetary crisis. Without a doubt, it is the deepest crisis of its type since the mid-1980s when the world suffered its worst recession in 50 years, and, in Jamaica, the bauxite/alumina industry virtually collapsed. That crisis cut our foreign exchange earnings in half from $1,000 million to $500 million, in one year. It does not need much imagination to understand the devastation caused, especially when the considerable revenues earned by the mining industry were also considerably decreased. The JLP government of the day had to find both very substantial revenue and foreign exchange to close the deficits in the budget.
How was that crisis handled? Expenses were cut drastically, rather than revenues raised extensively. Within one year, the economy rebounded and the budget was well on its way to creating a surplus. Exactly the opposite has been the case today in facing the present crisis. The heaviest tax package ever was imposed this year, $14 billion, to deal with the budget gap. Yet the crisis continues because expenses are still well above what the revenue can afford.
The pattern of excessive expenditure is now even greater today because the problems have grown worse. Where there was the usual financial tightness in the budget programme, the situation is now out of control. A huge financial hole in the budget has emerged, so large, in fact, that to find a way to close it will result in even worse problems. As a result, the country is now facing a 'no win' situation that has wiped out expectations of hope.
EXPENDITURE RACING ALONG
To explain the problem more fully, the country is spending far more than it earns and the majority of its expenditure is to pay interest on huge loans which have been borrowed to try to fill the hole. The end result is that Jamaica is drowning in debt. Our situation is the third worst in the world.
The position has now been reached where the drowning nation has few straws left at which to clutch as lenders overseas have backed away. The principal source of borrowing now is local and there are limits beyond which this cannot go.
So the bottom line is that there is not enough funding from loans, not enough revenue from taxation and not enough prospects for more loans or more taxation. But the expenditure still goes on and will go on until the country runs out of money. This is where we are now, unable to meet costs or pay bills. The situation is already out of hand.
There is only one road before us: cut costs drastically. Cut the over-expenditure: the corrupt expenditure, the unnecessary expenditure and prohibitively high interest rates.
All of this has been said before but still government does not act. The over-expenditure on goods and services is approached on tiptoe. No drastic decisions are likely to be taken to effect the considerable savings to close the budget gap as was generated in 1985. Corrupt expenditure is still a way of life because the biggest loophole, contract awards, has still not been plugged.
The Contractor-General is still not required to vet and certify contracts with his seal of approval. His responsibility arises after expenditure not before. Unnecessary expenditure is still prevalent led by wrong prioritisation by government. Edu-cation is still not priority number one. High interest rates prevail because competition is not allowed to bring it down.
Jamaica's excessive debt offers the best prospects for reducing budget expenditure by cutting the enormous outlays on interest payments, now 46 per cent, almost half of the budget. Some reduction can be made by swapping existing high cost debt for new lower cost instruments. Debt which carries high interest rates, are local instruments, generally bearing rates in excess of 20 per cent. Foreign loans should not exceed 10 per cent in today's market. The JLP Manifesto laid out this option. The private sector-initiated 'Partners for Progress' has picked up the trail and are 'working on it' as a proposal to government. There is no need to introduce this concept to government.
The Minister of Finance used it last year in a World Bank US$150 million loan. The reason why the prospects of this option is not more widely used is that it involves a limited amount of one time applications which are helpful but not generally repeatable.
GIVE COMPETITION FREE REIN
There is really only one way to reduce interest rates substantially and, hence, interest payable on debt. Let competition drive bank rates down. When a higgler has too many mangoes, she reduces the price. When banks have too much money (liquidity) they reduce the cost (interest rates). The problem is that whenever the banks become liquid, the government moves to sop up the liquidity, borrowing the liquid funds in order to prevent the liquidity from creating increased imports and greater demand for foreign exchange, putting pressure on the exchange rate.
In this dynamic of market forces, what is overlooked is that imports are not likely to increase beyond tolerable limits as import levels today reflect, in the absence of import restrictions, virtually the full extent of demand. Even so, it is worth losing some foreign exchange reserves in the Bank of Jamaica to allow liquidity to build up. As liquidity builds, banks will lower interest rates because deposits in the banking system cost money and cannot be allowed to be idle, earning nothing.
Government is unlikely to take this route to reduce expenditure on interest for the same reason that it will not dramatically cut other expenditures. It is still hoping for a miracle solution which will not expose it to any political risks.
As long as the prospects of political damage is given higher priority than damage to the national economy, the problem will remain, in spite of the good intentions by interest groups to effect solutions which are nothing more than using skin coloured powder to cover the sores.
The question continues to be asked therefore: Can this government manage the crisis?
The question is more than rhetorical. Over the past 14 years this government has failed every test of handling an economic crisis. It allowed money supply to run wild between 1990-95, causing prohibitively high inflation and interest rates, both at one point exceeding 100 per cent. This was the first crisis.
When government moved to reduce excessive money supply it did so in one year with such a sharp reduction that the resulting impact on the banking system caused near collapse. This was the second crisis.
Politics intervened to cause the third crisis. In 1995, government decided not to enter into any further IMF agreements. To do so, it had to stockpile substantial foreign exchange in the Bank of Jamaica which it purchased with massive amounts of Jamaican dollars, $10 billion in the first instance. This practice continued, skyrocketing the domestic debt.
The fourth crisis is on hand because of the third crisis. From the discontinuation of IMF agreements in 1995, the fiscal surplus, which prevailed before for several years, became a deficit in every year except one indicating the inability of government to manage on its own. This is the present crisis which is proving too difficult to handle. But why expect success when the government has failed to handle every crisis in the past 14 years?
As matters now stand the fiscal deficit is targeted not to exceed $24 billion (5.6 per cent of GDP). This is now going to be exceeded. The only question is by how much. The IMF, in a recent discussion with me, thinks the deficit will be $36 billion (8.3 per cent of GDP) an excess over target of $12 billion, virtually equal to the total of the massive new package of taxation introduced this year. Worse yet, the IMF did not factor in the unauthorised credits being indulged in by ministries.
On the loan side the shortfall is more than US$200 million, not counting the prospects of a BNS US$100 million. This gap is very unlikely to be closed as foreign lenders, in light of failure to control the fiscal deficit, have backed off.
The question is asked again, therefore, can a government, which has caused financial crisis after crisis in the past 14 years, solve the mother of all crises now?
Edward Seaga is Leader of the Opposition.