Davies
Andrew Green, Staff Reporter
AFTER THE political storm of 2002, we spent most of 2003 dealing with the impact of its economic fallout and the resultant sense of betrayal.
Presenting the budget in 2002, Finance Minister Omar Davies said the country's financing needs could be met by a "combination of the divestment activities and a more vigorous application of the tax laws projected to yield an additional $17.7 billion, thus clearing the financing gap."
With the elections out of the way and the budget deficit target missed by a mile, the 2003 presentation was somewhat different. We were issued with "a menu of options" to support a tax package of just over three per cent of gross domestic product or $13 billion, to close the financing gap.
The International Monetary Fund's February assessment of the economy and the policies guiding it was suppressed until Christmas Eve last year.
But the country's loss of credibility in international money markets could not be hidden. Nor could the internal loss of confidence, resulting in the May exchange rate crisis and massive increase in interest rates to compensate local investors for the risk of investing in their own country.
The hike in interest rates further undermined Government finances by making it more expensive for them to borrow. But still needing funds to carry on its operations, the Government has simply piled on more debt.
But what is truly interesting about this scenario is that the actual nature of the crisis doesn't seem to have been comprehended. We seem only to be able to wrap our minds around one crisis at a time, so the election overspending crisis has overshadowed the bigger FINSAC crisis.
In his 2001 budget presentation, Dr. Davies outlined the step which was taken on April 1, "whereby the FINSAC notes were taken on board by the Ministry of Finance as part of the national debt."
There have been complaints about the deferred financing schemes where the Government financed projects with IOUs, which were not brought on the budget until later. But there were few complaints when this was used to keep the multi-billion dollar FINSAC debt off the books.
One estimate of the cost of the collapse assumed by the Jamaican Government, through the Financial Sector Adjustment Company, placed it at $140 billion.
And in that "extremely tight" year of 2001, when the country started to shoulder the FINSAC burden, Dr. Davies said, "there is not one Ministry or Department which will have received the level of support which it would consider acceptable."
To deal with the crisis, the Minister of Finance said, "a great deal of emphasis has been placed on increasing revenue collection by expanding the tax net."
The Financial Sector Adjustment Company was established in January 1997 following clear signs, which had emerged in the middle of 1996, when several indigenous financial companies had developed severe liquidity and solvency problems, Dr. Davies said in 2001. Its mandate was to protect the savings of hundreds of thousands of Jamaicans, to protect the life insurance policies held by those who were clients of the intervened companies and to protect all pension funds.
A major objective was also to rehabilitate and rebuild the financial sector which was in dire straits, he said.
"In the 90s, Jamaica set something of a record in terms of the scale of the disaster that hit your banks," stated Sir Howard Davies, chairman of the United Kingdom-based Financial Services Authority, on a visit to the island last year. "You can see some indication of the scale of that problem in terms of the debt government held after the work done by FINSAC, which I think is, in terms of GDP, close to triple the scale of the debt following the Indonesian collapse and six times what happened in Mexico."
The Government acted to deal with the crisis by establishing FINSAC in 1997. It waited until 2001 to bring the costs of the disaster on its books, and only began aggressively dealing with the resultant debt crisis last year.
The fat salaries granted and usual election overspending are merely the icing on that FINSAC cake. And looking a bit further back, an interesting pattern begins to emerge.
Opening his 1998/99 budget presentation, he said "it is generally acknowledged that this is perhaps the most difficult presentation I will make. Not only because I am reporting on a difficult calendar year 1997, on a difficult fiscal year '97/98, but because the efforts in order to recapture the gains which were achieved on the fiscal side in previous years will have to be, as the multilaterals love to say 'front loaded' in terms of fiscal year '98/99. Despite being a difficult year, I must note in passing, the fact that the people of this country went to the polls during the fiscal year and gave this Administration a resounding vote of confidence."
Following the 1997 election victory, he attempted to recapture the gains with a $4 billion tax package an a $500 million hike in user fees.
Another $4 billion hike in taxes and user fees the next year caused the 1999 gas riots and his humble climb-down. In 2000, money market investors got hit, when he moved to collect the tax on interest income at source and tightened restrictions on the tax relief offered to workers in the tourist industry. The expected yield was $3.4 billion.
Assuming history repeats itself, we can expect some frightening tax packages for the next two years as we 'front load' adjustments to recapture the gains of previous years, before minds are once again focused on the next general election.
The lesson of all this is simple don't panic, the Government knows what it is doing.
Jamaica is a land of crises and this is merely another which we can and will overcome. So instead of standing paralysed in the headlights of what seems like impending doom, it might be best to consider measures for personal survival.
Rural Jamaica has started to see some relief from the import and exchange rate policies which have benefited urban Jamaica. Cheap food and a strong dollar were killing agriculture.
Local manufacturers also are gaining from the policies geared to boost domestic production. The bauxite/alumina sector is doing well, but it is not a major direct employer.
Tourism, on the other hand, is a big employer, and is set for a major expansion. New hotels are going up and the peripheral activities will gain vibrancy.
This is not an easy period for consumers with inflation high and certain critical costs set to rise. Whether they choose to or not, many are consuming less now than they did the same time last year. That pattern will be repeated so it will be best now to contain any unnecessary consumption.
For the individual, now is a good time to have your own roof over your head and to be invested in a unit trust or directly in the stock market. It is a time to become more productive.
Just remember, one man's crisis is another's opportunity.
