Delroy Chuck WHILE THE Government and the vast majority of Jamaicans are perpetually in financial distress, the financial institutions and rich investors are busily trying to find creative ways and means to use and increase their excess cash. The financial system is flooded with money seeking safe and secure investments. The available billions of dollars could have been attracted preferably to investments that could create wealth, develop the country and provide the needed jobs and opportunities, but for the ruinous government policies and lack of sustainable development plans that have deprived the country of meaningful options and choices.
The same situation occurred last year, when the increased liquidity in the monetary system induced prudent investors, sometimes called speculators, to buy U.S. dollars as an edge against inflation and, probably, as a good investment. When the dollar headed towards 70 to 1, the monetary authorities' response was to hike the interest rate from 19 per cent to 33 per cent and 36 per cent, which caused the dollar to revalue below 60 to 1. The same so-called speculators moved their money from U.S. dollars to Jamaican currency to get the better returns.
Twelve months later, the Treasury bills and other government paper are maturing, coming into the system with the interest added and, once again, threatening to put the financial system into another tailspin. Who put the interest rate up by 14 per cent and more, even with single digit inflation? It certainly wasn't the speculators, yet asininely they get the blame for causing the high interest rate. People with money and assets are always seeking to protect and increase their value, and will take the sensible and calculated risks to do so.
Already, the Stock Market is the chief beneficiary of an economy awash with money. Billions of dollars are invested in stocks, causing the index to pass the magical figure of 100,000 plus. With more money available and even more to enter the economy, the Stock Market is headed relentlessly towards even higher and dizzying heights before the Bull Run comes to an abrupt end. Who benefits from the present massive paper chase?
DOMESTIC DEBT
Apart from the stockbrokers, stockholders and the perceived confidence in the economy, I cannot think of any real and lasting benefit to an economy that is stagnating. Will any of this money get into real production? The companies that are doing extremely well are beneficiaries of the whopping 90 billion dollars interest paid out, mostly for domestic debt, by the Government last year and are nicely poised to benefit from the 96 billion dollars plus interest budgeted this year.
The Government should definitely have no difficulty raising the 500 million US dollars needed to repay maturing foreign loans and should really stop the facade of offering it overseas, as if the truth be known the foreign loans are taken up mainly by local investors who use their overseas contacts to make the purchases. How much better would it be if we could find economic activities to attract U.S. billion-dollar investments to create wealth and jobs, to inspire economic expansion and development, instead of seeking ever increasing loans merely to repay loans and interests. To be sure, rich investors are salivating, eagerly waiting on Government to float the bonds, assessing carefully the risks before snapping up the bonds and sit back quietly, while enjoying the high interest rate of 10 per cent or more. How can we blame these prudent inves-tors? Where else can they get such relatively risk-free or low-risk U.S. dollar investment?
Interestingly, Government may have difficulty raising the 150 or 170 billion dollars needed on the local market at an interest rate that is less than the inflation rate. I sometimes wonder how can anyone teach a socialist-oriented government to manage a market economy. After 15 years, the present socialist government has still not learnt how the market works and seems unlikely to understand. Nevertheless, let me try again, at least on this issue.
SINGLE DIGIT
When the inflation rate was in single digit that was the time to bring interest rate closer to single digit, instead of the 20 and 30 plus interest rate offered. Now, with inflation at 16 per cent and more, it is absurd to offer an interest rate below that figure, as any prudent investor will know that his money will lose purchasing power and so will not invest unwisely at a low interest rate.
Admittedly, the Government has promised an inflation rate of nine per cent for the fiscal year 2004/5 and, yes, if that promise could be kept then interest rate of 12 per cent would protect the purchasing power of the investment. However, the Minister of Finance, Dr. Omar Davies, has a dismal record of achieving targets! Investors will remember his inflation target last year was seven per cent but is more likely to be closer to 17 per cent.
So why should anyone believe his nine per cent target this fiscal year when nothing, absolutely nothing, indicates there is any significant production and economic activity to mop up the excess liquidity in the system, or to keep prices down.
Predictably, the Minister of Finance's main battle will be with the monster of inflation. With the economy awash with money, the excess liquidity will chase goods, cause prices to rise and stir the inflationary dragon to threaten the economy, once again.
Delroy Chuck is an attorney-at-law and Opposition Member of Parliament. He can be contacted by e-mail at delchuck@hotmail.com.
