We, not the IMF, must fix the economy

Published: Friday | October 5, 2012 Comments 0
Aubyn Hill, Financial Gleaner Columnist
Aubyn Hill, Financial Gleaner Columnist
Bishop Robert Thompson (standing) offers prayer to kick off the first Cabinet meeting of the new Portia Simpson Miller administration, at Jamaica House in Kingston, on January 9. Simpson Miller is at right and Finance Minister Dr Peter Phillips at second right. - file
Bishop Robert Thompson (standing) offers prayer to kick off the first Cabinet meeting of the new Portia Simpson Miller administration, at Jamaica House in Kingston, on January 9. Simpson Miller is at right and Finance Minister Dr Peter Phillips at second right. - file

By Aubyn Hill, Financial Gleaner Columnist

Anyone who expects the International Monetary Fund (IMF) to fix our economy or search for solutions to our problems should think again.

Also, there will be no quick fixes.

Jamaicans and our elected officials have put the country in this pervasive and prolonged economic distress. We have enjoyed a lifestyle we did not produce or earn. We borrowed too much for too long.

No one in the IMF borrowed one penny of the J$1.7 trillion national debt on our behalf.

Politicians, taxpayers and voters must concoct the bitter medicine of spending cuts, reformed taxes - which may be increased - and possible job losses into a programme that the IMF will find credible.

Our record with the Fund is not exemplary. We do not want to take the hard decisions.

The process with the IMF is straightforward. Technocrats from the Fund are here meeting with government officials and economic big shots.

Their assessments will be sent to a review body in Washington which is expected to make few changes to the Jamaican Government (not IMF) proposal. It then goes to the board of the fund for approval.

Before the proposal is sent to the board, Jamaica will likely be required to show its commitment to its proposal by, first, passing a sensible and comprehensive tax-reform package; second, approve and implement a robust pension-reform scheme; and third, agree a public-sector wage bill which will not exacerbate our very bad fiscal state - read personnel cuts and wage freeze.

DELAYED TAX REFORMS

Joe M. Matalon was appointed sometime in 2003-2004 by the then PNP government to propose a comprehensive fix to the tax code.

I have seen the substantive document prepared by Mr Matalon and his team. His mandate was revised and, among others, he had specialist help from Brian Denning of PricewaterhouseCoopers in 2009.

The working group was again expanded in 2011 to include a wide range of stakeholders to agree a significant reform package.

No one would contend that Mr Matalon's groups' proposals were universally liked and accepted.

However, a significant body of detailed tax-reform work was done to allow any serious set of political leaders to engage in crafting a suitable tax-reform code, and have it accepted by the Jamaican people and passed by Parliament.

After his first appointment, the Matalon tax-reform proposals have lived with four prime ministers and five administrations - P.J. Patterson, Portia Simpson Miller 1 & 2, Bruce Golding, and Andrew Holness - and still we have no approved tax reform in place.

Experts from as far as Mauritius have been here to explain to government ministers how they reformed their tax regimes - low flat tax on an expanded tax base - and the benefits they reaped.

Refusing to act

We have refused to act.

The incoming PNP, as did the JLP before them, knew that tax reform was a major requirement for IMF approval of our economic proposal.

Nine months later, we still do not have a final submission to Parliament for approval. Do we really want the IMF to take us seriously after eight years of dithering on this import piece of fiscal and growth legislation?

When we speak of pension reforms and the IMF, we are focused on public-sector pension reforms.

Primarily, GOJ employees have not had to pay any contribution to their pensions - unlike many in the private sector.

This cost burden is very high, anachronistic and, given our fiscal circumstances, unsustainable. Our political leaders of all colours have also avoided the tough pension-reform decisions.

BITTEREST PILL

The public-sector wage bill, the third requirement, may well be the bitterest pill of all given the variety of statements by senior government officials on the matter.

Under the Golding administration the police received a 40 per cent increase, teachers 60 per cent and other GOJ employees about 35 per cent over the life of their contracts.

The teachers' contract increase was linked to a study of private-sector salaries and agreed by the PNP administration before leaving office in 2007.

The problem is the cost of future labour contracts. The GOJ wants a freeze to 2012, but some union factions have announced a 26 per cent increase demand between 2012 and 2014.

The IMF parted ways with the Golding administration over a seven per cent retroactive wage payment demanded by public-sector workers in 2010-11 and agreed to by the GOJ.

The IMF may not think we are serious if we raise our fiscal burden by awarding wage increases the country cannot afford.

The decisions on tax and pension reforms and what size, if any, salary increases to be awarded to GOJ workers are entirely in our hands.

No outside party will direct our decisions although they may agree or disagree with them.

Getting to optimal decisions in this climate of recession and hardship will require great political skills at consensus building.

If the Jamaican public is taken into open confidence by our senior government officials, who will factually and with relevant details discuss the road map to a possible IMF agreement, confidence could be instilled in the populace, education of both sides would occur, assistance in terms of understanding by voters and taxpayers could be given to our leaders, and the IMF and other multilateral lenders would see the resulting consensual plan as credible.

No one expects senior GOJ officials to discuss in open forum the possibility of the twin options - default or devalue - outlined in my article last week.

The proper open discussions of the road map - a credible set of serious and quite radical economic reforms and plans with tight deadlines - could push those dire options back into the 'not necessary' category.

Indeed, getting our economic house in order is the real third option. The explanation and consensus building by our most senior political leaders is a crucial part of the very difficult fix.

Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years. writerhill@gmail.com

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