Wed | Oct 18, 2017

A review of Ja's economic performance

Published:Wednesday | February 4, 2015 | 12:00 AM

Briefing Exploring Issues with Dr André Haughton

How has the country been performing?

THE ECONOMY has been gradually improving over the last few years, moving from negative growth of 0.4, for the fiscal year 2012-2013, to positive growth of little under one per cent, for the last fiscal year, with signs of even more improvement as the end of the 2014-2015 fiscal year approaches.

Inflation has remained within target, seven to 9.5 per cent, over the last two fiscal years and is expected to be less than seven per cent this year.

The inflation rate for the December quarter was negative 0.8 per cent, the lowest Jamaica has seen in a while, resulting from the pass-through of lower global oil prices to domestic goods and services in some cases.

Inflation for the month of November and December were the lowest for the year. The exchange rate depreciated by less than seven per cent last year, relative to more than 13 per cent the previous year, which is a plus, as many anticipated Jamaica might have entered a currency crisis in 2014.

The current account deficit has been improving gradually, as the gap between imports and exports has been narrowing. Even though both exports and imports have been falling, the country would like to see exports increase, to earn more foreign revenue while imports fall to reduce the import bill.

The primary surplus target of 7.5 per cent of GDP has been consistently achieved over the last couple of years, and the debt to GDP ratio has dipped below 140 per cent of GDP.

How has the budget been going?

Last fiscal year is the first in a long time that Jamaica was able to achieve a balanced budget, minimising the amount the Government would borrowed for budgetary support, thereby improving the possibility of achieving certain debt to GDP ratio target.

Every year, up to 2012, the Government borrowed more than it budgeted, and achieved a primary surplus less than budgeted.

For the 2009-2010 fiscal year, the Government borrowed $83.8 billion more than originally planned. It had budgeted to borrow $215.79 billion, but ended up borrowing $299.5 billion. This materialised a primary surplus of $67.4 billion, $23.2 billion less than what was budgeted.

For the 2010-2011 fiscal year, the Government budgeted to borrow $176.2 billion, and actually borrowed $212.968 billion a difference of $36.7 billion more than what was budgeted. This resulted in a primary surplus of $54.1 billion, $7.1 billion less than the 61.3 billion originally budgeted.

The situation improved in 2011-2012. The Government actually borrowed $163.5 billion, $0.543 billion less than the budgeted $164.1 billion. The situation has thus further improved and borrowing to support budgetary expenditure has ceased.

What is the major downfall?

Jamaica consistently over-projects tax-revenue receipts on an annual basis. Revenue estimates for last year were off again, similar to the year before. Efforts to improve the country's economic platform, via capital expansion, have failed due to miscalculations of fiscal target over the years.

These targets continue to underperform since revenues materialised is always below expected projections. Pedro Schmid (2014), in an Inter-American Development Bank (IDB) Policy Brief titled: 'Fiscal Unruliness Checking the Usual Suspects for Jamaica's Debt Build-up'. Found evidence to suggest that poor revenue predictions, which influence planned expenditure, have led to Jamaica's systematic failure to achieve budget targets.

How can the country improve this?

In the process of creating a balanced budget, which forecast revenues and expenditure simultaneously, if more revenue is anticipated, the Government will always budget to spend more.

It is stipulated in the agreement with the International Monetary Fund that, if revenues fall short, Jamaica must offset this by reducing spending.

Majority of the funds from the existing budget is consumed by debt servicing and public-sector wages, with little remaining for capital expansion and infrastructural development.

Revenues, not materials, cannot be spent. In all cases, cutting spending, means cutting capital expenditure. The aim is to reduce the public-sector wage bill to nine per cent of GDP by 2016.

Until this, and other targets are achieved, consistently missing budget and GDP targets will continue to keep Jamaica in an adverse fiscal situation.

Schmid's evidence illustrated that if the Government had not constantly overestimated revenue projections, GDP and/or the primary surplus over the last eight years, Jamaica's debt to GDP ratio would have been 20 per cent lower than it is today.

Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email editorial@gleanerjm.com.