Editorial | Melissa and the fiscal rules

The government is obviously a far way from concluding its assessment of the damage left behind by Hurricane Melissa, among the most intense storms to have developed in the Atlantic since these phenomena have been scientifically tracked.

It, however, doesn’t require expert analysis to conclude that the toll, beyond the emotional trauma of citizens, especially in western Jamaica, has been huge. The Holness administration should therefore have already taken steps to ease the domestic rules, and called on facilities available from multinational financial institutions, to give itself greater fiscal space to respond to the crisis.

In communities worst hit by the hurricane, infrastructure has been destroyed or damaged and key sectors of the economy severely impaired.

HUGE BLOW

Indeed, agriculture in the critical breadbasket parish of St Elizabeth has taken a huge blow. Fields have been flooded. Thousands of tonnes of crops are destroyed. It will be several months, first for rehabilitation, followed by the growing cycle, before domestic food production returns to current levels. Food prices will rise, with a generally upward tug on inflation.

The tourism sector has also been hit. Some hotels on the island’s western and north-western shores have been damaged. Jamaica needs time before it’s in a position to accommodate mass tourism. This fact will be exacerbated by the natural psychology of holiday travellers: they usually, for a period, shy away from disaster zones.

It is reasonable, therefore, to expect that the island will fall short of its 2025 target of five million visitors and gross tourism earnings of US$5 billion.

Additionally, the hurricane has disrupted over forms of commercial activity. In several places, stores and shops are inoperable, their employees out of jobs. The likely upshot: an uptick in unemployment.

Without hotels filled with tourists, overall food imports may decline in the short-term, but some of those consumed primarily by Jamaicans will rise to off-set declining domestic production. An upward movement in food inflation is possible. The further weakening of an already weak export sector also seems in the cards, while decreased foreign exchange inflows from tourism may place greater stress on the exchange rate of the Jamaican dollar. This could lead to further inventions by the central bank in the foreign exchange market to shore-up the domestic currency. That means dipping some more into foreign exchange reserves.

WEAKENED ECONOMY

In summation, this scenario, should it materialise, translates to a weakened economy. Indeed, it is unlikely, if not impossible, that Jamaica can come close to achieving its projected growth of 2.2 per cent of GDP this fiscal year. The greater likelihood is that the economy will decline. In that event, the government may collect less in taxes that it budgeted for, with potentially negative consequences for its fiscal programme.

Yet, the government will have to spend more to rehabilitate and rebuild infrastructure and on social welfare.

In these circumstances, the administration government would be hard pressed to maintain a primary surplus of 5.2 per cent of GDP (the target for this fiscal year), balance its budget, while meeting its rehabilitation objectives.

Seen through this prism, Hurricane Melissa, clearly meets a critical criteria for the government to derogate from its timetable for achieving a debt-to-GDP ratio of 60 per cent, which it was on target to accomplish by the end of the current fiscal year – two years ahead of schedule.

Obviously, Jamaica is facing, per the language of the Financial Administration and Audit Act “a period of public disaster within the meaning of the section 20 of the Constitution of Jamaica”. It is possible, too, that the hurricane, if the recovery is slow, could lead to “a severe economic contraction” – another of the criteria.

An important question that follows is whether the “estimated fiscal impact” of Melissa is “equal to or greater than 1.5 per cent” of GDP, which is the benchmark for triggering a suspension of the fiscal rules, including pushing back the timetable for reaching the debt-to-GDP ratio. One-point-five per cent of GDP would be roughly J$52.3 billion.

The determination of whether the threshold has been met – which seems a formality – is to be done by Courtney Williams, the independent fiscal commissioner. However, the formal certification of a public disaster in this context is the responsibility of the Planning Institute of Jamaica (PIOJ).

ALREADY REQUESTED

Fayval Williams, the finance minister, should have already requested this assessment from the PIOJ and informed the Independent Fiscal Commissioner (IFC) and Commissioner Williams of her intention to ask for an urgent analysis of the hurricane’s fiscal impact.

Having earlier this year exited its 24-month Precautionary and Liquidity Line (US$968 million) and Resilience and Sustainability Facility (US$764 million) financing arrangements with the IMF, Minister Williams should also now be preparing submissions to the Fund for access to its Rapid Financing Instrument, which is open to countries that need urgent balance of payments support because of situations such as Jamaica new finds itself in.

The government should also have in its sights set on institutions like the World Bank and the Inter-American Development Bank as well as those developed countries, whose activities contribute to climate change – the primary trigger of extreme weather events like Hurricane Melissa – for funds with which to rebuild with greater resilience.

However, the administration has to ensure that the rebuilding exercise is properly calibrated, transparent and accountable.

While providing relief to people in distress is urgent, the larger reconstruction has to be properly planned and efficiently executed so that Jamaicans get optimal value for their money.

It would make little sense if politicians and bureaucrats go helter-skelter spending money, without the absorptive capacity to properly and efficiently digest the expenditure. That equals waste – and an opportunity for money to end up in pockets where it doesn’t belong. This is called corruption.

The inefficient, wasteful and corrupt use of taxpayers’ money must be avoided at all costs.