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FACTORS INFLUENCING THE FISCAL BALANCE The most frequently utilized indicator of a Government's performance is the fiscal balance. The fiscal balance is the difference between revenue (which does not include loan receipts) and expenditure (which excludes amortization). If revenue exceeds expenditure, the Government has generated a fiscal surplus. If, however, revenue is less than expenditure the Government has run a fiscal deficit. Another useful indicator of a Government's performance is the primary balance. The primary balance is revenue less non-debt expenditure (i.e. it excludes interest payments). In seven of the last ten fiscal years Central Government in Jamaica has run fiscal deficits. However, over the ten-year period the Government has run primary surpluses each year. It should be noted that Jamaica currently has one of the highest primary surpluses in the world. In light of the primary surpluses it is therefore interest payments that have generated and continued to fuel the fiscal deficits. The sustained primary surpluses over the period are also indicative of prudent fiscal actions pursued with respect to discretionary expenditure over the period. A fiscal deficit is possible only through deficit financing. That is, the excess expenditure has to be financed through incremental borrowing. The interest payments that fuelled the fiscal deficits in Jamaica have therefore also given rise to the need for incremental borrowing thereby adding to the debt stock and ultimately leading to additional interest payments. Interest payments are directly determined by two factors - the stock of debt and the rate of interest. Factors contributing to the level of interest payments since 1996/97 when the Central Government operations went into deficit include:
Impact of Monetary Policy on the Central Government's Fiscal Balance In 1994/95 in an effort to eliminate the losses of the Bank of Jamaica the Central Government replaced the Bank's maturing Certificates of Deposit with Government's local registered stock (LRS) and provided additional instruments to facilitate the Bank's liquidity management programme. It should be noted that the Central Government is legally required to cover the losses of the Central Bank. The Central Government's issue of Government instruments to the Central Bank to cover losses and facilitate liquidity management has continued over the period and is outlined below in millions of dollars:
Issues to the BOJ to replace Certificates of Deposits, cover losses, and facilitate liquidity management have over the ten-year period added $50,918.1mn to the Governments stock of debt. An indication of the impact of these issues on the Central Government's budget may be obtained by determining the proportion of the current debt stock that the $50,918.1mn represents. The $50,918.1mn represents 7.3% of the current debt stock and interest payments arising from these issues have therefore been instrumental in fueling the Central Government's fiscal deficits over the period.
Contribution of the Financial Sector Crisis to Central Government's Fiscal Balance In 1996/97 the emergence of sector wide problems within the domestic financial industry prompted the Government to intervene to restore viability to the sector. The Government initially responded by directly providing support followed by the establishment of the Financial Sector Adjustment Company (FINSAC) in January 1997. In April 2001 following FINSAC's completion of its mission to restructure and rehabilitate the intervened financial institutions the Central Government assumed the outstanding liabilities issued by FINSAC to heal institutions such as Life of Jamaica, Eagle, Citizens, Workers, Mutual Life, Dyoll, Horizon, Island Life and Victoria Mutual. The impact of the financial sector crisis on the Central Government's debt stock is outlined below:
Since 1996/97 the Central Government has issued the equivalent of $139,667.0mn in instruments to facilitate the restructuring and rehabilitation of the financial sector. Determining the proportion of the current debt stock that the $139,667.0mn represents provides an indication of the impact of these issues on the operations of the Central Government. The $139,667.0mn represents 20.1% of the current debt stock. Interest payments arising from this substantial addition to the Government's debt stock have therefore been a prominent factor in the generation of the fiscal deficits over the period. Contribution of the Public Sector Entities to Central Government's Fiscal Balance Over the last ten years the Central Government has assumed responsibility for a number of Government guaranteed debts. Debt of Air Jamaica and the National Water Commission form the majority of the debt assumed by Central Government. The annual addition to the Government's debt stock from the assumption of parastatal debt is outlined below in millions of dollars:
Government's assumption of parastatal debt over the period added $19,609.6mn to the debt stock and the associated interest payments assisted in fueling the fiscal deficit. The issues to the financial sector, the issues to the Central Bank and the assumption of parastatal debt over the last ten years account for $210,194.7mn of the debt stock (30.3% of the current stock) represents elements external to the normal budgetary operations of the Government, which are to a large extent responsible for the fiscal deficits incurred by Central Government since 1996/97. Debt raised to finance Infrastructure Projects It should be noted however that since FY 1997/98 to FY 2003/04 more than $27 bn of domestic debt raised and included in the stock has been for infrastructure projects as follows:
The combination of the amounts identified for supporting monetary policy, restoring the financial sector, the takeover of debt of public sector entities and domestic debt raised and included in the debt stock for infrastructure projects since 1996/97 amount to just over 50% of the domestic debt stock of $417.5bn as at end March 2004. The remaining amounts in the domestic debt stock is comprised of amounts utilized for budgetary financing inclusive of meeting costs associated with interest payments in excess of the primary surplus. Of the external debt stock of $276.5bn, project loans from multilateral and bilateral sources, in support of developmental priorities, amount to approximately $76bn or 27.5% as at end March 2004. It should also be noted that over the last ten fiscal years the depreciation of the currency has led to an increase in the stock of external debt in Jamaica dollar terms.
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