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1997/8 will probably stand out when the history of this period is being written, not only for the third term, which is significant, but rather because of the tremors to which the financial sector was subjected on a sustained basis over the fiscal year. Today, I have tabled Ministry Papers providing detailed information on FIS Limited, on FINSAC and on the Deposit Insurance Scheme. The occurrences in the financial sector during 1997/98 are significant, not only because of their domestic impact, but also because this was taking place in a year when several countries in South East Asia - countries which have been held up to us as models of how we should operate - have undergone similar tremors but have not been able to withstand them to the same extent that we have. The Ministry Paper on FIS outlines very clearly what the Administration did in order to deal with the problems of the Blaise and Century Financial Entities. Let me state here that our ability to address these problems, although there has been, and continues to be, a significant cost for the general taxpayer, was facilitated by the tightness of the monetary policy which was being pursued. If this held for Blaise and Century, then it holds even moreso for the operations of FINSAC. In the instance of FINSAC, a year ago the pundits were predicting an imminent and total collapse of the system. All those who had inside knowledge of the operations could indicate that this company would go within a month, another would be three months later and so on. Here we are a year later, somewhat hurt but in a position to step forward on a path of rebuilding. Before I get into the technicalities, I must take the opportunity to place on record officially, the appreciation of the Government of Jamaica and my own personal appreciation for the work and commitment of Dr Gladstone Bonnick who guided FINSAC through its first turbulent year of existence. Very few will ever appreciate the full extent of Dr Bonnic's contribution as, with minimal resources, a skeleton staff but unlimited intellect, commitment and patriotism he negotiated a path through a minefield. At any stage, one false move could have brought about the collapse which so many predicted and some may even have hoped for. There is no question that there are things we could have done more efficiently. There is no question that there are steps or actions which could have been taken in advance which would have, if not eliminated some of the consequences, could have ameliorated them. There is no shortage of persons who, based on hindsight, can indicate the path we should have followed. At the same time, there is no question that we have come through these problems in a way very few other countries have been able to. We have done this without one cent of external support. There is no question that we are now in a position to begin the rebuilding of the financial sector with the foundations stronger, the regulatory system more efficient and more exacting and the penalties for mismanagement or corruption surer and swifter within the ambit of the legal system. As regards the cost of the intervention to date, the two Ministry Papers outline what they are. In gross terms, the cost has amounted to $73.5 billion. I have deliberately said in gross terms because there is a tendency for several to highlight this gross figure and suggest that in meeting this cost the Government will have to deprive needy sectors of resources. Whilst there are those who have deliberately exaggerated the cost and impact of FINSAC's intervention, I have discovered that there is genuine ignorance of the rationale for the actions taken by Government, the full cost of this intervention and how and when this cost will be borne. The tabling of the relevant Ministry Papers seeks to place before the public all relevant information needed to foster a full understanding of the issue. However, there is a need for more. The first question which we must pose, and each person should attempt to answer it for him/herself, what if the Government had not taken the decision to act? What is the cost of the chaos which would have resulted? Can anyone describe what would be left of this financial system if LOJ, Mutual Life, NCB, Citizens, Workers, Horizon, Dyoll, Island Life had all collapsed with no one being able to access their deposits, their pension funds or their insurance policies? Is this the alternative which we would prefer? So we know that intervention has cost the country in gross terms $73.5 billion. Does anyone wish to guess what the cost of the collapse would be, had we not acted? The second point which must be appreciated is that whilst the taxpayers will have to foot part of the eventual cost, I am willing to bet that there is not a single Jamaican who, either directly or indirectly, through a relative or friend, will not have benefited in some way from the protection extended by the Government through FINSAC to all depositors, pensioners and insurance policyholders. So whilst it is quite easy to appeal to populism in terms of the gross cost, for the argument to be equitable, let the person inside this House or outside, who himself has not benefited directly or indirectly from the actions of Government be the first to stand up and identify himself. Now to the actual numbers. I have given the gross number of the intervention of both FINSAC and FIS. However, we can begin by eliminating a figure of $10.9 billion, which had been advanced by the Bank of Jamaica to certain institutions namely: Century, Eagle and Workers. This sum has been paid back to the Central Bank through the transfer of certain sterilized balances which were being held in the Central Bank on behalf of the Ministry of Finance. Let me explain precisely what I mean by "sterilized balances". These are resources built up from surpluses in various years which were being held in the Central Bank but which would never be utilized by the Ministry of Finance, as this was part of-the agreed monetary policy. This amount has to be listed as an expenditure, in order to satisfy the requirements of the Auditor General. However, in reality, it is a transfer on the books from the account of Central Government to the Bank of Jamaica to compensate for the advances made to those three institutions. Hence, that gross figure can immediately be reduced by $10.9 billion. Next we should realize that when we intervened in these institutions we received assets in return. These are assets of various types. We acquired real assets e.g., Holiday Inn, which is having perhaps the best year ever; half of the Jamaica Grande, the largest convention hotel in Jamaica; several buildings and land. We have received shares in companies and we are now shareholders in all of the financial institutions themselves. It is not possible for us at this stage to give a precise valuation of the assets we have acquired and various persons have come up with different figures, but as the saying in business goes, the only real price is that agreed to by a willing buyer and a willing seller. There is need for more time before we can give a precise notion of the value of the assets we have received. Whilst there are many who argue that we should try to sell as much as possible as quickly as possible at whatever price is offered, we do not take that view point. Rather, we must use this opportunity to reconstruct the sector. At present we are studying the cost and benefits of aggregating those financial institutions which we totally own. If it is felt that it is best for the country and for the sector that they be aggregated, we will proceed in a transparent manner to dispose of them together, rather than as single entities even if the latter approach would have brought a higher return. The country can be assured that any one or any institution to which these entities are divested must meet certain rigorous criteria:
There will be no compromises on these three criteria. One of the major tasks/responsibilities of the Board and management of FINSAC/FIS during this fiscal year, is to manage the debt service obligations of the two institutions from within, such that they are not a call on the budget. Many questions have been asked as to why FINSAC is not explicitly included in the fiscal budget. The answer is simple. In the first place, for clarity of analysis and as a good management practice, this extraordinary activity is best separated from the normal activities of Government as reflected in the Estimates of Expenditure. Secondly, in terms of managing the servicing of the debt, whilst the FINSAC Board and management have a difficult problem, it is one which I have every confidence they can handle. They are faced with a debt servicing requirement of approximately $16 billion for fiscal year 1998/99. However, of this amount, only about $3.4 billion will be needed in cash. To the extent that it is possible to meet these obligations through the issuance of additional paper, this will be done and cash will be utilized only as a last resort. It may be useful to note that FIS is itself managing a substantial amount of cash, at present approximately $1 billion. As I have indicated, this is a difficult problem but it is one which is not beyond the capabilities of the Board and management team which has been assembled. Management, Ethics and Corruption The problems we have faced in the financial sector have brought to the fore certain issues which many in the society would prefer if we left alone or certainly that we refrained from exploring publicly. They relate to the extent to which the problems, which we have faced in the sector, have been caused by corrupt practices and, more worrying, a degeneration in ethical standards. If I may be allowed to speak on a personal note, I have been accused at various times of carrying out a personal vendetta against specific individuals; of trying to cover up my own mistakes and incompetence by blaming others; of being hostile to the private sector and by some, who are perhaps more honest, of just not understanding the runnings of the business. Let me begin this discussion by stating that in my assessment of Jamaican businesses in general, including the majority of persons involved in the financial sector, there is a hard core of honest, hardworking persons, who pay their taxes, are fair to their workers and comply with regulations which govern the particular areas in which they are involved. It is this realization which has governed my interaction with both individuals and associations with whom I have had to interact at various points in time, during the period I have held this office. In terms of the issue of the vendetta, I just wish to note as a matter of record, that we have not lost one single case in the Courts. Therefore, if it were simply a matter of vendetta against personalities, is it likely that the Courts at home and abroad, would have consistently ruled in favour of the Government. I believe a far more rational explanation is that they have ruled in favour of what is right. I have discovered in meeting with persons from all strata of society, as I have explained to them the rationale for doing that which we have done with FIS and with FINSAC, that their common consistent plea/comment is, when are some of the culprits going to be seen to pay for that which they have perpetrated. I give the assurance that in every instance where wrongdoing is suspected it will be thoroughly investigated and the results of these investigations turned over to the appropriate authorities. No one will be protected and no stone will be left unturned in pursuing the truth. However, we have a legal system to which no individual can dictate, whether he be Minister or Prime Minister. It has served us well and everyone deserves his day in court, so even though the pace at which the cases are being prosecuted may not satisfy us all, we cannot attempt to circumvent the justice system in pursuit of quick results. However, there is a more critical issue which we all must address, and address honestly, and that relates to a creeping erosion of ethical values, not only in the financial sector but also amongst other groups, including professional bodies, whereby persons will do whatever they can get away with. Since the focus is on the financial sector, it is the one which has garnered the greatest attention from an angry public. Furthermore, this sector has a unique position in that it is built on trust. Trust of a depositor in handing over his or her resources to an institution for safe keeping. In too many instances those who have been given this trust have not been worthy of it and have utilized the resources as if it were their own. As a Jamaican I have been personally embarrassed by the various reports which have come to me from those who I have appointed to take over various institutions. The reports have pointed to total disdain for accepted procedures in the financial sector. They have pointed to a callous disregard for protection of the interest of depositors. They have pointed to actions, which can only be described as corrupt, and these actions have either explicitly or implicitly obtained the support and approval of professionals in one capacity or another. This is not meant to be a sermon but I am deeply worried if it is felt by any group or any individual in the society that my insistence on bringing these matters to light means that I am shaking the foundations of the financial sector. There are several reasons why such a position must be rejected. For one, if the foundation is rotten, if left untended, sooner or later the sector will collapse under the full weight of the spreading corruption. Secondly, if these actions become the norm, if these actions are accepted, is there any chance of our young people developing without seeing these behaviour patterns as the ones to emulate? How will they know what is right if their seniors do these acts as a matter of course, and prosper? But if we wish to move away from the ethical issues and speak as hard-nosed business people, the fact is that even if we may wish to condone such actions locally, even if we may wish to accept them as the "runnings", increasingly the rest of the world will isolate us and will treat us as we deserve to be treated - as persons who are not worthy of trust. Sooner or later, the only persons who would wish to do business with us are persons we should avoid. So for a variety of reasons, whether it be from a desire to halt the ethical and moral conduct or just the reason of wanting to be able to do business in a global economy, this corruption has to be acknowledged and dealt with. Finally, I turn to the issue of whether the problems have indeed been caused by the actions of the Administration through the pursuit of a high interest rate policy. Later in our presentation I will deal with the costs and benefits of this high interest rate policy, but this is not the place for that discussion. On several occasions, I have publicly stated that the high interest rate policy has had a negative impact in terms of the ability of business to service loans, especially in a difficult economic situation and with inflation rapidly declining. As customers become more concerned about increases and wary about how they spend their dollar, then price increases, which previously could be moved at whatever rate one desired, have to be kept in check, thus affecting revenues, thus affecting the ability to meet interest payments. So in short, yes high interest rates have contributed. But is that the full answer? Of course not. One of the requirements of managers is to deal with good times and with bad times. One cannot be hailed as a successful manager if you are only able to deal with a booming economy, increasing consumer spending and low interest rates. When faced with adverse conditions, a good manager takes appropriate actions and there are several businesses in Jamaica which have performed in this manner. No one makes much noise about them and they in turn, for their own good reasons, keep quiet and go about their business. I have looked at the balance sheet and accounts of several such businesses - businesses which are expanding, businesses which are profitable and businesses which are re-investing more of their profits. One common theme of all those businesses is that they have tried to limit their borrowings in order to limit their debt servicing costs. On the other hand, there are those who have borrowed to the hilt and one of the greatest ironies is that amongst those who claim that their problems have resulted from high interest rates, are many who have faced no interest rates. What do I mean? As you would expect, I have been privy to the list of bad loans, non-performing loans from several institutions and in several instances there are persons who having borrowed, often with no real collateral, have paid not one single cent on those loans, yet they and their agents proclaim that they are faced with problems because of high interest rates. Let me share with you some quotes from a report which I have just received from some of the auditors who have been sent into a group of institutions in which we have had to intervene.
You be the judge as to whether such institutions could have survived even if we had single digit interest rates. High interest rate is just a difficulty, but it is a difficulty well managed institutions have dealt with. So in conclusion, whilst we naturally accept that high interest rates have negatively affected the performance of some firms, it is not the major explanation for the difficulties faced in the financial institutions. We would be fooling ourselves if we based our corrective actions on this assumption. || Previous | Table of Contents | Next ||
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