The development of a technical financial programme is not an overly complicated exercise. It is something which successive Administrations have had experience doing together with the International Monetary Fund. Construction of the programme implies identifying critical targets and making assumptions about certain variables and then monitoring others so that these targets can be attained. In each instance the critical variables with which we are concerned are exchange rate, inflation, GDP growth, base money growth, credit to the private sector, growth in NIR, interest rates and fiscal surplus/deficit.

At different points in time, the critical tagets which we select will change depending on the problems facing the society and economy in that period. One handicap in structuring such a programme is that persons representing specific groups, focus on the variables and targets which impact on their interests most of all. With good reason, they will mount a consistent lobby in support of adjustments to facilitate the attaining of their special targets.

We have seen examples of this. At various points in time there have been pressures from business groups for devaluation, for liberalization of the exchange rate system, for liberalization of price controls, for liberalization of trade. At other times the same groups will ask for stability in the exchange rate system, less liberalization and greater protection from imports, subsidies on imports into production. In passing only, you will note the historical truth in the assertion as well as the fact that several of the targets which they demand may be mutually contradictory.

From the perspective of workers, both unionized and non-unionized, apart from that general term 'better working conditions" the fundamental cry is for better pay and reduction in the rate of price increases. Whilst the workers may not be able to articulate technically what they are demanding, this translates essentially into a demand for the control of inflation.

There are other interest groups which, whether they have their Organisation or they are spoken for by their elective representatives, also have priorities. There are consistent demands for increased allocation of resources from the budget on the social services, on improvement for infrastructure, on protection of the most vulnerable in the society. Again, these demands, however articulated, translate into a structuring of the fiscal budget to respond to their special needs and interests.

From the point of view of the Administration, regardless of which party holds political power, the budget is not simply to articulate the concerns special interest groups. Without belittling the efforts of leaders of special interest groups, it is not particularly difficult to point to the areas of need and to call on Government for action. In fact, in several instances, I could do this better than those who speak on behalf of the groups.

The Administration's job is to examine all of the concerns of the various groups and here I list but a few. The private sector, including foreign investors; large and small domestic businesses; small farmers; we have to take into consideration the housewives, the pensioners, the unemployed and then we have to take into consideration the urban/rural divisions.

That is not an exhaustive list, but increasingly that which we do with economic policy is subject not only to local analysis but also to the analysis of those abroad from whom we expect to borrow, hence, those who are not only looking at announcement policies, but more important, actions and concrete achievements.

In viewing the competing demands of the various groups, the Administration's job transcends the technical. As I have indicated before, it is not particularly difficult to put together a technical programme aimed at achieving technical targets. A Government has to go beyond that and pull together a programme which is able to attract the support of as many of the special interest groups as is possible.

At the heart of my point is that the technical articulation of the economic programme although important, becomes secondary to us being able to put together a programme which satisfies certain basic aspirations and concerns of each of the groups I have identified but simultaneously is able to meet the hard critical technical assessment of creditors, domestic and external.

Within that context, let me explain precisely what we have achieved over the last three years or so and the rationale for the macroeconomic track on which we have embarked.

Jamaicans notoriously have a very short memory, but just over three years ago what were the major characteristics of this economy - rampant inflation, a chaotic foreign, exchange market, regular devaluations, with monetary policy reacting to each new crisis. However, if one were to ask me what was the most damaging result of those factors, my immediate answer would be chaos at the workplace with discontented workers making wild demands, not only to compensate for past inflation which eroded their standard of living but also to compensate for the anticipation of further price hikes resulting from further devaluations.

In return, managers and owners were unable to plan as any minor disagreement would lead to a walk-off or acts of sabotage. Furthermore, producers and importers, uncertain of what would be the cost of raw materials or finished goods the next time they ordered, priced commodities not only to cover present costs but in anticipation of increased replacement costs.

From the point of view of foreign exchange, everyone simply held on to as much as possible like an attempt to store oxygen, since they never knew whether the system would be able to supply them with any, much less an adequate amount, and with no knowledge of the possible price when they needed it.

Within the context of sky rocketing inflation, property values were whatever you wished them to be and hence, persons borrowed indiscriminately, spent in a similar manner, covering over inefficiencies given the rate at which prices and values moved.

I am not talking about ten or fifteen years ago, I am talking about the situation which held three to four years ago and after due analysis, the Administration decided to put in a programme aimed at taming and, if possible, slaying the inflation beast.

No one should have been taken by surprise as to the cost of embarking on that course. I stood in this very House and articulated the measures to be taken. The results are there to judge the success of the programme. As regards inflation, we recall that this stood at 105.7 per cent in Financial Year 91/92 resulting from the devaluations which followed exchange rate liberalization. This fiscal year 97/98, we will record inflation of approximately 8.5 per cent. This could easily have been 6.5 per cent or lower had we not had a three-month period last year July, August and September when we recorded over 4 per cent as a result of the drought which pushed up agricultural prices.

There have been other benefits brought about by the programme - the build up in the NIR; the stability and predictability of the foreign exchange 'stem. Note that I have not made reference to the foreign exchange rate but to the system, as the Administration has ,no difficulty with the rate moving up or down based on real economic variables. However, we will not allow any speculator to try to hold the country to ransom, thus taking us back to the days which I have just described.

There have been significant costs. An aggressive monetary policy whereby the Ministry of Finance absorbs the full interest costs of the BOJ's intervention, in order to curb the growth in base money, is expensive. This we readily admit to, but even as those who clamour for a switch in policy raise their voices and point to the cost, is it that we have forgotten the benefits?

Ask the housewife in the supermarket whether she appreciates the relative stability in prices or would she prefer to return to the day when each day the dollar was devalued and she would take home less and less in her basket, having spent more and more. Ask the businessman who can source foreign exchange through legal channels without having to meet some under-world figure on a corner to exchange his hard earned Jamaican dollars for US dollars, the origins of which he is not certain. If many would be honest and brave enough they would tell you how many times they have been burnt in such transactions. Ask the worker who, having won a mammoth increase, finds that six to nine months later price increases have taken him back to square one.

There are many who are clamouring for a devaluation on the grounds that the Jamaican dollar is overvalued. Devaluation, it is said, will simultaneously spur export growth and contain import levels. That is the talk. What are the facts?

Based on analysis by the BOJ, the evidence is that the benefits from devaluations, in terms of the effect on imports and improving competitiveness of exports, are limited to the short term. Despite successive rounds of depreciation in the exchange rate in the past, total imports actually grew. The average quarterly import bill over the two year period January 1996 to December 1997, was approximately US$690 million, compared to US$422 million over the period 1988/91. More Work needs to be done, but so far, the notion that if we devalue, all other ills will be cured, does not hold.

Let me now go to a specific industry. There are many leaders in the sugar industry who insist that a devaluation is the cure for the sector's problems. I urge them to reflect and think through carefully whether they really wish to pursue this. line.

First of all, let us look at the economics of that approach. To grow sugar cane and manufacture sugar there are certain inescapable imports - the fertilizer, the tractor, the tyres, the oil, the spare parts all have to be purchased by the US dollar or the pound hence, devaluation brings no benefit. We can carry that analysis through step-by-step in terms of the economic costs and benefits.

A key component for the industry is fertilizer. At present, the cost per metric ton is $10,257.24. Let's say there is a devaluation to J$50:US$l. Immediately there would be an increase in receipts from cane, however the cost of fertilizer would also move upward by at' least fifty per cent, probably to $15,000 - $16,000.

However, by far, the most critical weakness in this line of discussion is that the very day this devaluation takes place, the fragile peace which has been arrived at in the sector whereby the workers, in what I regard as a historic move of conciliation, will immediately abandon the commitment to the wage agreement which has just been arrived at.

Therein is the major benefit of the policy on which we have embarked. For those who have questioned the direction, note the settlement of the Bank of Nova Scotia Jamaica Ltd. (BNS) wage dispute. To have BNS workers agreeing to a single digit increase for the year 98/99 -has not occurred by chance. It is without doubt a direct result of the credibility which the Administration has earned in terms of its handling of inflation.

The general approach which I am outlining which has informed the policy of the Administration over the past several years is first to have brought order to the system in terms of the exchange rate market, in terms of a build up in the NIR and most critically in bringing inflation down within striking distance of that which obtains in the economies of our major trading partners.

The next step is two-fold. All involved in business and production-workers, managers and owners of capital, must now seek to link wage increases to increases in output and productivity. This is not a demand based solely on domestic conditions, it is an imperative if we intend to survive in an increasingly competitive global economy.

This is a requirement which applies equally to public and private sector workers. To public sector workers I say - your increases in recent years, salary plus allowances - have outstripped inflation. You and your leaders must take cognizance of the achievements and "buy into" the model. The fiscal deficit must be reduced and eliminated if the gains we have made are to be maintained.

If you insist on making demands out of line with the Government's ability to pay, there will be two inevitable consequences. The first is that the gains we have made in terms of exchange rate stability and low inflation will evaporate. Secondly, there will be no option but to radically downsize. Bluntly put, unreasonable wage demands on the Government can only be met if we drastically cut numbers. I cannot spell out the trade-off any clearer.

I am confident that good sense will prevail. We all have the opportunity to participate in a win-win situation. We need to work together to preserve the gains we have made and to build on the sound foundation we have laid.

It does not matter whether a PNP Administration is in office or any other Administration. There is no other route. We cannot devalue our way to efficiency. Neither our recent, nor distant, history gives any basis for the hope that the workers, the fixed income householder will buy into an economic programme which demands that they carry the total burden of adjustment.

Rather, the approach which we advocate is that by controlling inflation you provide workers, managers, owners of capital, with the opportunity to move forward together, with reason and equity. Reason, in that wage demands can be more realistically related to the ability of the firm to pay and a recognition of the need for increased productivity. Equity, in that the burden of adjustment is seen to be shared by all involved,.

It is my firm belief that this fiscal year represents a watershed period in defining the economic model and the relationships at the workplace which will dictate our progress in the ensuing years.

The recent settlements in the BNS and sugar wage agreements are significant. There are few who would claim that they could have anticipated a situation where BNS workers would settle for a single digit increase for 1998/99. The country must salute what I consider a significant breakthrough and I argue that it is a signal of a maturation of the labour movement.

From the perspective of the fiscal budget, our ability to keep within the deficit targets which we have programmed is almost totally dependent on a similar demonstration of maturity from in the labour unions representing public sector workers. Of the unions I ask, let us collaborate to maximize job protection, but this requires your cooperation in terms of settlements consistent with returning the fiscal accounts to a sustainable surplus position.

There now remains two outstanding questions, that of the level of interest rates and the matter of growth. I will address the growth issue more fully later on, so 1 now turn to interest rates.

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Interest Rates

I will be the first to indicate, as I already have done, that the policy on which we embarked to tame inflation has had severe costs. There has been a cost to private individuals and there has been a cost to Government. The growth in the domestic debt is partially related

to Central Government absorbing the full cost of monetary policy as well as the increasing interest payments resulting from higher interest rates.

However, it is just not possible for a Government to unilaterally and precipitously reduce interest rates overnight. It is just not credible. Furthermore, we have been this route before with disastrous consequences.

What, therefore, is the solution? The solution is to bring interest rates down on a predictable path in line with the reduction in inflation. I have no difficulty in saying that the real interest rate, which is the spread between the inflation rate and the interest on Government Paper, is now more than it needs to be.

I have been asked to articulate quite clearly our objective in terms of interest rates over the ensuing fiscal year and if possible over the medium-term. This is a reasonable request and so I respond with reason.

We believe that in this period of confidence building, within this fiscal year interest rates should be reduced such that there is a spread of approximately 12 percentage points between inflation and the rates being charged on Government Paper. This will represent a significant reduction within a one year period.

As more and more people buy into the model, in particular, the holders of capital, as more and more people become convinced of the fixity of purpose of the Administration, then it will be possible to further reduce this spread, thus allowing for a closer alignment between domestic interest and inflation rates. This will logically mean a closer alignment between domestic and external interest rates.

This dilemma is not unique to Jamaica. Any country which has had to overcome the difficulties created by inflationary expectation has had to go this route. Chile has done it and still there remains a significant differential between domestic interest rates and domestic inflation rates. The key is that all parties, even if they do not agree with all aspects of the model, buy into the logic and the coherence of that which is being put forward.

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The Programme for 1998/99

Let me now state the major assumptions of the programme for 1998/99. The programme is built around an exchange rate of J$36.50. We project inflation at between 6 per cent and 8 per cent; real GDP growth of 2-3 per cent; money supply (M3) increasing at 7.9 per cent; NIR increasing by $118 million with gross reserves equal to 14 weeks of imports. The target for the public sector deficit is 4.6 per cent, down from minus 6.4 per cent for 97/98.

The main targets for 1999/2000 is inflation of 4 per cent; GDP growth of 3 per cent4 per cent; gross reserves remaining at 14 weeks of imports and the public sector deficit at 0.6 per cent of GDP. In the year 2000/2001 we project inflation of 3 per cent; real GDP growth at 4 per cent - 5 per cent; gross reserves remaining at 14 weeks of imports and public sector surplus of 2.3 per cent of GDP.

From the technical perspective, the two critical targets/objectives are to bring inflation down to 3 per cent in fiscal year 2000/2001 and to return the fiscal accounts to a surplus position.

These are but achievable targets from a technical perspective. However, as I have tried to indicate, they embody much more than a macroeconomic model. What is embodied in this programme is an attempt to identify a set of targets and objectives which speak to the concerns and needs of all the critical sectors which comprise the Jamaican socioeconomic mix. Simultaneously, we need to present to the outside world a programme which is technically feasible and attainable. This is the challenge which we face.

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