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FINSAC A status report on the operations of FINSAC is contained in the Budget Memorandum. This is in keeping with a commitment given to keep Parliament and the country fully abreast of the operations of this institution which was established following what is now recognized as the most critical financial decision taken by a Jamaican Cabinet in the Post-Independence period. This intervention has called for a gross expenditure of approximately $88 billion. Many have spoken about this in terms of a "bail-out" of the big man. This is a matter I will address because in certain instances this view is born out of a lack of understanding. However, in others it has been uttered by persons who know better but seek to cynically manipulate the situation. For the record, let me restate that the Cabinet took the decision to intervene in order to protect depositors of the troubled institutions, to protect pensioners covered by pension funds managed by various entities and to protect the holders of policies issued by the various insurance companies. I feel it is important to place on record again, that this decision to intervene was not mandatory. In fact, our multilateral advisors warned us both of the huge cost as well as about the issue of moral hazard whereby persons who had taken decisions on their own, would now assume that the Government was responsible for them. Paradoxically, very few who have been protected by this intervention see themselves as beneficiaries of the Government's action. The problem is that whilst we can easily quantify the amount of intervention in these institutions and this I will do, and whilst we can see the impact on the Budget, which will be just under $8 billion for the fiscal year, we cannot quantify what would have been the chaos resulting if no action had been taken. For all those who speak of the enormous cost to the Budget, what would they have said to the depositors in Billy Craig Merchant Bank, to the depositors in Buck Merchant Bank and Caribbean Trust Merchant Bank, to the depositors in Caldon Merchant Bank, to the depositors in Citizens Bank, to the depositors in Eagle Merchant Bank and Eagle Commercial Bank, to the depositors in Fidelity Merchant Bank and the list could go on. I have not yet mentioned the 949,649 Jamaican dollar accounts in NCB, totalling $39.2 billion or the 73,919 US dollar accounts, totalling (US)$ 293.2 million. This intervention has been at a tremendous cost and it is a cost which will be borne by all taxpayers for sometime yet. For this year we have included $8 billion in the Budget and similar sums will be included for the foreseeable future. Was it worth it? It is always difficult for one to make an assessment of a decision in which one is integrally involved. Nonetheless, we believe the decision was the correct one for two reasons. The first is that we are convinced that social chaos would have resulted had not the protection offered been given. The second is that Jamaica's economy is based to a large extent on trade with the international community for both goods and services, and there could be no doubt that the ability to continue such trade would have been destroyed with the collapse of the financial sector. There are many who have contributed to us making the progress which we have made. These include: The Board and staff of FINSAC, the staff of the Ministry of Finance and the Bank of Jamaica. The founding Executive Chairman, Dr Gladstone Bonnick continues to provide me with advice and remains a member of the Board of FINSAC; Mr. Patrick Hylton has served admirably in his position as Managing Director, particularly since there are so many persons who all claim to know exactly what should be done in his position. Our task now is to concentrate on two aspects of the rehabilitation of the sector. One is the restructuring. This involves a multi-faceted approach including reduction in the number of institutions which are licensed, a strengthening of their capital base and improvement in the regulatory and monitoring system. In terms of a reduction in number of institutions the following facts speak for themselves. Four years ago, there were 11 commercial banks, 29 merchant banks and 34 building societies a total of 74 institutions. After we are finished with the amalgamation of the various entities into Union Bank, there will be 6 commercial banks, 16 merchant banks and 5 building societies, a total of 27 institutions. Easier to monitor and regulate. If we turn specifically to FINSAC's operation in the commercial banks, the major area of emphasis at present is Union Bank and the persons we have brought in there have done a remarkable job. Union Bank As is well known the commercial banks under FINSAC's control namely: Eagle, Citizens/Horizon, Workers and IVB are being merged prior to divestment. The merged entity will be the third largest commercial bank in Jamaica. The following are some of the major accomplishments to date - Branch Rationalization The intention is to reduce the number of branches from 42 to 26 by October of this year. Already four branches have been closed. The branch rationalization process has been carefully thought through and no major centre of business will be left unserved. Furthermore, in terms of the staff rationalization the unions are being kept fully informed of developments. Consolidation of Head Office Operations Many head office functions including treasury HRD, IT, Operations and Legal have already been integrated. Divestment of non-related and overlapping entities A number of subsidiaries have been sold or dissolved including overseas agencies, merchant banks, building societies and financial services. Computer operating systems So far 6 branches have been converted to FINWARE, the banking software which will be used throughout Union Bank. Total branch conversions will be completed by September this year at which time entities are expected to be fully Y2K compliant. For those who question the feasibility of the consulting management team which was brought in to come to grips with the problem, the attaining of Y2K compliance by September will represent a major feat. Between now and the end of this year, further consolidation will take place in the operations of the entities and Union Bank should be ready for divestment by the end of this calendar year. In terms of the insurance companies, this has been somewhat more complicated in that the two major institutions in which we have intervened, Mutual Life and Eagle, were involved in diverse set of activities, most of which they had no business being involved in because they did not have the expertise to manage the operations. Hence, having taken control of the operations we began to understand more fully the extent of the chaos we faced. Nonetheless, the following outlines the road map to consolidation and divestment of the assets. The main activities being undertaken by FINSAC following Government's intervention in the sector are:
Sale of Portfolios Actuarial valuations have been done and FINSAC has put up for sale the following portfolios:
Offers have been received from 6 companies both domestic and overseas, to purchase the group insurance portfolio. The companies are from Jamaica, Barbados and Trinidad. Offers have also been received from 4 companies to manage the pension portfolios. The bidding on the traditional portfolios closes on April 23. The evaluation of bid for the group portfolios and pension portfolios have been completed. However, the overseas competitors have made their bids contingent on their acquiring the traditional portfolio. This has caused us to delay making a final decision as we will have to await conclusion of the bidding process on that portfolio. This should be by mid May. Interest sensitive policies Agreement has been reached with BNS for interest to be paid monthly to persons 65 years and over as at April 1. These payment advances will be funded by FINSAC. 967 lump sum policy holders with an investment value of close to $900 million have signed up for the April 1 tranche. These persons now have access of up to $200,000 on each account. Accounts for the second tranche will be opened on May 1, and 650 persons have already signed up. Accounts for the third tranche will be opened on June 1. I should indicate that I have met with representatives of groups, particularly pensioners, who are concerned about some of the terms of the arrangement with BNS. At the same time, I am in discussions with a group of financial managers concerning the possibility of an alternate arrangement which gives greater flexibility in terms of allowing investors, particularly pensioners greater access to their funds. We had hoped to have had a definitive proposal on which a decision could be taken, but talks are still ongoing. I expect to be in a position to make a definitive decision which will imply an improvement on the initial offer before the end of the month. Divestment FINSAC was not established as an institution to last in perpetuity. In fact, my specific instruction to the Board and to the Management is that whilst I wish for them to understand the various areas of operations, I do not want them to become experts in these matters as our intention is to sell these assets as soon as we can identify buyers which meet my three simple criteria.
And so, during this fiscal year the Government of Jamaica will be selling assets of a total value of approximately US$150 million to help us to meet the obligations of servicing the FINSAC debt. We are well on our way and I expect that we will have sold and collected money on assets with a value of $85 million before half of the year is over. For all those who had advice on sales I preferred to let actions speak. Within a month we have sold PETROJAM (Belize) (US$5 million), we have sold our shares in CIBC (US$7.5 million), we have sold Sandals (Ocho Rios) (US$14 million), we have sold our shares in the Cement Company (US$29.5 million). Two points must be made about these sales. One is that in selling to service the FINSAC debt, we are also disposing of assets which did not belong to the institutions in which we have intervened, e.g. PETROJAM (Belize) was owned independently by the GOJ and approximately half of the shares in the Cement Company were owned independently by the NIBJ. The essential point being made is that those who have created this problem are responsible for the fact that the resources from divestment are not available for expenditure in the capital budget and this, to a large extent, will apply for several years in the future. The second point which I wish to make is that the range of persons who have demonstrated interest in FINSAC assets reflect a situation which is contrary to what the doomsayers and naysayers proclaim. Even whilst many are speaking about lack of confidence in the country and in the economic policies, two foreign companies tried to out bid each other to purchase shares in the debt-ridden Cement Company. Similarly, the bids for the hotels are coming from persons both at home and abroad. My message, therefore, to those Jamaicans who prefer to sit on their resources and complain about the lack of confidence is, no one will wait until you gain confidence to move. Others are seeing opportunities, seizing them and will be making profits from them even whilst you complain about the absence of confidence. Whilst we have set ourselves a target of US$150 million in terms of divestment proceeds, if it is at all possible, we will be aiming for a larger amount and the extent to which these proceeds are received is the extent to which we can attempt to pay down the FINSAC debt at a faster rate, thus easing the burden in future years. SUPPORT FOR THE PRODUCTION SECTOR A year ago in my Opening Presentation, I indicated that as a major stimulus for the export sector, the Government would be providing the Ex-Im Bank with additional resources to facilitate a significant decrease in interest rates. I recall that this announcement was dismissed by many. Prominent persons - Even some in this Honourable House argued that there would be nobody who would take up this offer. What is my report? The report is that from almost every area of the productive sector, there has been considerable interest in the scheme. Let me begin with Ex-Im's local currency loan programme - there has been an increase of a 108.8% moving from J$901 million at the end of March 1998 to J$1909 million at the end of March 1999. This is the highest level of disbursement ever achieved by the Ex-Im Bank in its history. The range of firms covered by this disbursement cuts across economic sub-sectors. The portfolio was spread over agro-processing, food and drink manufacturing, and textile and apparels. The increase demand for funding resulted from new borrowers, increased borrowing by existing clients and renewed borrowing from former clients, who for one reason or another had lapsed in their borrowing relationship with the bank. For the 1999/00 fiscal year, Ex-Im Bank will focus on two (2) objectives. First, increased support for small and medium size exporters. Second, in terms of creating avenues for financing backward linkages for the productive chain. If additional resources are needed, they will be found despite the tight fiscal situation. Last year in my Budget Presentation I stated that the administration was taking the approach of fixing the old as opposed to announcing new initiatives, even whilst previous announcements had not been implemented. One area where this policy position was most relevant was with regard to the sugar industry. Sugar has been our major agro industrial activity for centuries. While we do not wish to understate the contributions of other agricultural activities, the sugar industry, more than others, has significant backward and forward linkages. As such, cane farming is only one aspect of the contribution of the industry - there is also haulage and manufacturing involving the employment of chemists, engineers, machinists. There are also the by products which, to date, we have not fully exploited. Many have predicted the demise of the industry and have argued that Jamaica must "get out of sugar". Whilst there have been and there are problems, this superficial piece of advice - "get out of sugar" is one which I urge those experts to pass on to the workers and their families in Trelawny, St. James, St. Elizabeth, Westmoreland, Hanover, Clarendon, St. Catherine and St. Thomas. Three years ago the situation of the industry looked irreversibly hopeless, although the Government had done "all the right things" by divesting its ownership to the private sector. We were faced with the real possibility of the three (3) factories which had been grouped under the SCJ, Frome, Monymusk and Bernard Lodge as well as Tropicana being closed. Subsequently, Long Pond and Hampden were put on the critical list. The Administration's decision to intervene was not dissimilar to that of the Government in the mid '80s when the bauxite/alumina sector was under pressure. The issue was how to ensure survival of the industry, provide hope of a viable future for the key participants and ensure a smooth transition in re-assuming ownership and management. No need to go into full details. My colleague Minister will certainly do so. However, it is important to reiterate this administration is total commitment to the future of the industry. I am certain that members of this Honourable House from all walks of life will support. The Administration has just not talked. We have "walked the walk". As of February 15, 1999 direct support for the industry's totalled J$2.8 billion disaggregated as follows:
In addition, commitment had been made for the conversion and rescheduling of outstanding debt totalled J$4.1 billion. This was necessary to enable the factories to operate for the 98/99 crop. In the process we have attempted to bring further order to the industry by appointing as of April 1, 1999 a new Board for the SCJ, headed by an Executive Chairman, Ambassador Derick Heaven, who is returning home permanently as of May 1, 1999 to take on the task of turning around this major entity. The other members of the Board demonstrate a mixture of highly competent professionals and persons very knowledgeable about the industry. I have charged this Board with running the SCJ as a business because the industry cannot be turned around unless SCJ attains viability, since it accounts for nearly seventy (70) percent of the total sugar output. I now turn to the issue of how the programme of support for the industry which began in November '97 will be financed. The programme was estimated at a cost of US$100 million. Of this, US$25 million came from the CDB loan. It is intended that total proceeds will be fully drawn down by the end of this calendar year. Of greater significance was our ability to obtain a credit facility of 65 million euros (approximately US$75 million) which was disbursed by the Consortium European Bank, headed by KBC Bank headquarterd in Belgium. This facility is historic in a number of respects. First, it was the first major Euro transaction completed for a developing country since the introduction of the Euro on January 1. Secondly, it is one of the very few soft commodity transactions that has a tenure of five (5) years. Thirdly, the initial interest rate of approximately 6.3% per annum reflects a high level of international confidence in the sectoral debt servicing capability and in the country as a whole. At the same time credit must be given to those elements of the private sector which are also demonstrating confidence in the sector by investing in the sector. I make specific reference to Wray and Nephew which has just completed a major investment of $212 million in Appleton which will increase its capacity by 50% to 33,000 tonnes per annum. AIR JAMAICA When we begin examination of our debt situation, one of the major areas which will attract attention will be the fact that during fiscal year 98/99, Air Jamaica received significant support from the Ministry of Finance. Questions can be rightly posed as to the rationale for such support for an enterprise which the Government divested some five (5) years ago. This is not a time to present a detailed analysis of the future of Air Jamaica but I commit myself to so doing in the near future. Nonetheless, recent experiences of other tourist destinations in the Eastern Caribbean have demonstrated the extent to which small economies, which are forced to rely on external airlift are vulnerable under variable conditions. I give a specific example - during the strike of American Airlines in February 1999, Air Jamaica was able to increase its flights into Jamaica. The result was that Jamaica was the only Caribbean tourist destination which did not suffer any effect to its long term visitors arrival, as a result of an almost total cessation of American Airline flights into the island. I say to this House and to this country that there are significant decisions to be made concerning the ownership arrangement for the national airline. I commit that once this has work been completed, a full report will be presented to Parliament. There are concrete data to indicate the positive results of this additional commitment of resources.
REDUCTION IN THE CASH RESERVE RATIO For years the commercial banks have maintained that a major contributory factor to high interest rates was the high percentage of liquid funds held by the Bank of Jamaica on which no interest was paid Cash Reserve Ratio. It was argued that this forced the high interest rates, contributing to the problem faced by the productive sector. In response, the Government decided to decrease the CRR from 25%, on a phased basis beginning in August 1998. The CRR presently stands at 19%, resulting in an additional $5.4 billion to date being available for on-lending by the commercial banking institutions. Clearly, given the problems faced by several institutions, the reduction in the CRR has mainly served the purpose of providing them with some breathing space. However we must confess that we have been disappointed by the reaction of the institutions which have benefited and which are in a position to effect a reduction in their lending rates but which have been less than rapid in their response. There has been one significant exception and that is the Bank of Nova Scotia, which has committed itself to a special loan programme with an interest rate is 8.5%. To date nearly $700 million has been approved in terms of loans for the special programme. The areas of production covered include poultry farming, fish farming, manufacturing of roofing materials and paints, food processing, sugar production, soft drink manufacturing and milk processing. One interesting statistic which continues to puzzle the technicians from the Government is the fact that commercial banks continue to maintain reserve balances far in excess of that which is required by the Bank of Jamaica. Whilst this benefits the Central Bank, and by extension the Ministry of Finance, in that it reduces the extent to which open markets operations are necessary, it also means that these institutions are losing income to the extent that they are failing to maximize earnings on the excess funds retained at the BOJ. These issues now being raised simply indicate that there is ample scope for improvement in treasury management functions within the commercial banking sector. This would allow for benefits to be passed on to borrowers in the private sector. THE INFORMAL SECTOR In dealing with the real economy, anyone who has knowledge of the "runnings on the streets" realizes that the data reflected through official statistical sources do not fully describe that which takes place in the real world. There are several factors contributing to this. These include illegal activities or operations by persons who, for whatever reasons, have contact with the revenue departments. One contributory factor is the high level of remittances. Whatever our view may be in terms of implied dependency, this plays a critical role in supporting many families in the country. The objective of our interest in this sector is not to cripple the initiative of those involved, except in instances where those activities are clearly illegal. However, the extent to which those activities remains outside of the tax net is the extent to which the country is deprived of revenues. Hence, the burden of maintaining essential services has been borne unfairly by those who either have no choice, or who voluntary comply and pay their fair share of taxes. Clearly, it is the Government responsibility to broaden the tax net for the reasons I have stated above with particular focus on Customs and GCT. Even as we speak of the decline in terms of real GDP, the following set of statistics on licensed motor vehicles over the past five (5) years is instructive. At the end of 1993, there were just over 185,000 licensed motor vehicles in the country. The data for the additional number licensed each year is instructive:
My question to you is does this suggest an economy which is disintegrating? The approach toward having those participating in the national sector carrying their fair share of the cost of the provision of goods and services will be multifaceted. On the one hand, Planning Institute, STATIN and BOJ are beginning research work which will provide a clearer fix on the size of those operating outside of the formal economy. At the same time, the revenue collecting institutions, given the restructuring exercise which is underway and will take full effect later this year, will provide the authorities with the ability to cross reference the identities of those with significant income but who are presently outside of the tax net. Many do not realize that until the recent passage by the legislation various tax departments could only exchange information under very limited circumstances. It is since these changes in legislation that centralization of the data system will allow the tracing of tax payers which was not possible before. I cannot at this stage indicate specifically the expected increase in revenues resulting from the exercise but there can be no doubt that the result will be significant. Furthermore, we are examining possible initiatives which will:
More specifics will be announced on these initiatives later this year. || Previous | Table of Contents | Next ||
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