It is important for us in assessing where we are today to look
at the trends in terms of the fiscal over the past five years.
We were able to contract the fiscal deficit over the fiscal years
1997/98 to 1999/00. That trend should have led to a surplus and hence debt reduction by
the recently concluded fiscal year 02/03.
It should be recalled that one of the major reasons we were able to
address the problems in the financial sector was due to these positive developments in the
fiscal accounts. Were this not so, there would have been total collapse given the cost of
the intervention which has now been assessed to have cost in excess of 40% of GDP.
Whilst I will not dwell on it today, the formal assumption of the
FINSAC debt as part of MOF’s debt stock and the associated debt servicing costs have
been the major causal factor of the twin problems we face.
There were several major setbacks in fiscal year 2001/02 which
reversed the positive trends which had obtained in the previous two years, these included
- the significant fall out as a result of September 11
- the formal assumption of the debt service charges on the FINSAC
debt, and
- increased expenditure related to tourism promotion, flood relief
and rehabilitation and decreased inflows from the travel trade.
In terms of the outturn for fiscal year 02/03, I have already
indicated that the target established in the SMP of a deficit of 4.4% of GDP was not
achieved. However, compared to the passive outcome of 8.4%, which was projected in
December 2002 if no action were taken, we have already given a clear indication of a
willingness to take corrective measures. This has resulted in the reduction of the deficit
to 7.7% of GDP for 02/03.
For observers at home and abroad, let me repeat that rather than the
8.4% deficit which seemed likely in December, we have reduced it to 7.7% of GDP.
Not surprising the debt statistics demonstrate a similar deviation
from the target. The debt to GDP ratio at the end of March 2003 stood at 151.8% of GDP
which is not only higher than the original target but is judged by all to be a clear
indicator of the need for decisive remedial action.
Even whilst we accept the need for remedial action this deviation
has not occurred in a vacuum. It has been caused by a sluggish world economy, adverse
movement in commodity prices, prices for imported oil up and that for bauxite/alumina
down. On the domestic front there have been the impact on production by four major floods
within a 12-month period as well as the cost of rehabilitation, and finally there have
been wage increases, including retroactive payments.
We could spend a great deal of time debating what could have been
done differently to avert the negative developments in both the size of the deficit as
well as the related increase in debt stock and debt to GDP ratio. No doubt this will be
the focal point of some of the contributions in this budget debate. However, while this
may be an interesting exercise, the reality is that there is need now for corrective
action. The drive for corrective action emanates both domestically and internationally.
From the international perspective, whilst Jamaica’s external
debt, compared to inflows (earnings, remittances and investments) and our reserve levels
still provides positive ratios, the fact that our foreign exchange system is totally
liberalized means that creditors no longer focus solely on external debt but look at the
overall debt stock. The reason is that it is quite easy to convert domestic resources to
foreign exchange, thus putting pressure on the exchange rate and the NIR.
Our external creditors, and rightly so, have placed a great deal of
focus in terms of the ability of the revenue stream to sustain our debt servicing needs
over the medium term unless corrective action is taken. There is a second issue and it
relates to a generally unfavourable view of emerging markets particularly given the
uncertainty which characterizes world economic developments. In time of uncertainty,
investors in the industrialized, capital-rich countries become increasingly inward
looking.
It is not that countries such as Jamaica cannot obtain credit but
within the present environment, this is increasingly difficult and at a high cost.
On the local scene, our domestic creditors are themselves becoming
concerned and it is an open secret that they are awaiting this presentation to see what
specific steps will be taken to ensure a predictable source of additional revenue inflows
to facilitate debt servicing.
However, whilst our creditors domestic and external are important,
the improvement in the fiscal situation in the medium term will also redound to the
benefit of the majority of ordinary citizens. The extent to which debt servicing consumes
a larger percentage of total expenditure is the same extent to which the Government is
hampered in addressing the needs of the most deprived members of the population.
Consider the present budget for fiscal year 03/04. Debt servicing
takes up 65% of total expenditure and the total capital budget net of amortization will
consume less that $9 billion or 3.4% of total expenditure. What this means is that our
future ability to address real needs in the economy is being constrained by the extent to
which debt servicing is consuming a larger and larger percentage of the expenditure
budget.
If there is one thing on which all 60 members of the Honourable
House should be united is that this trend cannot be continued. Simply put, the imperative
for strong fiscal action is something on which we all agree.
This need for strong corrective action is not restricted to Central
Government operations. Part of the problem relates to statutory bodies and
government-owned companies which have become a financial burden on the Ministry of
Finance. The NWC and the JUTC are two examples which will be required to put their fiscal
house in order with immediate effect.
This is the day many of our creditors have been waiting for when
the clear signal has to be given of the recognition to reduce the fiscal deficit and to
reduce the ratio of the total public debt as a percentage of GDP.
Whilst creditors both domestic and external, closely monitor the
debt and deficit to GDP ratios, perhaps the indicator which is most closely scrutinized,
is what is termed the "primary balance".
Definition – The primary balance is the difference between revenues and non-debt expenditure.
Hence it gives everyone, the analyst/creditor and the ordinary observer, a clear picture
as to whether a country is "splurging" or whether it seeks to demonstrate fiscal
responsibility in expenditure patterns. For ease of comparison across countries, the
primary balance is usually considered as a percentage of GDP.
Jamaica has had a remarkable record in terms of recording high
primary balances in the recent past. In fact, over the three-year period 99/00, 00/01,
01/02 the country recorded an average primary balance of 12% of GDP. This was an
unequalled record amongst member countries of the IMF.
Not surprisingly, last year 02/03 the primary balances fell to 8%
of GDP.
There has been a clear signal from our external creditors and the
rating agencies that whilst there are several indicators of interest, a special eye is
being kept on our performance with regard to the primary balance. Not just for 03/04, but
also for the medium term. In fact, it is no secret that it will be impossible for us to
achieve the target of eliminating the fiscal deficit by fiscal year 05/06 unless we return
the primary balance, as a percentage of GDP, to near or around the levels of the recent
past.
Whilst these expectations are high, we are confident that they can
be realized as we have done it in the past. Perhaps the only difference is that our
behaviour and our performance will be more closely monitored this time around than ever
before.
