Continued Bitter Financial Medicine Is Cure For Jamaica’s Economic Ills Remittances From Abroad An Antidote For Fiscal Headaches

By Tony Best

More of the same bitter financial medicine is what the financial doctors on Wall Street are recommending for Jamaica’s economic ills.

The nation’s headaches which range from anemic economic growth of less than two per cent for the past five years and a high debt burden to “labor market rigidities,” not to mention challenging external economic conditions that affect the nation’s internal picture, including a slowdown in the U.S. economy could be cured, in part, by a continuation of the new government’s “austere” financial measures.

That prescription, or sorts, was written by Standard & Poor’s, the major Wall Street credit rating firm, which insists the “government’s commitment to fiscal discipline, debt reduction and economic growth re-invigoration” was a major strength and could be the key to a brighter future.

“Overall, continuation of the austere fiscal stance, coupled with structural improvements to increase the transparency and efficiency of government, is the only viable strategy for bolstering investor confidence and gloomier financial and economic times,” was the way S&P put it in a review of Jamaica’s economic prospects. “This is particularly true given Jamaica’s huge debt burden, large amortization needs, and inherent structural vulnerability to external shocks.”

As the rating firm, perhaps the world’s largest and best known, sees it, the future is far from gloomy but is characterized by a mix of “strengths” and “weaknesses.”

First the strengths.

Heading that list is the Bruce Golding Administration’s firm “commitment” to fiscal discipline and debt reduction, plus a determination to slash the nation’s pile high debt.

Next is its “developed capital market when compared with countries with a “B” foreign currency credit rating. Among its “peers” are Kenya, Paraguay, Senegal, Mali, Mozambique, Fiji, Ghana and Grenada.

Another factor Jamaica has going for it is its political stability.

Also a strength is the overseas community, the Diaspora, which S&P explained was showing its worth at a time of threatening economic clouds that are drifting in Jamaica’s direction from foreign climates.

“The external situation remaining challenging, as a growing oil bill and uncertainties surround the growth in tourism inflows are only partly counter-balanced by thus far strong remittance inflows,” was the way it was put.
On the other side of the ledger are some weakness and they run the gamut from “difficulty in reducing a general high Government debt burden” and “limited fiscal flexibility” to vulnerability stemming from the island’s geographical location, size and openness.”

Added to that list are skyrocketing inflation; the country’s high security costs; and the impact of a rigid labor which was hurting productivity.

If S&P forecast turns out to be right on the money, Jamaica’s economy should grow this year by two percent, a marginal increase of less than one percent over last year’s 1.1 percent but down from the 2.6 percent of 2006.
“The negative impact on agriculture and resulting food shortages drove average inflation to 17 percent in 2007 from 5.7 percent in 2007,” the firm explained., “The GDP (gross domestic product) outlook for 2008 is 2 per cent and incorporates the impact of the economic slowdown in the U.S., Jamaica’s main trading and tourism partner.

However, this is counterbalanced by ongoing gains in construction, recovery of the agriculture sector, and a still-strong tourism sector, evidenced by a robust first quarter 2008 results and advanced bookings for newly opened hotels.”

Focusing on the new Jamaica Labor Party Government, S&P asserts “fiscal discipline remains the cornerstone of the government’s program to stabilize the fiscal situation and spur growth.

“On the economic side, the JLP’s focus is on restoring growth in the agriculture sector, increasing capacity in the manufacturing and export sectors and aggressive investment promotion,” it stated.

Specifically, the administration wants to:

* Boost public sector revenue as evidenced by its measures to improve tax compliance while coming to grips with rising expenditure, especially wages.
* Balance the budget by 2010 and “consequently bring down the level of Government debt,} which currently stands at 127% of GDP.
* Improve the debt cost structure which “consumes 42 per cent of government revenue” and equals 13% of GDP.
* Use loan from with multilateral financial institutions, including the Inter-American development Bank to change the debt picture.

But what are the chances of success?

S&P sees an urgent need for a boost in confidence in the country’s finances.

“While the situation on the Jamaican foreign exchange market has currently stabilized, confidence needs to be supported by disciplined fiscal policies and a timely monetary response, two crucial factors that have thus performed well in Jamaica,” S&P noted.

 

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