How FinMin technocrats viewed the economy before the flood rains
Published:Friday | October 8, 2010 | 12:00 AM
Huntley Medley, Contributing Editor - Business
Heavy rains which pounded the island for several days last week resulting in major flooding across the country and causing damage to roads and bridges estimated at J$12 billion, looks set to throw the Government's economic programme off track, with several current year fiscal targets likely to the missed.
Finance Minister Audley Shaw was presenting his case to the International Monetary Fund (IMF) this week on the need to revise fiscal targets and redistribute resources after the remnants of tropical storm Nicole cut a deadly and destructive track across Jamaica.
The IMF has said yes before to tweaking the two-year standby loan programme - last adjusting for the fallout from the May-June civil unrest that emanated from west Kingston and ended up costing J$13 billion to J$18 billion, according to Planning Institute of Jamaica estimates.
But just weeks ahead of the rains, top finance ministry bureaucrats were upbeat about achieving projected public-sector spending cuts, debt to gross domestic product cap now enshrined in law, and even the 0.6 per cent growth target for the year.
The forecast for the fiscal deficit - which at a nominal J$43 billion in August was narrower than the J$54 billion projected - remained at 6.5 per cent of GDP.
Recovery mode
And though, at the time, they declared the vagaries of the weather as a potential spoiler of the upbeat outlook, the ministry's technocrats were confident that the economy was in recovery mode and performance benchmarks would be met.
"We will reach the target," Pamella McLaren, senior director, debt management unit in economic management of the finance ministry said of the 120 per cent debt to GDP target programmed for the 2010-11 fiscal year.
"It will be realised," she said in September.
Similarly, financial secretary Dr Wesley Hughes, speaking with the Financial Gleaner as he marked one year on the job in September, expressed satisfaction with the achievements he said had been secured under the country's new IMF-endorsed economic programme.
He noted that the Government's appetite for debt had been successfully reined in, interest rates were being brought down, and the credibility of the Government's financial apparatus increased with the passage of fiscal responsibility legislation.
"The economy has stabilised quite nicely, even ahead of the targets," Hughes said then.
Senior director in the fiscal policy management unit at the ministry, Courtney Williams stressed that ensuring fiscal responsibility and the attainment of critical economic targets were not being left up to policymakers and bureaucratic, but was now enshrined in law.
"The law now states, by March 2016 the debt must be no more than 100 per cent of GDP (and) similarly, by that time, fiscal deficits in the central government must be eliminated," Williams pointed out, as an example.
But tempering their optimism with a dose of reality no one quite predicted at the time, the finance ministry officials said while no actual sums were built into the budget for contingencies, the financial authorities were always aware that economic targets might need to be varied in any given period, because of exogenous shocks such as natural disasters.
"Jamaica is susceptible to exogenous shocks, so even though you have targets, sometimes there may be deviations," McLaren said.
"You may have a hurricane (or) flooding, so you may have to accumulate more debt," she said.
Deputy financial secretary Darlene Morrison said a cap could not be placed on the deviation the economic programme envisaged, in the event of a shock such as a natural disaster, because of the uncertainty surrounding the extent of the possible shock.
At the same time, Williams outlined the process required by law forchanges to be made to such targets as the debt.
"We have included in the legislation, conditions under which you may have to deviate from targets, to include things like national disasters and national security, and it is not just a case of just changing the targets," he said.
He noted that in such a situation, the minister of finance is required to go to Parliament and fully explain the circumstances surrounding the need for the change.
"And it is not just to explain, but to say when you will be able to get back on target, and in doing that, the minister will be required to actually sign a solemn declaration that these targets that he has set, he will stick to them."
Williams said it was important to note that under the new legal arrangements, the minister of finance will need to secure a resolution of Parliament authorising the adjustment of those targets.
Meanwhile, on the issue of the still-elusive economic growth, the financial ministry technocrats are rejecting the notion that the big budgetary cuts they are charged with overseeing, is deepening the ongoing contraction in the economy.
"I would not say that the contraction in the central government spending is going to contract growth," Morrison, the deputy financial secretary opined.
"The programme, in terms of having reduced its need for debt and liquidity, is now available for the private sector to take it up and try and generate growth from that," she said, noting that the Government was also doing its part to drive growth.
"The Government is focusing on its core activities of providing the infrastructure that will facilitate growth, and that is occurring through, not just the central government, but through the public bodies, which are a critical part of the process."
"We have a responsibility to help to drive growth," Hughes, the top ministry technocrat said directly.
Critical platform
He suggested the Government was laying the critical platform and a macroeconomic environment conducive for private investment to be ploughed in, to spur the growth needed.
"The point is interest rates are coming down because of the JDX (Jamaica Debt Exchange) and other measures, that is just providing the opportunity for real investment to take place through the private sector," he said.
While optimistic that growth was on the horizon, Dr Hughes avoided specifics such as the areas he expected to provide the anticipated growth.
"The growth of the economy, as in the past, is going to be multisectoral in the short to medium term if the economy starts to recover in a broad-based way," he said.
Noting that all sectors were now depressed, he pointed to the need for new investments in new areas of goods-producing or service industries to replace what he described as mature and dying sectors, such as sugar and bananas.
"The compression that you say we are overseeing is a direct result of the compression of the economy (in Jamaica) and globally. The resources are not there to do the things we and the population would like done."
In such a scenario, he said, the Government was forced to look carefully at its expenditure to ensure it is not wasteful.
"Of course, there is always some degree of waste and corruption that has to be fought and dealt with on a continuous basis," the financial secretary said, but suggested that most Government spending was providing value for money and supporting critical areas of national development.