CLOSING BUDGET PRESENTATION 2004/05 ON WEDNESDAY, APRIL 28, 2004 BY DR. THE HON. OMAR DAVIES, MP, MINISTER OF FINANCE & PLANNING


I will provide responses and clarification for a set of questions/issues raised by Opposition Spokespersons.
ALCOA InvestmentThe Opposition Spokesman on Finance posed six questions about the proposed investment. I must confess surprise at some of the questions, as several of the answers are already in the public domain. Nonetheless I will respond.
Environmental Impact AssessmentThe contract for carrying out the impact assessment has been awarded and the study has started.
Dust Nuisance and Emission StandardsThese standards have been established as well as the indicators to be measured.
Manpower PlanningSignificant work as been done in this regard with collaboration with HEART and Jamalco for the establishment of a state of the art training facility at Breadnut Valley. Both the company and HEART will be investing in the facility which will serve as a platform for a modern apprenticeship system in Jamaica, serving not only the B/A sector but manufacturing and other sectors.
Details of Skilled Workers requiredThis work has already been done and the details are as follows:(READ FROM LISTING)
Implications for TransportationAs should be known, Jamalco has a well established rail system which has now been extended to the new mining areas in South Manchester. The plant is served by dedicated port, Rocky Point, which is adequate to meet its needs for importation of raw material and capital goods and the export of alumina.
Details concerning the equity investment swap. (The question is not clear.) As a result of the expansion the agreement is that GOJ’s share of Jamalco will be reduced to a minimum of 30%. Accordingly, after due valuation, the Government will contribute to the investment such that its shareholding does not fall below 30%. The valuation will take into account issues such as cost of production and the existing value of the assets.
Bauxite Fund/RehabilitationThe issue of the problems caused by displacement of persons prior to and subsequent to mining is of concern to both the Government and the Opposition. In fact, my colleague the Minister of Health and Member of Parliament for Central Manchester has been the leading advocate for closer monitoring of the effects.
It is for this reason that the Government has established a programme implemented by JBI to address some of the needs of communities affected by bauxite mining. There is need for additional work including the impact of settlement patterns, the need for land for expansion of population centres near to mining areas and perhaps most important, the need for programmes to facilitate economic activity in the post-mining period.
Work has been done but there is more to be done and Cabinet has commissioned a comprehensive study leading to further interventions. However, in direct response to the Spokesman proposal for a $500M fund, we must be careful about expanding this process of establishing specially dedicated funds. This is one country and the resources garnered through the Consolidated Fund are to be aimed at addressing national problems. We run the risk of segmenting the Consolidated Fund into specific areas, thus reducing our flexibility to address new problems.
The second point to be borne in mind is that we need to be very careful in addressing the issue of what needs to be done in these areas such that we do not convey the impression that the companies are “the enemy”. They have come here at our invitation. In many instances they have been better corporate citizens than many other companies. They recognize their civic responsibilities and it is for us as a country to seek to identify how we can collaborate with them in addressing needs in the areas affected by mining.
Let us not pretend that all the problems which we now identify were caused by their activities, as many of these areas had long suffered from a deficiency in facilities, etc.
It is apparent that there is an opportunity for the JBI/JBM to provide a comprehensive briefing to all members of the House on the state of the Bauxite alumina industry, the challenges we face and the potential benefits for not only the country but the communities in close proximity to the operations.
I have asked my colleague Minister with responsibility for mining to facilitate this exchange.
Relationship with the IMFThe Opposition Spokesman has made a big “song and dance” about our proposed agreement with the IMF and argues that “there now appears to be some “back-pedaling” on the need for a monitoring arrangement with the IMF”.
Let me address this issue very clearly. We have nothing to hide. I have announced that the Fund and the GOJ have agreed on the parameters within which such a programme would be developed. A small technical team from Jamaica visited Washington to work through the preliminary numbers and targets for the medium term. However, pending the presentation of the actual budget numbers they could only go so far.
Furthermore, because virtually all the technical team, as well as myself, are totally involved in completing the budget process during April, the decision was taken that any further work would await my annual post-budget visit to Washington which will occur in mid May. Immediately following that, the IMF technical team will be coming to Jamaica to carry out its Annual Article IV Consultations. The discussions will then move forward given that the full data on the last fiscal year, as well as the Government’s programme for fiscal year 2004/05 and the medium-term will now have been completely spelt out.
It should be clear to one and all that the better than expected out turn in terms of the fiscal, among other targets, would have improved Jamaica’s bargaining position in terms of the structure of the programme to be monitored by the IMB Board. Simply put, there is an agreed phasing of our discussions to which both parties are committed.
GDP MeasurementDuring his presentation in discussing the attainment of the fiscal, the Opposition Spokesman departed from his prepared text to make the assertion that our attainment of the fiscal deficit target (5.8% of GDP) was facilitated by us inflating the GDP figures for fiscal year 2003/04.
In other words, by increasing the size of the denominator, the clear implication is that the deficit was artificially compressed. I took the unusual step of interrupting his presentation to seek clarification but given that his further utterances did not assist, I committed myself to address the matter in my Closure.
Let me begin by making the point that Jamaica’s data collection agency – STATIN – has a world-wide reputation of excellence and integrity. Neither political party, either in Government or in Opposition, has sought to question this integrity. Even if any member of the political directorate were so inclined, the professionals at STATIN defend their independence with great zeal.
The GDP figures are the exclusive responsibility of STATIN. In fact, I do not know the out turn for the fiscal year either in terms of real growth or nominal GDP until a few days before my presentation. Therefore, I wish for the public to understand that there has never been and there is no question of political interference in those matters.
Question therefore, what is the basis of the Opposition Spokesman’s charge? I would prefer to believe that it a lack of understanding of the way in which nominal GDP is calculated. The size of the GDP is a reflection of the level of economic activity in the country within any specified period. By definition, since that activity has a value in current terms, the GDP in current or nominal terms must reflect inflation and hence nominal GDP, ceteris paribus, in a year with increased inflation, will grow more quickly than in a year when inflation is low.
There are well-established statistical techniques for correcting the impact of inflation have a way of correcting for correcting the impact of inflation. They use a “deflator” which then reflects the GDP in constant terms. But the nominal GDP does reflect the actual value of our economic activity in current dollar terms for any specified period. There can be no other way around it. The debt is calculated in nominal terms, expenditure is stated in nominal terms; the deficit is stated in nominal terms and hence all comparisons are made, based on current dollars.
The Opposition Spokesman asserts that “the GDP was recently inflated by 15% and this is another reason why his fiscal target looked so attractive”. A question which arises, is that increase in nominal GDP unusual? The answer is a resounding “no”. It may be useful to point out to the Opposition Spokesman that in 1983 nominal GDP increased by 19.2%, compared to the previous year. In 1984 by 34.8%, in 1985 24.7% , in 1986 by 22.4% and I could give more examples.
Is it that we have such difficulty in accepting a positive result like meeting the deficit target and have to put a negative spin on it. That is one explanation. The other is that the Opposition Spokesman just did not understand. Whatever the explanation, let us move on.
Energy IssuesIn his presentation, the Opposition Spokesman spoke about the need to look at options other than a tax on fuel including producing ethanol, developing more wind turbine and mini hydro projects, etc.
The Administration support all those initiatives. In fact, we go further in that the SCJ is examining investment in some co-generation projects which could reduce dependence on imported oil and boost revenues for the company but the reality is that, that will take us only so far.
The plain fact is that for the medium-term, Jamaica will be dependent on imported fuel. We need to take a national more mature view on the pricing of this scarce imported commodity and again I am calling for a Joint Parliamentary Group to examine this issue and take the politics out of the policies.
Expenditure on EducationAll three Opposition Spokesmen blasted the Government for supposedly reneging from the commitment to allocate a certain minimum percentage of the expenditure to education. The issue was first raised during the Standing Finance Committee and I indicated that the agreement which had been hammered out in Parliament was deficient in terms of not being specific enough.
I posed the question as total expenditure includes, as we all know, a large chunk of debt servicing. In fact debt servicing accounts for $228B of the total of $328B.
In that debt servicing figure, several of the loans being repaid are directly related to education. Hence, in the external debt payments over $835M (principal plus interest) is related to debts incurred for projects in education. Similarly, in the domestic debt servicing over $4.8B is related to payments for educational projects. Therefore, in summary, debt servicing for educational projects account for $5.7B.
The question which I posed then and I pose again – should not this figure be added to the amount which appears under the Ministry of Education? If this were so done, the total expenditure on education would be $35.9B which would be approximately 11% of the budget.
The Prime Minister has already spoken to the issue that it is not simply more money and that is a point which we all comprehend. But in terms of the charge of a betrayal of an agreement, let us first clarify exactly what we meant in this agreement.
Productivity ChangesI now turn to an issue raised by the Leader of the Opposition in his presentation, the extent to which Jamaica had lost competitiveness worldwide and regionally. He cited various studies to support his point.
Let me address the issues directly but begin by noting that there is often a tendency for us in Jamaica to point to a loss in competitiveness in a manner of “Lawd we dead now”. But nobody poses the question if we have lost competitiveness in ‘X’ why will we be better in ‘Y’?
The second point which we need to realize is that the whole nature of the Jamaican economy has been radically changed over the last 30 years. Simply put the service sector now dominates the economy accounting for over two-thirds of GDP. Yet we still persist as if we were back in the days when output was bauxite, alumina, sugar and bananas. How many people would argue that our tourism product is inferior to that of Barbados or the Bahamas. How many people would argue that our entertainment services were inferior.
I am not for one moment writing off the traditional sector, but there is a need for us to come into this new century and realize that whilst we wish to maintain a multi-sector economy, services will be the main driving force for the future.
Nonetheless, I want to address specifically the issue of productivity even in the traditional sectors and I will select two, bauxite/ alumina and Sugar.
In both areas, the fact is that we had lost competitiveness compared to other producers. But we have not stood still, and we have not accepted that the situation was beyond redemption.
Productivity in Bauxite AluminaIn 1998 it took an average of 1.7 man hours to produce a tonne of alumina. In 2003 the figure had dropped to 1.28 man hours a decrease of 24.7%. That is improved productivity.
That is the national average, but the plant with the highest level productivity moved from 1.7 man hours per tonne in 1998 to .96 man hours 2003 and expects to move to .8 man hours per tonne in 2004.
But increased productivity comes not only from improved labour productivity, but also in how you utilize resources. When our alumina plants were designed, oil was so cheap that it made no economic sense to conserve. Our last plant was based on oil at US($)1.50 per barrel.
Increased oil prices have forced improvements. In the case of the least energy efficiency operation, oil consumption has declined from 3.6 barrels to produce a tonne of alumina to 2.85 barrels.
In the case of the most energy efficient, they have reduced their consumption from 2.10 barrels to 1.74 barrels to produce a tonne of alumina.
Let me turn to another old industry which through Government’s intervention has started significant recovery – the sugar industry.
As an aside, for those who had proclaimed its death, please note the intention of Worthy Park to invest in a rum distillery. Rum can only be made from sugar cane.
Let us look at some of the data from SCJ which has just surpassed its production level of last year with several weeks to go in the crop. In terms of tonnes of sugar produced per factory employee, at Bernard Lodge the figure has moved from 72.9 in 2002 to 80 in 2004. At Monymusk it has moved from 71.8 for 2002 to 113 in 2004. In terms of tonnes of sugar produced per hectare , at Frome the figure has moved from 5.92 in 2002 to 6.48 for 2004. At Bernard Lodge it has moved from 4.67 in 2002 to 5.47 in 2004.
The Monymusk figure has moved from 4.17 tonnes of sugar per hectare to 6.27 in 2004.
We can provide you with more data along the same lines. The basic point which I wish to make is that rather than us looking at global figures and lamenting our inability to compete, each factory, each plant, each sector must begin by examining where we are presently and realistically planning ways to increase output, increase productivity and to lower unit cost.
There are too many simply gifted in explaining what is wrong and why we cannot compete. There are too few who simply see greater output as a challenge, have rolled up their sleeves and begin to demonstrate that we can meet the challenge.
C: ALTERNATIVE BUDGET
The Opposition Spokesman on Finance in critiquing the estimates has pointed to several priority areas which he has allocated additional funds. (a) The fire services $637M (b) PIDP $170M (c) Infirmaries $100M (d) Education $2.6B (e) Health $1B (f) National Security $600M (g) Industry & Tourism $400M (h) Dedicated Bauxite Fund $500M (i) Agriculture $200M

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