INTRODUCTIONMr. Speaker, the first quarter of this year has been a very busy period for the Ministry of Finance & the Public Service and all the economic agencies under its umbrella.
We entered the year navigating uncharted waters as we set about completing negotiations with the IMF while at the same time designing a debt exchange programme that would not rock financial system stability.
The hours have been long and tedious, but we have pulled through and have now laid a solid foundation on which to build economic growth and prosperity. It would be remiss of me not to acknowledge the work of the technical staff from the BOJ, FSC, PIOJ, and my own Ministry who have worked tirelessly throughout the last three months.
Mr. Speaker, within 8 days of the new financial year all have managed to present
to the House the preliminary macroeconomic outturn for FY 2009/10 and projections for 2010/11.
Mr. Speaker, in terms of the structure of the presentation the approach will be as follows:
I will provide an overview of the macroeconomic performance of the country for 2009/10 against the backdrop of the global economy. Fiscal Outturn 2009/10 and projections 2010/11. Next, the Medium Term Economic Programme (2010/11-2013/14) in the context of the Standby Agreement with the IMF will be reviewed. Highlights of the Expenditure Budget for 2010/11 will then be outlined. Financing the Budget 2010/11. I will speak on specific measures on Tax Administration and Tax Compliance and laying the foundation for growth. I will close with a discussion on building the foundation for prosperity.
Mr. Speaker, at the outset of this presentation, let me take the opportunity of saying to the people of Jamaica, that we understand the many difficulties that we face.
From the problem of bad roads to inadequate water supply systems, to increased
joblessness in part as a result of world conditions, to reduced purchasing power.
For too long, we have:
Created generations of people who are used to spending but have no idea of creating wealth; Entertained the view that wage increases have no bearing on productivity increases; Laboured under the mistaken belief that real wealth can be created as we continue to borrow more while recording annual declines in productivity growth; Falsely assumed that we can continue to have annual growth in our Budget without a commensurate growth in our output as a country – our GDP; Ignored tax cheats, tax evaders and instead, borrowed more and more money to finance the National Budget.
The result of all this has been disastrous for our economy. While other Caribbean islands have per capita incomes at between US$8,000 and US$16,000, Jamaica is still hobbling along at less than US$5,000. While their economies have grown at between 4-12% annually, we have barely grown at 1.0 % per annum for the past 15 years.
Mr. Speaker, this is the background against which I speak today. This is the background against which the government has had to make serious and
fundamental changes to policies that, over time will put the economy on a path of
growth and wealth creation.
It is now crunch time. For too long, we have talked but not acted on the fact that we can no longer afford to live beyond our means, and yet we have the capacity to so organize ourselves that in due course we can build the foundation for a better life.
2009/10 was a difficult year: -we saw the full effects of the global recession. -Domestic demand was weak as unemployment grew, real income declined. -Remittance flows declined. The revenue base of the government was weakened with the fall in bauxite/alumina export. In order to adjust we have to undertake some significant adjustment measures to enhance revenue and cut expenditure. The adjustment measures were difficult but could not have been avoided. No government likes to impose new taxes or to cut wages. The truth is, if we could have avoided it, we would have.
We took these serious and tough measures to secure the future of the country.
Our willingness to take tough measures, not popular, but necessary gave confidence to our development partners.
Mr. Speaker, as we continue to turn the corner in the development journey of our country, we are now on an unprecedented path of bold initiative and firm commitment, to secure sustained growth and development for our country.
This historic moment in the economic life of our country comes within the context of early signs of recovery from what was the worst global economic crisis since World War II; it comes within the context of very grave economic challenges that have plagued this country for far too long; economic problems that, while exacerbated by the recent global economic crisis, started long before the crisis began, and could not be allowed to continue.
1. MACROECONOMIC PERFORMANCE REVIEW -2009/10
Mr. Speaker, the global economic recovery generally continues to be encouraging:
The World Bank’s most recent forecasts show that global GDP growth is projected at 2.7% for 2010. Developing countries (led by strong manufacturing growth in China and India) are expected to grow by 5.2%. In 2011, growth is projected to be 3.2% and 5.8% for the world and developing countries, respectively. In particular, growth in the Latin American and Caribbean region is projected at 3.1% and 3.6 % for 2010 and 2011, respectively.
The US economy continues to expand, despite a weaker first quarter 2010 due largely to adverse weather conditions there. Revised GDP estimates show that the
US economy expanded by 5.9% in the December 2009 quarter relative to the
previous estimate of 5.7%. The US leading economic index (LEI) rose consistently since November 2009, and this increase is consistent with forecasts for further economic expansion in the March 2010 quarter.
While there is consensus on global recovery some downside risks to this recovery remain:
There has been a significant buildup of debt in several developed economies as a result of stimulus measures implemented to combat the effects of the global crisis. This has led to unsustainable fiscal positions, and the resulting need to tighten fiscal policy. It is deemed by many that the exit from stimulus programmes will begin towards the end of this calendar year, making the risk of a double dip recession higher in 2011 than in this current year. The European Commission has advised that economic recovery in the European Union will remain fragile in 2010 as the debt crisis there looms large, led largely by the untenable fiscal position of Greece. Consequently, the growth forecast remains unchanged at 0.7% in 2010 for both the EU region and the 16-nation euro zone. The Greek debt crisis and worsening public finances in several other eurozone countries pose one of the biggest challenges to the European economic recovery, which contributed to recent volatility in the financial markets.
JAMAICAN ECONOMY Mr. Speaker, Jamaica’s economic outlook and the demand for GOJ Global bonds continue to be buoyed by news of multilateral support for Jamaica following the approval of the Standby Arrangement with the IMF, as well as the recent upgrades by the ratings agencies following the success of the Jamaica Debt Exchange (JDX).
Inflation in 2009 was 10.2%, relative to 16.8% recorded in 2008. The latest data show that Headline Inflation, measured by the change in the Consumer Price Index (CPI), was 12.8% for FY2009/10 to February 2010. Inflation for the fiscal year to date was largely influenced by the pass-through of higher international commodity prices, mainly oil, and the impact of Government revenue measures in December 2009. Current projections are for the inflation rate to be approximately 13.5% for fiscal year 2009/10. Growth For the calendar year 2009 it is estimated that the economy contracted by 2.7%, reflecting primarily weak external and domestic demand. The fall in external demand resulting from the global recession led to a significant reduction in exports. Falling real incomes, increased unemployment and reduced remittance flows led to weak domestic demand and lower consumption. Industries recording significant declines were Mining & Quarrying, Manufacture and Construction. However, Agriculture, Forestry & Fishing grew by 12.1%. For the fiscal year 2009/10 it is estimated that the economy contracted 2.3%. Unemployment The unemployment rate increased from 10% in October 2008 to 11.6% in October 2009, due to the fallout from the global recession. With measures contained in our Economic Recovery Programme, which I will highlight shortly, we expect this trend in unemployment to reverse, as more jobs are created in the economy. Interest Rates At the end of March 2009, the interest rate on the BOJ 30-day REPO stood at 17.00 % and the 90-day at 18.00 %. Over the fiscal year, the BOJ eased its monetary policy stance in the context of positive trends in inflation as well as stability in the foreign exchange rate and lowered the interest rate on its instruments. By the end of the March 2010 the 30-day REPO stood at 10.00% and remaining tenors were removed from the menu of instruments. Concurrently the market responded to the signal of rate reduction sent by the BOJ and the average yields on the 3 and 6-month Treasury Bills also trended downwards moving from 20.51% and 21.77% respectively at the end of March 2009, to 15.95% and 16.80% respectively at the end of December 2009. At the March 24 2010 Treasury Bill auction, after the successful debt exchange, these market rates declined to 10.18% on the 3-month and 10.49% on the 6-month instruments. It is significant to note that these interest rates are the lowest they have been in 24 years.
Mr. Speaker, I wish to appeal to members of the financial sector. While the return to core banking activities is a process, the expectation, not just of Government but of the people of Jamaica, is that lending rates will be reduced more significantly so that much more affordable credit is made available to the people of this country who want to invest, produce, create jobs, earn foreign exchange and create wealth.
Exchange Rate The Jamaica dollar has remained relatively stable in 2009, depreciating by 0.78%. Of significance is the fact that in recent weeks there has been a 0.58% appreciation moving from a high of J$89.77 to the US dollar on February 18 down to J$89.26 to the US dollar yesterday (April 7). This reflects the increasing confidence in the market and increased availability of foreign exchange due to the support from the multilateral institutions.
Balance of Payments
Preliminary data for the year 2009 show an improvement in Jamaica’s Balance of Payments. The current account deficit is estimated to have narrowed sharply by US$1.88 billion to US$912.4 million (7.3% of GDP) and largely reflected a reduction in the merchandise trade deficit, which was complemented by an increase in the surplus on the services sub-accounts. Mr. Speaker, this improvement is significant as it follows four consecutive years of deterioration. For FY2009/10, the Bank of Jamaica projects a current account deficit of US$1.06 billion (8.5% of GDP). This estimated deficit represents an improvement of US$1.39 billion relative to the previous fiscal year. Concurrent with the improved growth outlook, Jamaica is projected to record marked improvement in the current account of the balance of payments. This will stem mainly from the impact of the fiscal adjustment on imports as well as a gradual pick up in remittances. Continued improvement is expected to around 4.0% to 5.0% of GDP over the medium term. International Reserves On March 31 2010 the Net International Reserves of the Bank of Jamaica stood at US$1.75 billion compared to US$1.63 billion as at March 31 2009. Gross reserves amounted to US$2.4 billion, representing adequate coverage of some 17.4 weeks of imports of goods and services.
2. FISCAL OUTTURN 2009/10 AND PROJECTIONS 2010/11
The fiscal programme for FY 2009/10 was geared towards achieving a fiscal deficit of 5.5% of GDP, down from 7.3% in FY 2008/09 as a precursor towards a sustained reduction in the debt/GDP ratio over the medium term. Faced with a significant shortfall in revenue flows and higher expenditure outlay, arising from costs associated with higher than anticipated domestic interest payments due to the JDX. The First Supplementary Estimates were tabled in September 2009. These Estimates reflected a revision in the fiscal deficit target to 8.7% of GDP. Under the aegis of the IMF Stand-by Agreement (SBA) the fiscal targets were further revised. The fiscal deficit target was set at J$106.7 billion, or 9.6% of GDP. The SBA however utilizes the Central Government’s primary balance (revenue & grants less non-interest expenditure) as the main fiscal quantitative performance target rather than the fiscal balance. The primary balance for FY 2009/10 was set at $66.9 billion. Provisional data indicates that for FY 2009/10, the Central Government primary surplus amounted to $68.1 billion, which was $1.2 billion better than the SBA target. Central Government operations generated a fiscal deficit of $120.6 billion or 10.9% of GDP.
The FY 2010/11 Budget has been crafted during one the most challenging periods in recent years. The challenges arise against the backdrop of a less than favourable international economic and financial climate resulting from lower levels of economic activity in the world’s major economies, which contributed to a sharp decline in the domestic economy. Budgeted expenditure for FY 2010/11 is $503.9 billion. The Budget reflects expenditure of $407.1 billion and amortization payments of $96.8 billion. As in previous years, debt-servicing of $240 billion accounts for the largest portion of the budget (47%), but is significantly reduced compared to a share of 60% last year. This is followed by education services of $71.9 billion (14.2%), national security services of $38 billion (7.5%) and health services of $31.6 billion (6.2%). For FY 2010/11 revenue and grants are projected at $326.3 billion. This represents an increase of 8.5% over FY 2009/10. Tax revenue of $287.2 billion is budgeted to grow by 8.0% over collections in FY 2009/10. In FY 2010/11, the Government proposes to borrow $176.3 billion to cover the projected fiscal deficit of 6.5% and amortization payments. Of this total $118 billion is programmed to be raised from the domestic market. The remainder of $58.3 billion is to be raised from external sources, in the form of investment project loans and policy based/development policy loans.
3. THE MEDIUM-TERM ECONOMIC PROGRAMME
Mr. Speaker, when this Government came into office in 2007, core issues at the heart of our economic challenges included anemic growth levels, an oppressive and unsustainable debt burden, and poor fiscal discipline and accountability.
In an effort to combat these and to place the country on a firm path of sustainable growth and development, the government has embarked upon a vigorous economic reform programme to raise the real GDP growth rate, reduce public debt, and permanently instill fiscal discipline and accountability through a stronger institutional framework for government finances.
As I have previously explained, the medium-term programme rests on three central and interrelated pillars:
A fiscal consolidation strategy focused on streamlining expenditure and reforming the public sector, including divestment of some public bodies. Reforms to continue the strengthening of the financial system. A comprehensive debt management strategy
Fiscal Consolidation In relation to the fiscal consolidation strategy the Government of Jamaica took a decision to amend the Financial Administration and Audit Act (‘FAA’) and the Public Bodies Management and Accountability Act (‘PBMA’) so as to establish Fiscal Responsibility Framework legislation confirming our commitment to institute a culture and process that will promote fiscal discipline. The amendments
to the FAA Act, as passed in this honourable House last month, seeks to correct
shortcomings identified in the existing fiscal policy and administrative systems relating, in particular, to the control of expenditure, reporting of financial performance, accountability, and transparency.
For too long we have allowed some Public Sector bodies to incur significant sums of debt which ultimately have to be absorbed by central government, thereby increasing the fiscal deficit. Mr. Speaker some of the examples are NROCC, Air Jamaica, Sugar Company of Jamaica, JUTC, CAP and others.
On March 25, 2010, the first in the history of this Parliament, we tabled consolidated estimates of expenditure for the Central Government and public sector bodies. Total expenditure for central government and the public sector bodies is projected at $869 billion in FY 2010/11 comprising recurring expenditure of $634.6 billion and capital expenditure of $234.6 billion.
Currently, we have 195 active entities and 43 inactive entities. It is projected that Central Government will fund 34 % of these entities, while another 24% will be partially funded by the Consolidated Fund. The remaining 46% is expected to generate adequate revenues to fully finance their operations, including, remitting $23.37 billion to Central Government as corporate an other taxes.
The Capital Expenditure for the active self-financing entities is projected to increase by $30 billion this year with the major portion of this expenditure being accounted for in the UDC, NHT, Port Authority, NWC and JUTC.
Of the 74 inactive public sector bodies, 31 are to be wound-up, 34 are to be merged with the existing operations and the remaining 9 are currently under review to determine their optimal mode of operation.
In respect of privatization we are:
proceeding with the Air Jamaica divestment and have budgeted $22 billion to spend in this fiscal year; we are proceeding with the privatization of the Sugar Company of Jamaica. We successfully privatized two of the entities during the last fiscal year and we expect to complete the process this year; we have started the process of privatization of the Port of Kingston, the Norman Manley Airport, and selected bauxite interests, including CAP.
Mr. Speaker, we intend to be extremely aggressive with our privatization efforts during this fiscal year. The current asset base of these public sector entities is projected at $774 billion for 2010/2011 and it is our opinion that these assets are best utilized by the private sector.
Air Jamaica Divestment Mr. Speaker, I would like to pause here to inform the House on the progress of the Air Jamaica divestment:
INTRODUCTIONMr. Speaker, the first quarter of this year has been a very busy period for the Ministry of Finance & the Public Service and all the economic agencies under its umbrella.