Back to reality
BOTH in Jamaica and Europe, the long summer month of August provided an opportune break from anxiety about the economy. In the case of Europe, European Central Bank Governor Mario Draghi's statement in July that he would do "whatever it takes" to stabilise Europe's financial markets, in our interconnected world, appeared to have also stabilised the US stock market.
In the case of Jamaica, the break from anxiety was provided by the combination of our success in the Olympics and our Independence Jubilee celebrations, meaning that very little attention was paid to the local economic situation by either so-called "movers and shakers" or even the man on the street. On August 13th, rating agency Standard of Poors even upgraded Jamaica's short-term rating to B from C, albeit on purely technical grounds driven by a change in their overall rating methodology, stating specifically that the change in rating did not "reflect a change in Jamaica's short-term credit prospects".
As we enter September, however, things are different as both Jamaican and international observers have again begun to pay attention to the local economy. Data points, such as the collapse in second-quarter business and consumer confidence revealed in the Jamaica Chamber of Commerce's Business and Consumer Confidence Indices, now become highly relevant as they suggest an ongoing negative economic trend. Anecdotal evidence suggests that August was an unexpectedly weak month from a retail perspective, with no "Independence" or "Olympic" bump, and there is also growing evidence that Jamaica's surprisingly strong tourism arrival figures may have been flattered by the return of overseas Jamaican's seeking to participate in the Independence celebrations, many of whom would in any case have stayed with friends and relatives.
As we move into September, the timing of a new IMF agreement and the associated need for market confidence now take centre stage. The Jamaica Debt Exchange, combined with the now-lapsed IMF agreement, allowed Jamaica to achieve a fragile stability as it not only sharply reduced interest costs, but also pushed back the government's debt repayments. However, like the new government's honeymoon, this breathing space has now come to an end.
The government still has a little time, and plenty of political capital, to take the necessary hard decisions and avoid much greater economic pain being inflicted on the general population, including the civil service.
The starting point is to treat the public sector monitoring committee meeting, now rescheduled for September 6th, as the prelude to restarting the partnership process by bringing in the private sector and civil society. If this is treated as part of a coherent overall confidence building exercise of frequent communication, it could sharply reduce the level of economic uncertainty that has continued to build over the past few months, as occurred in 2004.
In the area of tax reform, for example, an enormous amount of work occurred in the run up to the budget, and a huge amount of useful information was exchanged between the public and private sectors, and within the private sector itself. It was unfortunate that, so close to the finish line, the process appeared to run out of time, capacity and most importantly, fiscal space. Nobody, including critically the IMF, can regard the past budget as tax reform, and the collection of all new taxes imposed has to be in doubt in our very depressed economy. It is likely, therefore, that even after the enormous tax package imposed in the budget, any tax reform process would also have to be revenue positive to satisfy the IMF. Such a reform would also need to improve the competitiveness of the productive sector, as Minister Phillips himself noted in his recent speech to the Sir Arthur Lewis Institute of Social and Economic Studies.
Some kind of down payment on tax reform (and public sector wages and benefits) is likely to be required by the IMF as a "prior action" to reach an IMF agreement. The private sector has superior access to information (compared with government) as to how to maximise activity in their specific industry, and it makes sense to involve them up front in the policy process, particularly if it is part of achieving a wider national consensus. The government, of course, has the critical coordinating role and is the ultimate decision maker. It is therefore a mystery why successive governments would rather, in the area of tax policy for example, try to correct bad taxation decisions after they have been made, rather than fully inform themselves of the consequences up front. More importantly, the advantage of taxation as the basis for a social contract is that it is not mere words, but about dollars and cents, and therefore guarantees meaningful engagement and the need for real commitments from the participants in the process. Such a process of communication and consultation, leading ultimately to execution is the way to dispel uncertainty and drive investment and ultimately job creation.