FINANCIAL secretary Wesley Hughes expects flat growth and single digit inflation for fiscal year 2010/11, provided Jamaica secures the debt swap next week.

“Santa Claus comes only once a year but Scrooge will dominate next (fiscal) year,” analogised Hughes in his address to analysts at Pegasus Hotel on Monday.

“GDP growth would be flat about 0.3 to 0.6 per cent…not noticeable,” stated Hughes, who was a guest speaker at the Jamaica Stock Exchange’s (JSE) Investments and Capital Markets Conference. “Inflation will be in the range of seven and nine per cent, there will be significant improvement in the Balance of Payments and the reserves will be healthy.”

Inflation, he said, needs to be controlled as public sector wages would be frozen for four out of five years. “Workers seeing negative returns and having to endure a wage freeze…the society would not be stable”.

The grim outlook was due to conditionalities arising from the pending International Monetary Fund (IMF) standby arrangement valued at US$1.3 billion and the government’s rising fiscal deficit. Up to November, Government revenues fell short of initial projections by some 10 per cent or $22 billion.

Government has essentially secured the support it will need for its planned debt exchange transaction that will involve the swapping of over $700 billion in its domestic debt for lower yielding bonds. The swap is expected to yield savings of $40 billion on interest payments next fiscal year. It requires the support of financial institutions that hold 63 per cent of the domestic debt.

“It is not perfect but its the best option available at this time,” said Hughes about the debt swap which was one of three options Government contemplated. Government plans to use up to US$400 million from the IMF and multilateral funding to create a Financial Sector Support Fund, to provide a source of liquidity to eligible financial institutions that may be affected by the issuing of new bonds in the exchange.

Hughes cautioned that the savings from the debt swap should not be utilised for capital spending.

“The savings resulting from the debt exchange is to be used to get the debt down. If we don’t do that then we are going to be creating more problems — our credibility both in the international and local market will be undermined,” he said.

He confessed that the difficulty in signing the IMF deal was due to “starting from a fairly weak position in terms of credibility in Washington”.

Hughes who was the former head of the Planning Institute of Jamaica stated that central government along with its public sector bodies must reduce their respective deficits. He added that the Fiscal Responsibility legislation is going to be tabled and “hopefully” passed by March which would “impose significant restraints on government and on public sector entities”.

The largest holders of the domestic debt include merchant banks, trust companies and brokers with $247 billion; insurance companies with $108 billion; commercial banks with $87 billion and building societies holding $12.5 billion at the end of October last year. Superannuation and pension funds, including BOJ’s superannuation fund and the National Insurance Fund (NIF) held $89 billion.