EASE OF DOING BUSINESS

MANY business ideas, if lucky enough to sail past the rough waters of crime, high energy cost, low human capital and high interest rates, were not lucky enough to sail past the difficulty in conducting business. Many businesses often complain of the weak social infrastructure and poor institutions that they have had to deal with.

Where are we?

The 2010 Doing Business report (DBR) shows that Jamaica ranks 75th out of 183 countries surveyed, slipping eight places below the 67th ranking it received in 2009. The most substantive improvement came in the area of Registering Property, which increased seven places in 2010 relative to 2009, due primarily to the reduction in the transfer tax.

Starting and Closing a Business, Employing Workers and Dealing with Construction Permits continue to maintain a ranking of over 50, and all except Closing a Business registered respective deterioration in performances of -7, -2 and -1, compared to 2009. While there were improvements in the costs associated with Starting a Business (7.9 to 5.3 per cent income per capita) and Dealing with Construction Permits (396.3 to 265.7 per cent income per capita), they were not sufficient to offset the inactivity in the other subcategories nor the significant improvements undertaken by other participating countries.

Protecting Investors and Getting Credit received ratings of 73rd and 87th, respectively of 183 countries. However, similar to their performance last year, they continued to decline in rankings, down three places each.

Registering Property, Enforcing Contracts and Paying Taxes, are areas that require immediate attention due to their respective positions in the overall rankings (over 120th). With reference to Trading Across Borders and Enforcing Contracts, both registering a two-place slide in rankings (from 102nd to 104th and 126th to 128th, respectively). There was a one-place improvement in Paying Taxes (from 175th to 174th).

The nation’s performance in DBR 2010 was less than impressive. Several reforms have been proposed by the International Monetary Fund (IMF) and the World Bank that, once implemented, should help to improve the ranking in the DBR.

INTEREST RATES

It is widely accepted that poor fiscal management has played a significant part in retarding growth, by raising the opportunity cost to deploy capital to the real sector of the economy. However, the evidence also suggest that, while access to credit is a major concern (see section on ease of doing business) the other structural impediments must be addressed simultaneously.

Historical data dating back to 1993 show that weighted average commercial bank lending rates have gradually declined, and loans and advances in real terms have increased significantly beginning around 1999. Economic growth, on the other hand, recorded no significant improvement between 1993 and 2009. A look at the composition of loans and advances shows that a great majority of the growth in total loans and advances, between 1993 and 2009, was due to the growth of loans for personal credit and government services. The sharp distinction in the growth of loans for personal credit and government services, relative to that of the real sector, occurred within a context of interest rates on personal credit being consistently higher than interest rates on commercial credit.

Where are we?

Recent data from the Bank of Jamaica (BOJ) shows that benchmark interest rates slid to another unprecedented low. Yield on six-month treasury bills hit 7.61 per cent in November 2010, coming from a previous historical low of 7.99 per cent in October 2010. Key to the significant slide in benchmark rates is the continued improvements in central government fiscal operations, significant structural reforms and a stronger balance of payment profile.

On the other hand, the movements experienced in weighted average lending rates in recent times have been sluggish. Nonetheless, the move by the Development Bank of Jamaica to lower lending rates in recent times, and the full implementation of the credit bureau could create further room for reductions in weighted average lending rates. Fiscal authorities have also proclaimed that a suit of policy initiatives is in the pipeline to stimulate further reductions.

ENERGY COSTS

For a number of years the nation has been plagued by high energy costs, which have had a retarding effect on the profitability of local companies, and have served as a major deterrent for the flow of foreign and domestic capital.

Where are we?

There have been moves to further diversify the energy mix in recent times. The government only recently installed a number of wind turbines that is expected to generate 18 megawatts (MW) of power at Wigton, increasing the total amount of energy produced by Wigton to 38.7 megawatts (MW). However, there is need for further diversification to significantly address the cost of energy factor. Fiscal authorities have, in recent times, announced plans to significantly diversify the energy mix by adding Liquefied Natural Gas (LNG) to the mix. The LNG project is expected to be fully implemented by 2014 and is proposed to add 300 megawatt (MW) to the energy grid.

Conclusion

Overhauling the engine of growth requires a comprehensive plan to address all the necessary parts to growth generation, which is inclusive of education, health, ease of doing business, energy costs, crime and interest rates. Many may argue that because the government has to embark on fiscal consolidation over the medium term, it is therefore severely constrained in dealing with some of these issues simultaneously. This argument has it merits, particularly as it relates to education, crime and health. On the other hand, there are cost effective ways to improve the other areas that policy can control, particularly surrounding interest rates and the ease of doing business. It would be prudent, therefore, for fiscal and monetary authorities to address the areas it can now and gradually adjust the more expensive areas as time progresses.