Financial literacy: The real crisis
The average Jamaican does not understand how inflation and interest rates impact their spending power.

When I look back at the People’s National Party’s (PNP) 2016 General Election campaign, I vividly remember how important it was for the team to convey to the general population that we had fixed the economy. This we incorporated in mesages such as: “Never before has Jamaica had a fiscal surplus”; “We have been able to pay our public sector workers who have held strain”; “We are bringing down our debt-to-GDP [gross domestic product] ratio”; “Jamaica is on the right path”.

The extent to which our economy has been resilient is built on the foundation laid by our former Minister of Finance Dr Peter Phillips between 2012 and 2016 and the Portia Simpson Miller-led Administration.

Their courage reversed a 40-year trend of deficit spending, thereby creating an economic environment with a 7.5 per cent fiscal surplus, reducing our debt-to-GDP ratio from 140 per cent to manageable levels, which is the foundation on which this current low interest rate environment has been built. This low interest rate is the primary reason the Jamaican economy was not devastated in 2020, and we should give the credit where it is due.

However, in February 2016, the PNP lost 14 of its 42 seats and became the Opposition. How was this possible when the International Monetary Fund (IMF) and other multilaterals praised the PNP Government of the day for making the right decisions without encountering riots tantamount to what occurred in Greece?

Many would argue that a combination of elements created the perfect storm for defeat. But the truth is, if you want to lead a group of people to a destination, they must first understand the overall value of the journey and why they should trust you to take them. The fact is that the Jamaican people never understood the importance of a fiscal surplus, the positive impact of reversing deficit spending, or how decreasing the debt-to-GDP ratio would increase their purchasing power to buy more or improve the roads and water conditions in their communities.

Regardless, the Jamaica Labour Party (JLP) took advantage of the situation and told the people: Vote for us, and you will $1.5 million tax free to improve your lives.

However, this discussion is not about who had the best political slogan; instead, it’s about identifying what’s needed to get Jamaicans to appreciate macroeconomic issues, particularly interest rates, and how they affect their everyday lives.

Did the PNP fail to communicate its message, or is financial literacy the real crisis among our people?

It would have been hard not to notice that, year to date, the stock market in the United States has lost almost 15 per cent in response to the US Federal Reserve raising interest rates by half a per cent two weeks ago. The Fed has declared its intention to continuously raise interest rates to curb the eight-and-a-half per cent inflation rate in the US, which is the highest it’s been in 40 years.

A full appreciation for the impact of interest rate increases is that a three per cent increase in the rate would incur a cost to the US Government that is higher than its national defence budget based on the current US debt.

If, as projected by analysts, the US Federal Reserve rate moves to four per cent or higher by the end of the year, people worldwide will seek to convert their currencies to US dollars and place them in US banks and securities. In response, banks in other countries will increase their local banking saving rates to discourage people from converting to US dollars. This increase would be at least four per cent above the Fed rate. Add to this possibility a bank’s inclusion of their margin for administration and profit, and you can see the probability of double-digit lending rates by the end of this year.

Were this to happen, the result would be a major reduction in a person’s disposable income as their mortgage, car loan, and hire-purchase payments would increase. So, interestingly, even though the Fed decisions are outside of our control, they directly impact the pocketbooks of ordinary Jamaican people.

Here at home, the Bank of Jamaica (BOJ), which operates as an independent body and controls local inflation as one of its core responsibilities, has set a target of four to six per cent. However, as of April 2022, Jamaica recorded an inflation rate of 11.8 per cent.

As a counter to inflation, the BOJ has moved the policy interest rate from 0.5 per cent in August 2021 to 4.5 per cent in March 2022. The next review is slated for May 19, 2022 (after this article has been submitted) and may see the BOJ increasing the rate again. What would add more fuel to the inflation fire is to go back to deficit spending, which the PNP eradicated during its last term in office. And if Jamaica went back to the days of borrowing money to finance expenditure, spending more than the country earned, such a move would drive interest rates even higher.

Therefore, the BOJ must explain to Jamaicans whether it can impact inflation when, to a large extent, it is driven mainly by external factors.

Why? Many Jamaicans don’t understand how inflation or interest rates affect them and are unaware of how to plan or budget if they move higher. Furthermore, they cannot directly link surging oil prices globally; the devastating impact of the Russia-Ukraine war on grain, fertiliser, and cooking oil prices; and the supply chain disruptions out of China to the erosion of their purchasing power.

MONEY MATTERS

One of our essential responsibilities as leaders is to do all we can to improve the Jamaican economy, thereby increasing our populace’s disposable income to give them more purchasing power. But we must teach them, too, how interest rate movements and inflation affect their ability to buy goods and services.

Financial literacy is the knowledge and understanding of critical financial skills, from budgeting and saving to investment and retirement planning, and the ability to put them to use. Several countries have financial literacy in their schools’ curricula.

For example, financial education is mandatory for grades 7 and 9 students in Denmark. In addition, adolescents participate in an annual event called Global Money Week, organised by Finance Denmark and the Danish Union of Teachers of Mathematics, during which financial professionals speak to students at local schools.

In 2014, Israel mandated personal finance instruction in schools and educated its secondary school students through a Financial Education Month in the School System in which banking, investment, and general economics were taught.

Today, the dilemma facing all governments operating in this extreme financial environment is their failure to communicate the problems and how they will impact the people and the national objectives.

Our Government should first have a wide range of public consultations with people across Jamaica to help them understand the economic fundamentals, and more importantly, they should introduce financial literacy in our secondary education curriculum. These measures would go a far way in helping the average Jamaican to understand the solutions needed for a country to budget, save, and invest, which, in turn, will help them to plan their domestic affairs.

But if they continue to speak at our people as opposed to with our people, it will only lead to misinformation, rigidity, and more social unrest. Furthermore, beating them with extensive financial jargon won’t help if they can’t make ends meet.

Jamaicans will come if they trust you and understand the objectives. It’s time we start explaining the economy effectively to our people, hear from them how they are being affected, and find common ground in the best interest of our country.

Lisa Hanna is Member of Parliament for St Ann South Eastern, People’s National Party spokesperson on foreign affairs and foreign trade, and a former Cabinet member.

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Lisa Hanna

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