Searching for growth in a time of budget contractionWednesday, March 03, 2021
BY SOPHIA WHYTE-GIVANS
The Government of Jamaica's (GOJ) 2021/22 budget is a fiscal consolidation budget chiselled by the realities of the novel coronavirus pandemic. Fiscal consolidation is the deliberate policy intended to mitigate fiscal deficits as well as public debt growth. To use football terminology, such a budget is one drafted on the defensive.
This budget cannot be read in isolation. It has to be looked at alongside the Fiscal Policy Paper (FPP) 2021/22, the minister of finance's statement on the budget, and the global realities as they unfold.
Jamaica's exposure to the rest of the world, as an open economy, and its reliance on the global economy for goods and services, including vaccines to fight COVID-19, is not dissimilar to other developing countries and our Caribbean neighbours. The Caribbean Development Bank (CDB) 'Regional Report: 2020 Review and 2021 Outlook', published February 25, 2021, makes the following assertion which represents Jamaica: “Across the region, the fall in economic activity led to a steep decline in government revenues. At the same time, Government increased expenditure to support health sectors and to provide social support and economic stimulus. Primary fiscal balances worsened in every BMC [borrowing member country], averaging -4.1 per cent of GDP [gross domestic product] compared with -1.3 per cent in 2019”.
As at the third supplementary estimates for FY 2020/21, Jamaica's fiscal balance is projected to be -4.0 per cent of FY 2020/21 nominal GDP or -$78 billion. Jamaica is, therefore, not unique in its dilemma.
Given the overarching global context and the regional context, there should be no blame cast. By virtue of being human, there was no avoiding COVID-19. Rather, there must be problem-solving and, at its best, a coming to terms between human development and public finance imperatives. At stake are trade-offs based on preferences — what do we want to do — provide for our population's basic needs or reduce the public debt to GDP ratio?
The short-run perspective is to save lives and livelihoods so that our population can be productive over the medium to long run after some semblance of normalcy has returned. Yes, the budget has expenditure allocated to bolstering the social safety net, but we must also remember that there are people who are working class and working poor who are not beneficiaries under the Programme of Advancement Through Health and Education (PATH). We must not underestimate the impact of the pandemic and overestimate the impact of the vaccination programme, as vaccines are not the panacea. We must prepare for any eventuality — after the vaccines, and after COVID-19.
The FPP 2021/22 is a necessary companion to the FY 2021/22 budget as it provides insights and information that are important in providing an overarching context for the fiscal programme and the budget. The inflation target is very credible — 5.1 per cent for FY 2021/22 — for the simple reason that the Bank of Jamaica (BOJ) has been pursuing a policy of inflation-targeting and has been doing it very well. Real GDP is projected to grow by an average of 4.1 per cent over fiscal years 2021/22 to 2024/25 (FPP, p 22). Table 2E (FPP, p 23) projects real GDP growth of 5.2 per cent for FY 2021/22. This is 1.4 per cent above the calendar year 2021 average of 3.8 per cent projected by the CDB for the Caribbean.
An important questions are: What are the underlying assumptions or premises on which this enthusiasm is based and is it realistic? Will the receipt of vaccines, and vaccination of a core mass of the population by a time period that would allow a return to normalcy, factor into this enthusiasm? Is it the $31-billion infrastructure programme? Is it tourism?
The CDB's news release on its report states, “Tourism-dependent BMCs will experience some economic recovery, led by Anguilla, where GDP is expected to increase by 10.9 per cent. This recovery is underpinned by a gradual return of tourists, which is expected in the fourth quarter of the year, and focused efforts to roll out mass vaccination programmes throughout the region. However, recovery is subject to risks, such as new waves of infection and possible new variants of the virus, and widespread availability of vaccines for some countries.”
So, while the CDB is optimistic, it is tempered optimism, given that there is still so much uncertainty. The tourism recovery is not expected to happen before the October to December quarter of the year. Within this context and the regional projections it is noteworthy that nominal GDP is projected to rebound past the FY 2019/20 levels of $2,121.2 billion to $2,154 billion in FY 2021/22. Nominal GDP for FY 2020/21 was $1948.0 billion. (See FPP, p 23, Table 2E for the nominal GDP figures.)
The questions to ask are:
1) Are the nominal GDP and real GDP figures credible?
2) Can this FY 2021/22 budget deliver the kind of psychological blessing that growing at a rate we have not grown at in decades would give us?
3) Is this growth likely to occur before the third quarter of the fiscal year?
4) Why is the projection not more conservative, given the risks and uncertainty?
Projected public debt to GDP for FY 2021/22 is 100.7 per cent, and this is forecast to decline to 76.8 per cent by end-FY 2024/25 (FPP, p 49). The public debt to GDP target of 60 per cent has been extended to March 31, 2028 in keeping with the suspension of the fiscal rules associated with the fiscal impact of the pandemic.
Table 3G (FPP, p 50) shows an interesting medium-term debt management strategy. There appears to be a shift in the strategy to again rely on domestic debt in favour of external debt due to exchange rate fluctuations. The proportion of domestic debt declines from $111.2 billion in FY 2020/21 to $64.4 billion in FY 2021/22, but is projected to increase to $116.5 billion by end FY 2022/23, which most likely coincides with the maturity of an instrument that will be reissued.
It is a quasi-reversal of the previous strategy to reduce reliance on locally issued debt. It is assumed that there is cost-effectiveness in taking on the locally issued public debt. In other words, the interest rate on these locally issued instruments is less than the foreign exchange risk deviations (a more favourable interest rate, per se) and may be lower than the cost of borrowing on the capital market, given that recent sovereign ratings of stable to negative (Moody's & Fitch for the former, and S&P for the latter) could have increased the cost of borrowing.
Additionally, while this is not a growth-inducing strategy in the short run, it may shore up the financial sector in the short run and result in long-run financial stability given that, currently, the private financial sector's appetite for credit is impacted negatively by overall economic conditions.
The FPP states: “Going forward, the GOJ will maintain its strategy of issuing mainly local currency debt in the domestic market as a means of limiting the Government's exposure to movements in the exchange rate.” (FPP, p 102) An implicit argument here is that the strategy could signal challenges in limiting devaluation of the Jamaican dollar, or extreme variations, over the short to medium term.
In summary, the FY 2021/22 budget is built on a foundation of fiscal year targets of: 5.2 per cent real GDP growth, nominal GDP of $2,154 billion, inflation of 5.1 per cent, and public debt of 100.7 per cent. If all these targets are met by March 31, 2022 we would be in a good position to rebound.
The budget is numbers, so we start by looking at the numbers. We cannot look at this budget without looking at the previous one — originally tabled budget of February 11, 2020 and the third supplementary, as passed, of January 26, 2021. The FY 2021/22 budget is $830.8 billion — $776.6 billion was the recurrent budget and $54.2 billion was the capital budget. Of the $776.6 billion recurrent budget, $146.3 billion is amortisation.
The total FY 2021/22 budget, without adjusting for amortization, is 2.7 per cent less than the originally tabled budget, but 2.3 per cent less than the third supplementary. In real terms, it is 7.4 per cent less than the originally tabled budget and 7.0 per cent less than the third supplementary. If we adjust for amortisation, the budget is 2.0 per cent less than the originally tabled 2020/21 budget and 1.0 per cent less than the third supplementary. However, in real terms, it is 6.8 per cent less and 5.8 per cent less than the third supplementary.
Any way one chooses to look at it, the budget represents a tightening of the belt, despite notable increases in allocation; for example, the $7.9 billion to PATH beneficiaries (Activity 12821) and PATH social assistance (Activity 12832), and the $60 billion to the Social and Economic Recovery and Vaccine Programme for Jamaica (SERVE).
Amortisation is a part of the recurrent budget. When amortisation is adjusted for, the recurrent budget is 1.0 per cent more than the first tabled FY 2020/21 recurrent budget, but 1.5 per cent less than the third supplementary. However, in real terms, the recurrent budget is 5.8 per cent less than the first 2020/21 tabled recurrent budget and 6.3 per cent less than the third supplementary. The third supplementary is what matters because it is what was actually spent for the fiscal year.
The capital budget is where there is actually hope. The 2021/22 capital budget is 27 per cent less than the first tabled capital budget of FY 2020/21, but 4.2 per cent higher than the third supplementary. In real terms, however, the 2021/22 capital budget is 30.5 per cent less than the first tabled 2020/21 capital budget, and less than one per cent (0.9 per cent) of the third supplementary.
Capital budgets are usually sacrificed when there is need for fiscal consolidation. A look at the previous FY 2020/21 supplementaries provides evidence of this. In the first supplementary, there were significant reductions:
* Ministry of Economic Growth and Job Creation (19000C) — reductions in Inter-American Development Bank loans ($419.25 million and 9.08 million), World Bank/ International Bank for Reconstruction and Development loans ($128.3 million and $149.2 million) and land acquisition by the GOJ and capital goods for the Southern Coastal Highway Project were reduced (by $1.3 billion and $4.2 billion, respectively);
* Ministry of Finance (20000C) — reductions of $3.4 billion and $790.5 million, respectively, in relation to the Contingency Provision for the Public Investment Management System and the Public Sector Transformation Implementation Project;
* Ministry of National Security (26000C) — reductions related to the Cybersecurity Initiative for the Jamaica Defence Force and the Jamaica Constabulary Force ($930 million each); also deferred or reduced were $1.1 billion to purchase and overhaul of ships/coastal surveillance and the construction and improvement of police stations and other buildings;
* Ministry of Industry, Commerce, Agriculture and Fisheries, now Agriculture and Fisheries and Industry, Investment and Commerce (50000C) — reduction of $725 million to have been spent on farm roads to reallocate to the recurrent budget to provide additional resources for production incentives;
* Ministry of Local Government and Rural Development (72000C) — reduction of $1.1 billion in the acquisition of fire trucks (and carried forward to FY 2021/22);
The second supplementary estimate saw a partial reversal in the reduction of approximately $6.43 billion under the Southern Coastal Highway Project. A sum of $4.6 billion was approved, resulting in a net reduction of $1.83 billion. There were no radical changes to capital expenditure in the third supplementary. The point here is a reference to the minister's assertion in his statement on the budget.
The minister's statement
Minister of Finance Dr Nigel Clarke stated that the $31.1-billion infrastructure programme “to drive jobs and economic activity, improve productivity and strengthen resilience” is historic. It “will be the largest programmed allocation to physical infrastructure tabled by GOJ in the budget and… is pure infrastructure, not merely capex”. It is sincerely hoped that this $31.1 billion can be spent, because if this is where the growth will come from it will really need to be spent.
It is well known that construction is the real sector and its growth drives overall economic growth. However, this must be in the context of other economic activity occurring. Construction alone cannot save the economy or allow it to achieve the 5.2 per cent real GDP growth that is cited in the FPP for FY 2021/22. There is hope in that the Planning Institute of Jamaica (PIOJ) projects that growth will be in all industries.
I have all respect for my colleagues at the PIOJ, but I am a bit hesitant and more cautious. At the recent quarterly press briefing, real GDP growth projections were given: The projection is for growth in the range of four to eight per cent. That is a wider range than I was expecting. However, what is noteworthy is the caveat the PIOJ's director general, Dr Wayne Henry introduced.
“The current projection is that the economy will grow within the range of four to eight per cent with all industries forecast to record growth. It should be noted that these projections are fluid, given the uncertainties that currently prevail regarding the pandemic, but there are some positive signs which provide optimism.” ( Business Observer, February 24, 2021)
In essence, there is uncertainty, so the projections are subject to change as conditions change.
As the CDB reported, tourism is not expected to pick up until the October to December quarter, so the growth from tourism will not be early in the fiscal year. The PIOJ is counting on other industries to also rebound after a slump — and this is intuitive. If nothing much has been happening, and something starts happening, there is bound to be a positive effect. This is all, however, subject to the extent of the uncertainty.
Thus, the rebound from a nominal GDP of $1,948 billion for fiscal year ending March 31, 2021, to $2,154 billion by fiscal year ending March 31, 2020, appears very, very optimistic, especially for a budget that has contracted relative to its predecessor.
There is a concept known as implementation rate. It is the rate at which the project is actually implemented both in terms of physical and financial execution relative to what is projected. There are usually implementation pains in executing projects. These may be as a result of procurement or other issues, including available fiscal space, but start up is usually not as smooth and steady as desired. This fact alone — a fact borne out by the initial analyses of projects that informed the development of the public investment management system — should make anyone cautious.
Of greater interest than the tabling of this budget is the mid-year review. This is when the interim fiscal policy paper will be tabled. There is still too much uncertainty now. By September 2021, the vaccination programme should have achieved some success, and there should be greater realism in forecasting the outlook for the rest of the fiscal year.
Creating fiscal space when there is none
Lastly, there are some items in each budget which just do not seem safe. They are space-holders and, when push comes to shove, they will be removed. It was heartening to see that the Ministry of Finance's budget includes amounts related to fiscal resilience. There is an amount of $13.8 billion for contingencies (activity 10099), a $2-billion payment of catastrophe risk insurance (activity 11808), and $200 million allocated to contingency for natural disaster (activity 12824). Of the three activities, both activities 10099 and 11808 were removed from the FY 2020/21 budget. The catastrophe risk insurance payment was deferred to FY 2021/22. If circumstances require adjustments, contingencies is usually a budget line item that is removed.
In this case, $6 billion is for a social protection programme and $7.7 billion is to meet compensation adjustments for public sector wages. There is really hardly any fiscal space in which to manoeuvre. There is $2.3 billion (0.1 per cent of 2021/22 projected nominal GDP) that could be exchanged for fiscal space, depending on fiscal exigencies.
From a fiscal policy standpoint, fiscal consolidation is prudent. Fiscal economists want to see reining in of expenditure in order to not exacerbate other fiscal targets; for example, the fiscal and primary balances and the public debt-to-GDP ratio. The GOJ's approach is, therefore, prudent — if that is the lens being used.
However, the GOJ has to respond to human beings with real needs. The question remains what is at stake and what is important — the public debt-to-GDP ratio or the human capabilities of the citizens?
The public debt-to-GDP ratio — even without the Government borrowing one dollar more — will worsen if there is no GDP growth. Once the denominator declines, the quotient will get bigger, even with the numerator held constant. The current budget — notwithstanding the ambitious $31-billion capital spend — cannot guarantee growth. It can try, though.
For the time being, the GOJ has to balance social welfare with economic welfare. It is not an easy task.
A good friend of mine and mentor said: “We may have to incur more debt to avoid death.” It is not just the death arising from loss of life, but also economic death arising from loss of livelihoods and economic opportunities.
I wish I could say to the GOJ, “borrow more”, but the history of this country leaves me in a conflicted position as a public financial management/fiscal specialist. It is difficult to see the progress that has been made and watch a regression right on its heels. However, we are not alone. We are making similar decisions to other governments. We are strategising in a context in which the US Congress is also trying to put a human face to the fallout of the pandemic and pass a US$1.9-trillion COVID relief/stimulus plan.
As the FY 2021/22 budget is being debated, let us be non-partisan, conscientious, realistic, innovative, and think of ways to provide for our population's needs and achieve growth. Anything is better than the estimated -11.6 per cent real GDP decline for FY 2020/21.
Sophia Whyte-Givans is principal of SWG Research & Analytics as well as public financial management consultant with the World Bank, working primarily with disaster risk financing in the Caribbean.
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