Going behind the numbers

R. Anne Shirley, Guest Columnist

On Thursday, April 14, the Government of Jamaica tabled an expenditure budget of $544.721 billion in the House of Representatives which includes projected debt-servicing costs of $263.343 billion. The debt-servicing estimates suggest projected interest payments of $131.084 billion and amortisation payments of $132.259 billion.

The total proposed expenditure budget represents an overall increase of $47.11 billion, or nine per cent, as compared with the Revised Estimates for the just-concluded FY 2010-11. It should be noted, however, that a decision was taken by the Ministry of Finance to account for the redemption of the full issue of Treasury bills in this year's Budget rather than publishing the net position as in previous years, which made for an increase of $13.7 billion in the amortisation payments figures. If this is taken into account, the increase in the FY 2011-12 Budget over last year's Budget is really an increase of $33.397 billion, or seven per cent.

As in previous years, debt servicing accounts for the largest portion of the Budget. In the current Budget, debt servicing accounts for 48 per cent, as compared with 46 per cent in FY 2010-11 - an increase of just under two per cent. Amortisation for FY 2011-12 accounts for $132.259 billion - up from $98.309 billion in the revised estimates for FY 2010-11. This is an increase of $33.95 billion, or 35 per cent.

Interest payments are estimated at $131.084 billion, down from $132.909 billion in the revised estimates for FY 2010-11, which is a reduction of $1825 billion, or 1.4 per cent.

JDX II?

The key point that needs to be made about the debt-servicing projections is that the Government has given a clear indication that it intends to pursue another 'liquidity-management programme' - this time on the external debt. Government officials have, coyly, stated that they are exploring this option, but it will be 'different' from the terms of the Jamaican-dollar (JDX) programme. A contingency amount of $7.382 billion has been set aside in the estimates for this exercise - with $6.5125 billion in Capital A (external debt payments) and $870 million for possible interest charges.

The Government has to tread carefully with this one for a number of reasons. First, the majority of the GOJ's external debt is held by Jamaicans, and part of the success of the most recent eurobond issue in February 2011 (in which the equivalent of US$400 million was eagerly taken up) is that most of this was by local bondholders looking to maximise their savings and hedge against currency devaluation and inflation movements in the future. Pension funds and other bondholders, who are still owed approximately $8 billion of interest taken out at source by the Government on their local investments, have taken a significant hit on their investment portfolios as a result of the JDX exercise, and they will be very reluctant to enter into any type of debt-swap/liquidity-management programme at this time. In addition, the Government will have to contend with external bondholders who are seeing increasingly attractive rates on sovereign bonds with higher debt ratings than Jamaica - including European bonds (Ireland, Spain, Portugal, Greece, etc.) and other higher-rated emerging market bonds.

Lowering of GCT?

The GOJ should not overlook the possibility of capital flight as well. Also, there are indications that work is currently under way to see how the GCT could be lowered, while taking more items off the zero-rated and exempt list. These two moves would have a tremendous impact on disposable incomes, particularly for the poor and the working poor, and even if GCT could be lowered to, say, 12-15 per cent, the impact would still be tremendous.

Legacy Payments

Another point that needs to be made is that the non-debt portion of the Budget also includes some large amounts set aside for legacy payments for Air Jamaica and the Sugar Company of Jamaica. The amounts set aside are $4.566 billion for Air Jamaica and $2.686 billion for the SCJ. Since these amounts were not originally debt undertaken by the central government, these payments are reflected in the Ministry of Finance's non-debt Capital A accounts.

Similarly, $2.728 billion has been provided for "liquidity support for growth sustainability" - which represents payments from the Consolidated Fund, which, no doubt, represents the local counterpart funding for the loans to the micro and small-business sectors through the DBJ and EXIM banks for working capital and trade-finance support.

Non-Debt Expenditure

So although the central government's non-debt expenditure allocations amount to $281.4 billion - with non-debt recurrent expenditure of $220.96 billion and non-debt capital expenditure of $60.42 billion - one needs to back out $9.98 billion out of the Capital A expenditures for programmes as noted above. There is also a further carve-out of a $1.5-billion contingency in the non-debt Capital budget that has been set aside for natural disasters. So what is available to the ministries for capital programmes is really around $48.94 billion.

JUTC's Perilous Financial Position

In the recent meetings of the Standing Finance Committee, the Opposition pointed to its concerns regarding the Jamaica Urban Transit Company's financial position and the fact that the Road Maintenance Fund (RMF) will not be able to fully service the loan from the China EXIM Bank for construction and repairs of the island's road network. Questions were raised about the revenue projections of the JUTC - whether these were overly optimistic and the fact that, as currently programmed, the JUTC is projected to expand by a further $620 million, or a 35 per cent increase in its operating deficit position this year - moving from $1.776 billion in FY 2010-11 to $$2.396 billion in FY 2011-12. The accumulated deficit position of the JUTC is projected at $10.9 billion by the end of the current financial year, with accounts payable and accrued charges of $6.2 billion.

Road Maintenance Fund

In terms of the RMF, the fund has a projected net operating deficit of $10.8 billion for this year - with expected revenues of $2.03 billion and expenditure projected at $12.88 billion. RMF expects to receive $1.293 billion of its revenue from the 20 per cent SCT on fuel, with an additional $738 million from its portion of motor-vehicle licence fees. It expects to receive a further contribution of $750 million from the Consolidated Fund - bringing its total revenue overall for the fiscal year to $2.753 billion. But the projected revenue from the fuel tax has been frozen by the Cabinet, and the minister of finance has stated that this position will be revisited by the Government on an as-needed basis. This flies in the face of the original position given to the public with the imposition of the additional tax that initially the RMF would receive 20 per cent of the tax increase, moving to a 35 per cent allocation in the second year and a 50 per cent take thereafter.

At this stage, it is still not clear just how the RMF will be able to finance the US-dollar loan from the China ExIm and the impact that financing obligations will have on the central government's budget going forward.

GOJ's Real Estate Policy

The final point that I'd like to make about the Estimates of Expenditure is that we need to have a clear policy position on the purchase of real estate by the Government and its agencies. In the tabled estimates, there is an allocation of $200 million in the Ministry of Finance for the acquisition of the floors in the Air Jamaica building downtown that were owned by Air Jamaica.

I have suggested to the minister of finance and the minister of labour and social security that it would make more sense for the National Insurance Fund to purchase these floors and then lease them to the Accountant General's Department. The NIF already owns several floors in that building and this would be a more tidy arrangement.

Similarly, in the discussions between the Government of Jamaica and the Government of China regarding the financing of a new Ministry of Foreign Affairs slated to be built on lands adjacent to the Digicel Group offices, again why revisit the issue of who will own the property? In fact, this might be a good time for a reassessment of the entire government real estate portfolio in light of the seeming mandate to get rid of "non-core assets". Let's get a firm and transparent policy on Government real estate acquisition, retention and the policy re the divestment of government properties.

R. Anne Shirley is an economist. Email feedback to columns@gleanerjm.com and renee.shirley@yahoo.com.