Nigel Clarke | Having buffers is vital to sustained development

We are here again, once more. Events beyond our immediate control are projected to have a significantly adverse impact on economic growth, and, by extension on the Government’s revenues. The impact of this growth shock is such that we will need to draw on buffers if we are to achieve planned development objectives while simultaneously maintaining a downward debt trajectory, consistent with Jamaica’s fiscal rules.

External shocks frequently visit Jamaica’s shores. In the past, they also interrupted growth, but buffers to offset the fiscal impact were often unavailable. As such, economic shock would either suspend development or deepen instability through increased debt or both. In the current era, however, the Government’s focus on the pursuit of economic independence, the enhancement of fiscal resilience and the building of buffers, has allowed Jamaica to absorb a significant growth shock this year without compromising development or reversing debt reduction. This should not go unnoticed.

In the first quarter of this fiscal year (April 2024 – June 2024) the economy grew by only 0.2 per cent. The major explanatory factor for the deviation from expectation was the sub-par tourism performance for that quarter. For the previous four quarters, tourism grew by between seven and eight per cent per quarter as compared with same quarter in the previous year. However, for the first quarter of this fiscal year, tourism growth cratered to one per cent which pulled overall growth down considerably. Availability of airline seats into Jamaica declined during the quarter which tourism policy experts link with the earlier unfavourable US Travel Advisory on Jamaica.

If that were not enough, Jamaica was hit by Hurricane Beryl in July. This category 5 storm was the most intense since Hurricane Dean 17 years ago. While we were more prepared than ever before to finance the related emergency relief and recovery costs, Jamaica remained exposed to the impact of this climate event on economic output. Hurricane Beryl decimated agricultural output in the bread basket of the country. Anecdotally too, economic output related to the generation of electricity and water declined and economic activity was disrupted for several weeks.

These developments led the Planning Institute of Jamaica to forecast a decline in economic output, or negative growth, of -2.1 per cent in the July 2024 – September 2024 quarter.

Sadly, this projected quarterly decline in Jamaica’s Gross Domestic Product (GDP) will break the stretch of 13 consecutive quarters of economic growth between the April to June quarter of 2021 and the April to June quarter of 2024. Let us recall that it was the COVID-19 induced shock, that broke 20 consecutive quarters of economic growth (the 20th quarter was flat) between the January to March quarter of 2015 and the October to December quarter of 2019.

GOOD NEWS

The good news is that these represent the two longest periods of consecutive quarterly economic growth since Jamaica started measuring growth quarterly 27 years ago. While the Government’s economic reforms have not yet delivered an increase in the absolute level of average growth, Jamaica’s reforms have undoubtedly delivered a much greater stability of growth.

But back to 2024. With a growth outturn of 0.2 per cent in the first quarter and a projection of -2.1 per cent in the second quarter, it will be difficult to recover lost ground in the third and fourth quarters at a level that fully offsets the negative growth shocks. As such, the PIOJ is forecasting that Jamaica will therefore experience an economic contraction of -0.2 per cent for the full 2024/25 fiscal year. This compares with prior growth projections of 1.8% for the fiscal year. The growth shock therefore represents a huge two percentage point deviation!

Tax revenues, for the most part, bear a relationship of proportionality to economic output. The higher the level of economic output, the higher tax revenues are likely to be. The converse is also true. Economic decline drags tax revenues lower. Given that our economy exceeds $3.2 trillion in size, a growth shock of two percentage points potentially represents a profoundly significant adverse revenue impact of over $64 billion on an annualised basis. A growth shock, therefore, quickly becomes a fiscal shock.

Faced with a fiscal shock of this magnitude, without buffers, the Government would have had the unenviable choice of borrowing more, thereby compromising Jamaica’s debt trajectory (which would make Jamaica more vulnerable to economic shocks in the future) or delaying major development projects in health, transportation and/or roads, in an effort to adjust one-off expenditure to fit the updated revenue profile. That is where buffers can come in.

SHOCK ABSORBERS

Jamaica’s buffers, or shock absorbers, this fiscal year primarily consists of having $75 billion of inflows from the successful execution of the Government’s first securitisation in international capital markets. In this transaction Jamaica generated resources by selling its share of revenues from the recently privatised Norman Manley International Airport.

The parallel with the much more serious COVID-19 economic shock is worthy of inclusion. Immediately prior to that historic shock, the Government had harvested substantial inflows from a series of transactions involving the privatisation of Wigton Windfarm and Trans-Jamaica Highway that included historically large initial public offerings on the Jamaica Stock Exchange. While these flows were initially intended for an explicit acceleration of debt repayment, they instead assisted Jamaica in maintaining a modest fiscal deficit in 2020, as compared with peers, even after accounting for plunging Government revenues and surging COVID-19 related expenditure. The proceeds of these transactions were vital to Jamaica’s debt reduction in the sense that they limited the country’s reliance on borrowings to finance our way through the difficulties of 2020.

In 2024, transaction inflows will again come to Jamaica’s assistance at a time of external economic shock. Despite the projected GDP contraction this year, Jamaica will still be able to maintain its flagship infrastructure development programs e.g. the SPARK (road improvement) Programme, the REACH road improvement programme, the buildout of multiple hospitals, and further investments in public transportation. Despite the projected GDP contraction this year, we still maintain a balanced budget and Jamaica’s debt/GDP ratio is projected to fall from 72 per cent to 67 per cent by the end of this fiscal year, the lowest level in nearly 50 years.

This is fiscal resilience in action. Without these transaction inflows none of the above would have been possible this year in light of this sizeable economic growth shock. We are sustaining development, even while passing through the valleys of repeated growth set-backs this year.

So what are the lessons?

Clearly, we had no premonition of COVID-19 when we planned and executed on the series of Wigton and Trans Jamaica transactions in 2019 and early 2020. Similarly, we would not have been aware of Hurricane Beryl when we embarked on the securitisation transaction process more than a year ago.

So first, it is always helpful to maintain a disposition towards the harvesting of resources. In times of adverse GDP shock – as in COVID-19 and Hurricane Beryl – these can be strategically deployed to preserve fiscal sustainability through crisis and as an alternative to debt accumulation. And in benign times these resources can be used to generate further fiscal space by reducing debt.

The second lesson is that the experience this year is yet another timely reminder of Jamaica’s vulnerabilities and the pernicious fiscal exposure that arises from these vulnerabilities. The lessons cannot be clearer. If Jamaica is to experience uninterrupted, sustained development as an independent country we must maintain low debt, adequate foreign exchange reserves, strong economic institutions and fiscal buffers.

Third, having built a disaster risk financing framework we must maintain it. However, the Government will need to improve physical resilience too by having disaster proofed power supply for water storage, processing and distribution systems, for telecom towers, as well as better drainage and more resilient road infrastructure.

Fourth, we will need to enhance our GDP resilience. Our economic base is too narrow. We are over-reliant on a few sectors for most of Jamaica’s foreign exchange: tourism, business process outsourcing, agriculture and mining. We must seek to further diversify over the next decade.

Jamaica has a strong privatisation and transaction pipeline that, if strategically executed, will help to continue enhancing resilience and building buffers for sustained development and economic stability. Policymaking must be deliberate. Given Jamaica’s vulnerabilities, complacency is not an option.

Dr Nigel Clarke is minister of finance and the public service, and member of parliament for St Andrew North West. Send feedback to opedjamaica@gmail.com or columns@gleanerjm.com