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published: Sunday | January 27, 2008
Edward Seaga, Contributor
I breathed a deep sigh of relief when I heard Prime Minister Bruce Golding announced definitively in his post-Cabinet retreat press conference that the fuel of choice for Jamaica in the future would be liquefied natural gas (LNG), not coal.
LNG is the second cheapest of th fuels available to Jamaica, the cleanest, producing very little carbon pollution of the atmosphere, and does not have a limitation on future supplies, as does oil.
The comparative costs of the three types of fuel are:
US$ cents/kilowatt hour
Fuel Fuel Cost Non-Fuel Cost Total
Coal 3 4.5-5 7.5-8
LNG 2 8 10
Oil (2006) 13.89 9.7-5 23.64
Energy is currently the most critical issue of the world economy. Finding the right choice of fuel to produce electricity at less than half the current cost will bring substantial benefits for the future of Jamaica.
The overall Jamaican economic scenario, however, is not as straightforward as the energy component. The local economy has always been vulnerable to external shocks which batter the stability of the macroeconomy. This is currently the threat.
The United States economy - with which the Jamaican economy is deeply interlocked in imports/exports, tourism, remittances and other financial flows - is facing a possible recession due to the collapse of the sub-prime mortgage market.
Mortgages
Sub-prime mortgages are those which are not fully securitised. A weakening of the economy impacting on the ability of those home- owners to service their mortgages would result in non-payment and the sub-prime group being treated as bad loans.
The value of these bad loans held by banks was at first estimated at US$150 billion, but more recently at US$500 billion, and still climbing. The losses suffered by the banking sector are creating tighter credit conditions for the future and prejudicing growth.
It could be said that the banking regulations of the U.S. economy, which would be expected to be tight, were not so resistant to bad banking practices after all.
The same type of failure occurred in the late 1970s to early 1980s, when the U.S. economy experienced the worst recession since the Great Depression of 1930, partly because it removed loan ceilings for lending by small banks which went wild with new loans. The result was hundreds of billions of dollars of bad loans.
It might be considered that this is an American problem, not affecting Jamaica. That was not the case in the 1980s, nor will it be the case now if there is a recession. In the 1982 recession, bauxite/alumina exports from Jamaica were cut in half, and since this was the source of 75 per cent of our foreign exchange earnings and 30 per cent of the total revenues, the result was devastating to the Jamaican economy.
A study done by Paul Chen Young and Associates showed that if there was no recession and the bauxite/alumina industry had remained at the same level of production of 1980, without any growth, the economy would have averaged a staggering 7.25 per cent per annum growth, instead of -2.1 per cent negative growth, over the first half of the decade, which was the problem period.
Successful strategy
The period 1982-85 was used to structurally adjust the economy to ensure that the singular dependence on bauxite/alumina for most of our foreign exchange earnings would not continue. Other sectors were strengthened, notably tourism, to carry some of the load. This adjustment of the external earnings sector succeeded. Today, we see the wisdom of that strategy.
The other pillar of adjustment at that time was the Stabilisation Programme of the International Monetary Fund to bring the fiscal account under control.
In 1980, the fiscal deficit was 17 per cent of GDP. It took six years to wipe out that deficit at which time budget-spending no longer exceeded the revenue earned.
This was done with the application of harsh measures which concentrated on decreased expenditure, moreso than increased revenue in order not to create a disincentive to growth. The principal areas of reduction were in the staffing level of the public sector. In 1974, total employment in the public sector was 76,000. One year later, in 1975, the year before the general election of 1976, employment was increased to 98,500. Between 1984-1986, 27,000 posts were cut in the public sector, reducing the total to 71,500, even less than the 1974 level.
Public Sector Employment - Public Sector Employees>
1974, 1975, 1984-86
76,000, 98,500, 71,500
This raises the question as to how the economy was able to grow in the last half of the 1980s, with 27,000 fewer public sector employees, yet in the 1970s, with 21,000 more employees, produced negative growth annually. This points to a direction which needs to be examined for the future. I recall that around 1997 or 1998 it was disclosed that between attrition and voluntary redundancy the public service could be reduced by 14,000 from the more than 100,000 then employed.
There is little purpose to be served in projecting growth and debt reduction unless there is a radical restructuring of the economy to cut expenditure and to boost revenue.
The single greatest impediment to growth is the lending rate of the commercial banking system. With lower rates there could be more development, as many projects not considered feasible with high interest rates could become feasible.
Commercial banks in Jamaica have the highest of all the lending rates in CARICOM countries. The table (below) makes the comparison of lending rates of CARICOM countries in 2006.
Lower lending rates do not necessarily mean less profitability for banks. Lower rates would result in more lending and more profit which would compensate for the lower rates. Greater lending would create more economic growth and more jobs.
Why are interest rates so high in Jamaica? The main reason is that Government policies support high rates by borrowing heavily in Jamaica, which sops up liquidity in the banking sector, curtailing inflationary pressures.
But this excess liquidity would put pressure on banks to lower interest rates, reducing the cost of goods and services, and also price inflation.
Wage inflationary pressure would also be decreased by reduced price inflation. If credit restrictions were used to ensure that excess liquidity was not unduly used for consumption instead of production, growth would be assured.
It seems to me that there is room for study here, as the reduction of interest rates would be the greatest stimulant and strongest incentive to move the economy forward.
Without structural adjustment of the economy, tinkering will produce the same stagnant pattern of projections which are not achieved and expectations which do not grow. With tough times ahead tough steps should be considered.
CARICOM Commercial banks percentage lending rates 2006
Countries Average Rates (%)
Antigua & Barbuda 10.0-11.9
Barbados 10.2-10.8
Dominica 8.5-10.0
Grenada 8.5-10.5
Guyana 14.5
Jamaica 21.9
Saint Lucia 9.5-10.0
St. Kitts & Nevis 8.5
Suriname 9.0
Trinidad & Tobago 9.5-11.8
St. Vincent 9.0-11.0
The Bahamas 6.0
Edward Seaga is a former prime minister. He is now a Distinguished Fellow at the UWI. Email: odf@uwimona.edu.jm.
Edward Seaga, Contributor
I breathed a deep sigh of relief when I heard Prime Minister Bruce Golding announced definitively in his post-Cabinet retreat press conference that the fuel of choice for Jamaica in the future would be liquefied natural gas (LNG), not coal.
LNG is the second cheapest of th fuels available to Jamaica, the cleanest, producing very little carbon pollution of the atmosphere, and does not have a limitation on future supplies, as does oil.
The comparative costs of the three types of fuel are:
US$ cents/kilowatt hour
Fuel Fuel Cost Non-Fuel Cost Total
Coal 3 4.5-5 7.5-8
LNG 2 8 10
Oil (2006) 13.89 9.7-5 23.64
Energy is currently the most critical issue of the world economy. Finding the right choice of fuel to produce electricity at less than half the current cost will bring substantial benefits for the future of Jamaica.
The overall Jamaican economic scenario, however, is not as straightforward as the energy component. The local economy has always been vulnerable to external shocks which batter the stability of the macroeconomy. This is currently the threat.
The United States economy - with which the Jamaican economy is deeply interlocked in imports/exports, tourism, remittances and other financial flows - is facing a possible recession due to the collapse of the sub-prime mortgage market.
Mortgages
Sub-prime mortgages are those which are not fully securitised. A weakening of the economy impacting on the ability of those home- owners to service their mortgages would result in non-payment and the sub-prime group being treated as bad loans.
The value of these bad loans held by banks was at first estimated at US$150 billion, but more recently at US$500 billion, and still climbing. The losses suffered by the banking sector are creating tighter credit conditions for the future and prejudicing growth.
It could be said that the banking regulations of the U.S. economy, which would be expected to be tight, were not so resistant to bad banking practices after all.
The same type of failure occurred in the late 1970s to early 1980s, when the U.S. economy experienced the worst recession since the Great Depression of 1930, partly because it removed loan ceilings for lending by small banks which went wild with new loans. The result was hundreds of billions of dollars of bad loans.
It might be considered that this is an American problem, not affecting Jamaica. That was not the case in the 1980s, nor will it be the case now if there is a recession. In the 1982 recession, bauxite/alumina exports from Jamaica were cut in half, and since this was the source of 75 per cent of our foreign exchange earnings and 30 per cent of the total revenues, the result was devastating to the Jamaican economy.
A study done by Paul Chen Young and Associates showed that if there was no recession and the bauxite/alumina industry had remained at the same level of production of 1980, without any growth, the economy would have averaged a staggering 7.25 per cent per annum growth, instead of -2.1 per cent negative growth, over the first half of the decade, which was the problem period.
Successful strategy
The period 1982-85 was used to structurally adjust the economy to ensure that the singular dependence on bauxite/alumina for most of our foreign exchange earnings would not continue. Other sectors were strengthened, notably tourism, to carry some of the load. This adjustment of the external earnings sector succeeded. Today, we see the wisdom of that strategy.
The other pillar of adjustment at that time was the Stabilisation Programme of the International Monetary Fund to bring the fiscal account under control.
In 1980, the fiscal deficit was 17 per cent of GDP. It took six years to wipe out that deficit at which time budget-spending no longer exceeded the revenue earned.
This was done with the application of harsh measures which concentrated on decreased expenditure, moreso than increased revenue in order not to create a disincentive to growth. The principal areas of reduction were in the staffing level of the public sector. In 1974, total employment in the public sector was 76,000. One year later, in 1975, the year before the general election of 1976, employment was increased to 98,500. Between 1984-1986, 27,000 posts were cut in the public sector, reducing the total to 71,500, even less than the 1974 level.
Public Sector Employment - Public Sector Employees>
1974, 1975, 1984-86
76,000, 98,500, 71,500
This raises the question as to how the economy was able to grow in the last half of the 1980s, with 27,000 fewer public sector employees, yet in the 1970s, with 21,000 more employees, produced negative growth annually. This points to a direction which needs to be examined for the future. I recall that around 1997 or 1998 it was disclosed that between attrition and voluntary redundancy the public service could be reduced by 14,000 from the more than 100,000 then employed.
There is little purpose to be served in projecting growth and debt reduction unless there is a radical restructuring of the economy to cut expenditure and to boost revenue.
The single greatest impediment to growth is the lending rate of the commercial banking system. With lower rates there could be more development, as many projects not considered feasible with high interest rates could become feasible.
Commercial banks in Jamaica have the highest of all the lending rates in CARICOM countries. The table (below) makes the comparison of lending rates of CARICOM countries in 2006.
Lower lending rates do not necessarily mean less profitability for banks. Lower rates would result in more lending and more profit which would compensate for the lower rates. Greater lending would create more economic growth and more jobs.
Why are interest rates so high in Jamaica? The main reason is that Government policies support high rates by borrowing heavily in Jamaica, which sops up liquidity in the banking sector, curtailing inflationary pressures.
But this excess liquidity would put pressure on banks to lower interest rates, reducing the cost of goods and services, and also price inflation.
Wage inflationary pressure would also be decreased by reduced price inflation. If credit restrictions were used to ensure that excess liquidity was not unduly used for consumption instead of production, growth would be assured.
It seems to me that there is room for study here, as the reduction of interest rates would be the greatest stimulant and strongest incentive to move the economy forward.
Without structural adjustment of the economy, tinkering will produce the same stagnant pattern of projections which are not achieved and expectations which do not grow. With tough times ahead tough steps should be considered.
CARICOM Commercial banks percentage lending rates 2006
Countries Average Rates (%)
Antigua & Barbuda 10.0-11.9
Barbados 10.2-10.8
Dominica 8.5-10.0
Grenada 8.5-10.5
Guyana 14.5
Jamaica 21.9
Saint Lucia 9.5-10.0
St. Kitts & Nevis 8.5
Suriname 9.0
Trinidad & Tobago 9.5-11.8
St. Vincent 9.0-11.0
The Bahamas 6.0
Edward Seaga is a former prime minister. He is now a Distinguished Fellow at the UWI. Email: odf@uwimona.edu.jm.
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