Jamaica could wipe out its fiscal deficit for the 2013/14 fiscal year if measures announced by the Government achieve the targets set. A primary surplus, the target that has been set, will translate to a surplus before interest cost of around $100 billion. The Minister of Finance spoke of a potential $17 billion savings from the swap out of old loans into loans with lower interest rates that would reduce interest cost to around $100-120 billion.
According to the Minister of Finance, the first debt exchange in 2009 saw the average coupon on outstanding domestic debt decline by an average of 650 basis points to 12.5 per cent. The JDX resulted in $700 billion domestic debt refinanced from an average of 18 per cent to 12 per cent; 25 new benchmark securities replaced 350 illiquid bonds; and 99.2 per cent participation — the highest on record world-wide.
The estimated annual interest cost savings for the Government was projected at $41 billion. In fact the government saved vastly more in the first full year as interest rates fell sharply afterwards.
The new debt exchange earlier in February of this year (JDX2) along with the tax package should see interest rates across the system fall as more funds are taken out of the economy with limited need to borrow new funds. This won’t happen immediately but over the course of the year. This will mean lower borrowing cost but also lower withholding taxes for government. The wiping out or virtual wiping out of the fiscal deficit will mean government will be borrowing no new funds from the local economy and could well repay some to the system.
Pressure will be eased off the Jamaican dollar and people should not be surprised if there is some revaluation of the dollar. The JDX2 debt exchange will not have the same impact as the first one on the business sector. For one, interest rates were in the mid-teens to mid-twenties when the first one was implemented. JDX2 is expected to save $17 million less than the $41 million estimated back in 2009 and is worth far less in real terms as inflation has made the savings worth about 50 percent or so less. Banks are less dependent on government paper for income as they have aggressively expanded their loan portfolio.
The tax package is a poor commentary on the government’s views on increased production and productivity. To add taxes on businesses that our main trading partners don’t have to bear is a direct hit on the country’s competitiveness. Increasing cost on production is clearly not the way to go but that is exactly what’s been done.
All in all, the main objectives of cutting the fiscal deficit quickly are right but many of the methods being implemented are the wrong medicine.
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“To add taxes on businesses that our main trading partners don’t have to bare is a direct hit on the country’s competitiveness”.
I believe you mean ‘bear’?
You are absolutely correct! But we could be ‘bare’ after all these taxes!