Clarke says fiscal discipline paid big dividends

Minister of Finance and the Public Service Dr Nigel Clarke says that a policy of fiscal discipline enabled Jamaica to confront the novel coronavirus-driven economic crisis with substantial buffers and confidence.

“Policy matters, and good policy matters even more, and the discipline to stick to good policy when the going gets rough paid big dividends for Jamaica [in 2020/21],” he said as he delivered the opening speech in the annual budget debate at Gordon House on Tuesday.

Dr Clarke argued that good policies expand opportunities and provide flexibility when there is a need to respond to crisis, and Jamaica benefited from fiscal discipline regarding handling its cash reserves, disaster contingency funding, foreign exchange reserves and keeping debt under control relative to a history of huge debts.

He said that due to these policies, the country was able to enter an economic crisis with substantial buffers, enabling the Government to handle a loss of some $74 billion in revenue with the benefit of some $90 billion in buffers.

In terms of the performance of the cash reserves he said that this was due to fiscal over-performance maintaining that “this is when you manage revenue and expenditure cycles, to achieve better fiscal outcomes than what you planned”.

“We were able to accumulate cash reserves over time, and particularly over the four years prior to the pandemic. Due to the reintegration of public bodies into parent ministries we were able to harvest surplus cash,” he stated.

He said that, for example, when the Government reintegrated the Petroleum Corporation of Jamaica (PCJ) into the Ministry of Science, Energy, and Technology, approximately $6 billion was saved and released into the Consolidated Fund, which finances the annual budget.

He explained that this was possible because the PCJ’s existence, as a holding company, was only justified when it had 13 subsidiaries to oversee. However, by 2020, PCJ only had one subsidiary, having divested, closed, or privatised all the others and so its existence, as an umbrella holding company, could not easily be justified.

“It took courage and leadership to make that decision, and I salute the then minister, the Hon Fayval Williams, for taking that bold step,” he told the House, pointing out that resources in excess of $25 billion were also added to the Consolidated Fund, as a result of the privatisation of Wigton Windfarm and Trans-Jamaica Highway, and inclusive of the refinancing of Wigton’s debt, which retired obligations to the Government.

“I announced with great enthusiasm last year, that we had accumulated significant cash resources that would be used to prepay debt in the amount of four per cent of GDP, which would have reduced our debt ratio to the mid-eighties, creating much-needed fiscal space going forward,” Clarke said.

“Well, COVID-19 intervened and we did not get to do that. But there is a proverb that says ‘preparation is better than good luck’. With close to $90 billion of cash resources, which resulted from thoughtful policy choices, thank God, we were better prepared for this crisis,” he noted.

On the issue of Disaster Contingency funding, Clarke recalled that for the two fiscal years prior to the pandemic, the Government tucked away more resources in the Contingencies Fund than had been placed there in 30 years cumulatively.

“In fact, for 30 years, the Contingencies Fund only had $100 million. In the two years prior to the pandemic, we added $4 billion to the fund, which was only to be drawn down in the event of a disaster,” he told the House.

He also pointed out that when the economy was locked down in the first quarter of the fiscal year, job losses were mounting and there was a need to get the COVID-19 Allocation of Resources for Employees (CARE) Programme payments out, under emergency conditions, the Government was able to draw down on the Contingencies Fund.

Explaining the benefits of cash reserves, Clarke said that the foreign exchange reserves, which the Bank of Jamaica manages on the Government’s behalf, provided assurance to suppliers of goods and services that the country’s firms could pay their external bills when they become due, in order to keep open credit to Jamaican businesses.

“If we had little or no foreign exchange reserves, businesses would not be able to purchase overseas raw material, intermediate or finished goods and we would live a deprived existence. Just prior to this crisis, our foreign exchange reserves were in the region of their highest levels in history. For a long time prior to this, however, a significant stock of our foreign exchange reserves [was] borrowed from investors in the form of certificates of deposits owing to these investors,” he explained.

He said that between 2016 and 2019, the Government increased its non-borrowed reserves by US$1 billion, which placed it in a good position when the crisis hit home.

“Now, Madam Speaker, suppose we had buckled under the pressure, and deviated from policy and it ended up that the central bank spent its precious reserves when there was hollering and shouting in 2018 and 2019, as we transitioned to exchange rate flexibility and inflation targeting?” the minister asked.

“What would have happened to us under these COVID-19 circumstances, when our earnings from tourism collapsed by US$2.5 billion? Where would we be now? Our foreign exchange reserves belong to all Jamaicans,” he insisted.

He said that the foreign exchange reserves “do not exist to achieve a particular exchange rate level, but to protect us in times when our normal inflows of foreign exchange have been interrupted”.

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