Densil A. Williams | COVID-19 after-shocks: Is Jamaica ready?
As Jamaica signs off on Budget 2020-2021, we are still uncertain whether we will be able to withstand the economic onslaught that will accompany the crisis in the years to come.
It is clear that this pandemic is like none other that we have seen before, and there are many unknowns, which makes it even more difficult to plan. However, from the sign of things today, what we can say is that the global economy will see a massive slowdown if the pandemic continues for the next 12 weeks.
Already, we have seen governments across the world proposing massive stimulus packages to combat the economic fallout. The United States is leading the way with over five per cent of its gross domestic product (GDP) committed to stimulus programmes on the fiscal side and the Federal Reserve cutting interest rates on the monetary side to boost investments in a bid to stave off the expected downturn in aggregate demand.
Similarly, countries in Asia such as Japan, China, and others are doing likewise and also those in the Eurozone. Closer to home, Barbados has announced a fiscal stimulus package of over US$75 million, which is about 1.6 per cent of its 2019 GDP.
In his Budget presentation on March 19, 2020, Prime Minister Andrew Holness announced a plan of J$25 billion, or US$183 million, as a stimulus for Jamaica, which is 1.2 per cent of its 2019 GDP. Although, curiously, J$13 billion of this is from a nine per cent reduction in the rate of general consumption tax, which had nothing to do with a stimulus package for COVID-19. So, technically, direct stimulus for COVID-19 is merely J$12 billion, or US$87.9 million, or 0.6 per cent of GDP. While this is an important step in the right direction, this stimulus package will be woefully inadequate to deal with what is to come.
Expectations for economic activities
Since the partial shutdown of the economy in early March when Jamaica reported its first case of the virus, the signs have been clear that it will not be business as usual. Every single sector that has contributed to the paltry economic growth of 0.1 per cent in the fourth quarter of 2019 calendar year has been affected by the measures put in place to contain the further spread of the virus. Activities in the retail trade, tourism, manufacturing, restaurants and bars, construction, everywhere, have seen a slowdown in business operations. And since we are still in the uncertain zone as to when the containment measures will be lifted, we can safely say that the slowdown in these activities will continue for a good while because it will take some time for things to get back to normalcy.
Expect tax revenue declines
Therefore, we should expect to see a decline in tax revenues, increased unemployment, rise in poverty levels, and, ultimately, a reduction in our GDP. We cannot pronounce on the magnitude of the decline as yet as we still need to hear the GOJ’s full response to the economic fallout using both fiscal and monetary policy tools to further stimulate aggregate demand when the crisis is over.
Despite the stability in the macro-economy, what we do know from seeing the declining trend in economic growth over the last four quarters of calendar year 2019 is that the GOJ does not have a war chest of cash to throw at any massive fiscal stimulus to the tune of the five per cent of GDP like the United States. For in the coming months, GOJ revenue will be under severe stress owing to fall-off in GCT, trade taxes, and other sources that normally contribute to the revenue stream.
It is, therefore, surprising to me why the GOJ, despite seeing the signs on the wall, would have continued with the announcement of the reduction in GCT as part of the 2020 Budget. The aim clearly was to stimulate consumption as one of the levers of aggregate demand if things were normal. However, with the massive change since March 10, 2020, the new normal of social distancing, fewer night-outs, and conspicuous consumptions, GCT reduction will not have the desired effect. It would, therefore, have been better that the GOJ not give up this revenue and, instead, protect that source and use it to invest in critically needed equipment and other things in the healthcare system.
The GCT rollback could be delayed. The banks clearly got it right when they agreed to waive their asset tax give-back and sent it to the COVID stimulus fund. So on the fiscal side, we should not expect the GOJ to come with any major cash package to stimulate the economy post the crisis. For we do not wish to go back to the days of running huge fiscal deficits and create instability in the macro-economy.
One way to move the fiscal stimulus package in any significant measure is to lobby the multilateral financial institutions (MFIs) to provide budgetary support and not the traditional balance-of-payments support to which they are accustomed. This, more than likely, will have to come in the form of grant support and not debt as, again, we have to be careful that we do not reverse the steady downward trend for the debt-GDP ratio. Jamaica has proven that it can be responsible in its economic management, so the MFIs should be more confident to engage with us and provide necessary resources to assist with the stimulation of the local economy post this pandemic. It will require steady leadership and adroit negotiations to get this done, but it is not beyond us to do it.
Another option the GOJ needs to look at is the use of monetary policy to stimulate the investment lever in aggregate demand. The central bank will have to loosen monetary policy even further so that interest rates can come down and also ensure that the transmission mechanisms work so that this benefit of a reduced interest rate reaches the real economy and not just those who carry out portfolio investments. Similarly, for this to work, it is urgently required that the GOJ address the bureaucracy to make it much more efficient to ensure that investments can flow more quickly and efficiently in order to spur jobs, tax revenues, and ultimately, economic growth.
From where things stand today, Jamaica will be in for a rough ride post the pandemic. The longer the pandemic stays with us, the more severe will be the aftershocks on the macro-economy. With so many ordinary Jamaicans investing their small wealth in the stock market, especially through the GOJ two major assets listing – TransJamaican Highway and Wigton Windfarm– with the bear market now taking shape, these ordinary persons will see a fall in their wealth, and with the prospect of unemployment being real, it can be a rough ride for many of them. Now is the time to hear from the GOJ the plans and strategies that are being considered to ensure that the effects of the aftershock are not as devastating as the signs are showing.
Densil A. Williams is professor of international business at the UWI. Email feedback to firstname.lastname@example.org.