No need to dispense with EPOC, Dr Clarke

Sunday, May 13, 2018

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Incompetent fiscal planning and ineffective macroeconomic management have been among the largest contributors to Jamaica's extremely poor record of economic growth.

The institution responsible for fiscal management is the Ministry of Finance which, it must be said, has been staffed by honest, dedicated and hard-working civil servants who should be lauded for doing the best they can.

Unfortunately, however, the fact is that Jamaica's fiscal management has left much to be desired. The factual proof is the large perennial budget deficits and government debt that, up to recently, had topped 150 per cent debt to GDP.

The consequence was destabilisation of the macroeconomic fundamentals as debt-financed government expenditure produced demand-led inflation, inflated imports, pressured the exchange rate, and depleted international reserves.

This in turn prompted the use of increasingly higher interest rates to restrain the demand for foreign exchange and to slow, not stop, the continuous depreciation of the Jamaican dollar. The high interest rates destroyed many viable businesses and, together with oil prices, made the manufacturing sector uncompetitive.

The persistent fiscal mismanagement led to the lack of confidence in successive governments, giving the lingering impression that our governments are incapable of managing the economic affairs of the country.

On and off since the mid-1970s, governments have had to subject themselves to the fiscal discipline imposed by the International Monetary Fund (IMF). It should be noted that the IMF did not require Jamaica to do anything that economic common sense and economic arithmetic did not require.

More than the money that the IMF provided was its seal of good housekeeping. No local or international lender trusted the economic policy pronouncement by the governments of Jamaica, and if they gave the benefit of the doubt they felt Jamaica did not have the managerial capacity to live up to its word. It is for this reason that the independent Economic Programme Oversight Committee (EPOC) was established.

Dr Nigel Clarke, the new finance minister, has announced that a fiscal council will replace the EPOC when the current agreement with the IMF ends in 2019. It will have its own technical capacity, which the Ministry of Finance presently does not. But this still leaves the real problem of the weak technical and managerial capacity of the ministry. This is what needs to be fixed.

First, build up and supplement the technical capacity of the ministry instead of creating a new extra-governmental institution. It is better to prevent fiscal mismanagement than to try to correct it after it has happened.

Second, restore the authority of the Ministry of Finance to control profligate politicians who keeps spending and borrowing. This is a sad reality but it is the job of the ministry to prevent this from happening.

Third, after the current IMF agreement, Jamaica will still have access to the IMF's technical expertise, and the GOJ's ability to not be in an IMF-monitored programme of conditionalities is a statement more powerful than an endorsement from the fund. Once a country is in an IMF programme, it is seen as unable to manage its own economic policy.

And fourth, retain the EPOC. It does not cost the Government any money. It has credibility which a new institution will take time to gain.

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