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Do not ignore the value of small businesses in achieving 5-in-4

BY HUGH GRAHAM

Sunday, November 05, 2017

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Four months shy of two years since taking office, the Jamaica Labour Party's 5-in-4 plan is yet to prove beneficial to small businesses, which are the true catalysts for economic growth and development.

The current malaise in which the economy continues to operate is mired directly related to hindrances posed to entrepreneurs and business owners. Small businesses continue to struggle, having to eke out a living with thin profit margins, high taxes and fees ,and rising cost of operating business.

The Jamaican economy grew by 0.3 per cent in the April to June quarter compared to 1.4 per cent for the corresponding period last year. The Planning Institute of Jamaica (PIOJ) projected real GDP growth of one to two per cent for the quarter ending in September 2017.

While this growth would be commendable in comparison to that of the corresponding quarter in 2016, the 2017/2018 fiscal year is not expected to grow beyond 2–3 per cent, PIOJ Director Dr Wayne Henry said at the end of May this year. And even so, this projected increase depends on whether the goods-producing and services industries see increases.

Small and medium-sized businesses largely make up the goods-producing and services industry. Recent figures from the Companies Office of Jamaica show that there are approximately 130,000 registered business names in Jamaica. However, this sum pales in comparison to the 300,000 small businesses estimated by the Medium Small and Micro Enterprises (MSMEs) to be operating in Jamaica.

Many of these businesses are not formalised and include truckers, customs brokers, livestock and cattle farmers, craftsmen and women, fish farmers, hairdressers, creative arts industries, just to name a few.

These businesses continue to face obstacles, and if no concrete plan is put in place to stimulate and boost their growth, the country runs the risk of significantly losing out on the potential growth and development that small businesses can spur.

Aside from not being formalised, these businesses continue to face several challenges.

The depreciation of the Jamaican dollar, which the Minister of Finance Audley Shaw has quietly ignored, paints a stark picture of what these businesses face as they have to use foreign exchange, or its equivalent, to not only conduct business, but also pay some of the fees as Government charges. The exchange rate has fluctuated between $130-128 for U$1 (selling) at present.

While it appears that Jamaica's GDP has grown, it is important to note that this growth is particularly attributed to increase in construction activities (PIOJ).

I was looking to see where data compiled showed that small businesses are to be credited for increases. However, such a search is in vain as small businesses, although having the potential to make a big impact, are not disaggregated in the data from the PIOJ.

The hindrances to small businesses, which increased this year with tax measures imposed in the 2016/2017 budget, have seen many closing their doors, as operating a business has become unsustainable, due to increased cost of electricity and fuel, and even difficulties with increased insurance costs related to employees.

Recently there have been complaints lodged by customs brokers regarding the imposition of penalties on goods which miss the third appointment for clearing at the Kingston Freeport Terminal.

What the Government has failed to recognise is that imposing penalties such as this (US$100) has a direct impact on the cost of doing business and employment. If a business incurs additional costs, it needs to recover said cost, usually through product pricing.

This is where things get tricky as customers are forced to pay more for goods whilst their disposable income does not increase. Businesses end up suffering, and when they have to cut back or let employees go there is a greater cost to the Government.

It is already noted that Jamaica has the second-highest customs duty rates in the world, according to audit firm UHY Dawgen.

In 2015, the firm said customs duties in Jamaica are among the highest in the world, imposing a levy of 1.61 per cent of its gross domestic product. Jamaica is second behind Nigeria, and India is third. The economies and production output of these countries are significantly larger than Jamaica's.

While it is understood that import duties are a sort of protective measure for the local industry, the bevy of taxes to be paid to Jamaica Customs remains high, and for small businesses it is unreasonable.

A quick check on the Jamaica Customs website shows that the number of taxes to be paid for the clearing of an imported shipment numbers between nine and 12 separate taxes.

A small business, with limited capital, that manages to somehow procure their goods ends up in difficulty to clear those goods when faced with these taxes. What ends up happening is goods remain stuck on the wharf incurring additional storage fees, penalties charged in American dollars etcetera.

Don't get me wrong, businesses ought to pay taxes, but taxes shouldn't be an albatross around the necks of small businesses which are needed to help to boost the economy.

The solution to this is pretty simple: Develop an across-the-board system to look at reducing these taxes for small businesses that are paying appropriate taxes and complying with the regulations in place. This would incentivise small businesses which are faced with a host of other operational costs.

The 2013 Ernst & Young G20 Entrepreneurship Barometer study on the needs of global businesses noted that countries that offer favourable tax rates simplify procedures and provide entrepreneurial support will enjoy a high number of start-ups, which eventually leads to employment and a rise in the standard of living of its citizens.

Taxes are not the only concern. There also needs to be a focus on building and creating space in which businesses can operate.

Government can either facilitate private development of these spaces or they can build these spaces. The lack of commercial space forces business owners to pay significant portions of their earnings in rent and utilities. New Kingston is a prime example, where rent is not only high but space is restrictive. Expansion is important to growth.

The much-touted and long-awaited redevelopment of downtown Kingston may provide some much needed space to spur growth and development.

We need more focus on building commercial space in the same vein as residential space. The recent announcement that the Government will be building housing units in New Kingston, ranging in prices from $16 to $22 million per unit, may provide opportunities to create commercial space alongside this development.

A good opportunity for developers is the building of warehouses and factory space. The PIOJ, having recognised that construction is helping the economy to grow, should perhaps encourage Government to make available State lands for the construction of factory, warehouse and commercial space.

This would certainly create investment opportunities and even the playing field where rent is considered high and a negative factor in expansion for businesses in certain areas.

Governments in recent times have delved into the National Housing Trust coffers for budgetary support. The time may now be ripe for the real development of a lending facility for small businesses, even if it is in collaboration with the Development Bank of Jamaica to ensure compliance.

Precedence certainly exists for such interventions. Look at Silicon Valley in the United States where businesses were encouraged to move to the area where they enjoy specific benefits as start-ups.

Even earlier this year, President Donald Trump proposed a cut in corporate tax, from 35 per cent to 15 per cent, to encourage US businesses domiciled overseas to return home.

Moves like these create the space for companies to be innovative and expand. The possibilities are endless, as we can see from the creations of Facebook, Apple, Uber and Airbnb, which are now large and powerful companies with global impact and operations.

As the year winds down, there is uncertainty as to what the spending for Christmas will be like, but that worry is nothing compared to the apprehension businesses feel as they prepare to hear from the finance ministry the new budget measures for the 2018/2019 year.

It is my sincere hope that consideration is given to reviewing the needs of small businesses that will address any questions as to the utility of doing business in Jamaica.

Will the Government kindly outline measures to show how small businesses are expected to contribute to the overall 5-in-4 plan as we enter another budget year?

In addition to the taxes imposed in this fiscal year, what new measures will be put in place for businesses?

It is my position that the Government is well intentioned in focusing on a five per cent growth in four years, which is possible, but only if it creates the right conditions for growth.

The engine of growth in any modern economy are the MSMEs. Neglecting to create the proper conditions for small businesses to thrive is inimical to this ambitious plan.

I urge Finance Minister Shaw to consult, where possible, with business owners regarding the upcoming budget as, much like him, we are also intent on growing the economy, creating jobs and improving the livelihoods and standard of living of ourselves, our families and our employees.

Hugh Graham is a businessman and councillor.

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