Building a Better Jamaica

Prime Minister of Jamaica, Hon. Bruce Golding

In recent broadcasts, I have spoken about the problems facing us as a country, problems that have been so terribly aggravated by the global recession but problems which existed and had accumulated long before the recession.

Every year for many years, we have been spending more than we earn. Every year, we have to borrow to make up the difference, so, each year, the debt gets bigger and bigger and each year we have to set aside more money to pay the interest on that debt.

As I told you last month, for the last 10 years, all of the taxes we collect have had to be used to service that debt. So, before we can pay one teacher or nurse or policeman, before we can patch one pothole, before we can put one bottle of medicine in our hospitals or provide one school lunch for a needy child, we have to borrow more money, piling up the debt even further and the cost of servicing that debt even higher.

We have had to raise taxes to narrow that gap. I know how hard this is on you, especially the poor and low-wage workers who struggle every day to make ends meet, the middle class who work hard to achieve the standard of living they deserve. But without those additional taxes, we would have to start shutting down schools and hospitals because we wouldn’t have the money to keep them going.

As necessary and unavoidable as these additional taxes are at this time, we can’t tax our way out of our problems. There has been a loud cry for the burden that must be borne at this time to be shared more equitably. That is why we withdrew the tax measures announced on December 15th and replaced them with a package that was more evenly spread.

There was a call for us to impose a special tax on the interest income earned by the banks and other financial institutions from government bonds. Holders of government bonds have made huge profits because of the high interest rates that the government has to pay – some as high as 28%. The cost of these bonds is a big burden on the government’s budget. It is costing the government $182 billion this fiscal year to pay the interest alone on these bonds.

We can’t blame the banks. It is government’s heavy borrowing that has resulted in the banks reaping so much income from government. It is the government’s continuing fiscal deficits that cause the interest on those bonds to be so high – among the highest in the world!

When the call was made to “tax the banks”, I pointed out that that wasn’t the way to address the problem. It would have raised some money to help the government to meet the burden of interest payments but it wouldn’t reduce the burden itself.

What is more, it would have kept interest rates high forcing government to borrow more to meet those payments. High interest rates and heavy government borrowing are a big part of what is stifling the economy. Let me explain this.

There are businesses and individuals who want to start or expand a business. They have good, sensible ideas that would create jobs and increase production but they don’t have the money to get going, so they need to borrow. But when interest rates are high, they can’t borrow because the business cannot afford to pay those high interest rates; they would not be able to compete.

High interest rates hurt us in another way. There are some businesses and individuals who have money that they need to invest; they don’t need to borrow. But when interest rates are so high and government is hunting so much money to borrow, it suits them better to invest that money in government bonds rather than in a business that would create jobs. So, the youngster leaving school who might have been able to get one of those jobs finds himself on the scrapheap of unemployment.

The strategy, therefore, must be to reduce interest rates so that the burden on the budget can be eased, so that the government doesn’t have to borrow so much money to meet those payments, so that more businesses and individuals will find it possible to borrow and invest, do business and create jobs.

For several months, Minister Audley Shaw and his technical team along with advisors from Citi Corps of New York have been working on a new debt management strategy that would see a reduction in interest rates and a reduction in the cost of interest payments. We have completed that work and tomorrow we will launch a Debt Exchange Programme that is a critical part of an economic programme designed to steer the economy out of the recession and into a new era of opportunity for sustained growth.

Let me explain how this programme will work and then I will say something about the Medium Term Economic Programme of which it is such an integral part.

There are $700 billion of domestic government bonds. This is more than a half of the country’s total debt. These bonds carry varying interest rates ranging up to 28%. As I said before, it is costing us $182 billion to pay the interest on these bonds.

Tomorrow, we will formally invite the holders of these bonds to exchange them for new bonds that will carry much lower interest rates and extended maturities. The offer will be open until January 26th and the actual exchange transaction must be completed by February 16th. The principal amount of these bonds will be fully honoured. There will be no “haircut”. In other words, someone who tenders a $100 bond will receive in return a new $100 bond but at a lower interest rate and an extended maturity date.

Those financial institutions that participate fully in the programme will be assured of the support of the Government in any adjustment that they need to make. We have the full support of the IMF, World Bank and IDB and a special fund will be established to assist those financial institutions to ensure financial system stability.

I have spent the last few days briefing the key stakeholders – leaders in the financial sector, the members of the Opposition, trade unions, private sector leaders as well as the media.