The Ministry of Finance (MoF) recently created a COVID-19 Economic Recovery Task Force whose mandate was identifying and examining the impact of COVID-19 on the different sectors of society, while also providing actionable suggestions to improve on these areas. This tasks force was comprised of individuals from the private sector, public sector, civil organisations and trade unions spanning multiple industries and positions of leadership. This collective pool of resources compartmentalized into sub-committees with specific areas of focus allowed for a comprehensive overview of the current state of Jamaica’s economy, the impact COVID-19 had, and the required measures needed to improve on these sectors. This week, we’ll examine some of the critical insights we believe are necessary for piecing together an image of what Jamaica in a post-COVID era will look like, and what it may take getting there.
Where is Jamaica vulnerable?
Truthfully, no industry went unscathed due to COVID-19, and this was exemplified in Jamaica’s context due to the deep interconnectivity of our economy. Also, the significant dependency on external forces, given that Jamaica is a net importer of goods and services also compounds our issues. Based on the report, the government’s revenue was significantly impacted by the closure of our borders as approximately 40% of tax revenues collected are from border-related activities. With lower productivity within the economy, firms would generate lower corporate earnings; hence lower taxes would also be collected by the government. This issue was further compounded as the entities would have decreased their staff complement to align with the new level of business activity; hence lower Pay As You Earn (PAYE) tax revenue was generated, another significant component of the government budget. The estimated revenue fallout is expected to be J$81 billion, while the estimated cost of the COVID-19 bill is J$120 billion. The financing for this amount was supported by multiple sources including i) cash resources of approximately J$70 billion previously earmarked for debt repayment and ii) reduction in approved expenditure by about J$50 billion. The use of the COVID Allocation of Resources for Employees (CARE) Programme to allow companies to retain their staff also cost J$4.2 billion, taken from Contingency Fund that was recapitalized to the tune of J$4.6 billion before COVID. These developments show the magnitude of the impact COVID-19 had on Jamaica.
At the industry level, all were affected and with specific implications. The most direct impact was in the Tourism industry, which accounts for approximate 10% of Jamaica GDP output. This 10% sounds small, but when one considers the interconnectivity of the Tourism sector in Jamaica economy, this 10% has a lot more weight. Considering the Agricultural Industry is the major supplier of produce to the hotels and restaurants, with the closure of these establishments, the agriculture industry would have been stalled. With Jamaica already having weak trade competitiveness, the ability to pivot to outside markets was also muted. This, in effect, led to the laying off individuals in both the tourism and agriculture sector. Considering also that Jamaica’s total employment level is 47% informal (excluding agriculture), this again shows the weakness in the economy. The provider of capital to both these sectors is the Financial Industry who would now have to prioritize liquidity management due to COVID-19. To the extent that their borrowers are unable to repay their loans due to the current pandemic, these financial intermediaries would experience higher loan loss provisions. Reduced capital market activities, showcased in the somewhat horizontal trading of our local stock market, reduces the levels of fees and commission that are generated by these institutions. As lower revenues are made, and higher costs are to be expected, lower earnings will be created and hence lower tax payable to the government. This is the deep interconnectivity of our local economy that stems from just tourism. We have yet to consider the implications COVID-19 had on industries such as construction, real estate, entertainment and recreation, and mining.
So what’s the solution, how do we move forward?
The answer to this question is, collectively. No man is an island, and this is truer now than before when we examine the interconnectivity of our domestic industries and Jamaica’s vulnerability to the global economy. The recommendations made to enable each industry to necessarily return to and improve on the pre-COVID levels has technology at the root of it. The digitization of our local economy is a crucial step in ensuring that the resilience of our country is created. This would allow for greater access to capital for businesses to grow and improve, greater ease of doing business (i.e., doing transactions, making applications for permits, granting of license etc.), and improving the social safety net of our most vulnerable in society by being able to identify such individuals and provide them with the necessary benefits. Technology alone will not do it though, as Jamaica’s legislations need major revamping to be accommodative this aggressive push. The infrequent meeting of the legislative arm of government significantly bottlenecks Jamaica push for advancement. An improvement in the frequency of meetings of this arm of government would allow for quicker passing of bills that are geared towards proving the economic framework of Jamaica, assuming consensus bipartisan support. Crime has become a common theme in Jamaica. It is a significant hindrance to Jamaica realizing its full potential of growth when considering the level of foreign investments that would be detoured from investing in Jamaica. The need for higher public-private partnerships (PPPs) was emphasized as there are services offered by the government that would be divested to the private sector improve on the efficiency and quality of the product. We view these recommendations as actionable and imperative to reestablishing the linkages within our economy. The long-term effect will be the strengthening of our domestic economy, which results in a more robust operating environment for our listed companies on the Jamaica Stock Exchange. The improvements in the environment will result in more significant avenues for generation amongst our listed companies, with adequate cost management, there will be higher earnings generation. But, this ideal situation can only be accomplished with a full buy-in of all parties across all sectors in the economy.
Written by Haughton Richards, FRM, Senior Research Analyst
COVID-19 continues to weigh on the local economy...
COVID-19 continues to weigh on the local economy as indicated by our consumer confidence index. Consumer confidence took a hit during the first and second quarters of the year. This was measured by the consumer confidence index which moved from 180.1 points in the fourth quarter of 2019 to 172.9 and 165.2 points in the first and second quarters of 2020 respectively.
Optimism among business recorded a decline...
Optimism among business recorded a decline to 115.4 index points in the second quarter of 2019, the lowest on record for the last 4 years. However despite the index, businesses expect activity to improve in the coming months. These expectations are driven by three factors, they anticipate that business will be fully opened within the next 12 months, management teams would have adapted to operating safely under the current economic conditions and they expect a steady flow of tourist to reach the shore of Jamaica post pandemic.
We view these recommendations as actionable...
We view these recommendations as actionable and imperative to re-establishing the linkages within our economy. The longterm effect will be the strengthening of our domestic economy, which results in a more robust operating environment for our listed companies on the Jamaica Stock Exchange. The improvements in the environment will result in more significant avenues for generation amongst our listed companies, with adequate cost management, there will be higher earnings generation. But, this ideal situation can only be accomplished with a full buy-in of all parties across all sectors in the economy.
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