The World Bank (WB), in its Country Economic Memorandum (CEM) on Jamaica dismisses claims by Jamaican firms that access to financing, or crowding out, is a major hindrance to business development, pointing instead to crime, the high cost of electricity and low workers’ skills as the top three major constraints and noted that Jamaican firms complain more than other firms.

The report, published May 26, 2011 and recently launched at the University of the West Indies, Mona campus concluded that as a small open economy, the overall funds available to Jamaica do not seem to be a binding constraint on growth and an analysis of real interest rates and credit flows to the private sector, as well as international comparisons, do not support the crowding out theory. The study also concluded, contrary to widespread opinion, that real interest rates in Jamaica are not high.

According to the World Bank, with the large inflows of foreign direct investments (FDI), workers’ remittances and the presence of large financial institutions with available funding, there is no shortage of capital in Jamaica for investment purposes. Instead the WB pointed to possible ‘distortions’ in the financial markets which affect the allocation of capital. For example, the WB found that there is a distortion in the distribution of loans in the domestic financial sector as credit is concentrated in a few sectors at the expense of others.

In 2008, tourism and distribution accounted for more than 50 per cent of the stock of loans to the private sector. Tourism accounted for 30.3 per cent of loans, distribution for 20.5 per cent, professional and other services 13.4 per cent and construction 11.9 per cent. However, in the same year, entertainment accounted for 0.4 per cent, mining for 0.6, agriculture for 3.1 per cent and electricity, gas and water 2.5 per cent.

“This might reflect problems for some firms in Jamaica, even if there is enough financing at the macroeconomic level. It might be a signal that there are some distortions in the allocation of credit among firms,” noted the World Bank.

Some Ja companies get favourable tax treatment

The capital distortions also extend to the way in which some businesses get favoured tax treatment over others, causing the perception that some companies are more progressive.

The WB noted that raising taxes on all economic activities, instead of on some businesses, would make sense as “everyone would be contributing to the economy at a similar rate”.

“If a country relies on tax incentives to promote some activities however, the gross-of-tax rate of return would be lower in favoured activities, compared with others that pay all taxes. As a result, capital in the favoured activities will contribute less to the economy.”

In addition, there is the suggestion that the large remittance inflows, totalling — in– could be better used to fund investments. “The country has large inflow of workers’ remittances which could be invested if there were attractive opportunities. Instead a large share of these funds are consumed or invested in housing in Jamaica,” the WB wrote.

The World Bank contended that a look at real interest rates and credit flows to the private sector does not support the crowding out argument as credit flows to public and private sectors seem to flow in the same direction. That is, in instances where there was high public debt- for example in the 1980s- there was also high domestic credit to the private sector. In the 1990s when the public sector increased its issue of local debt, credit to the private sector also increased.

“Jamaica’s domestic banking credit is in line with the expected level for its level of economic development as reflected in GDP per capita,” the World Bank concluded.

Interest rates

Interest rates in Jamaica have trended in the mid to high 20s over the past two years, to below 10 per cent in recent months following the Jamaica Debt Exchange (JDX), concluded in February 2010. However, according to the World Bank, interest rates in Jamaica are relatively low when other factors are considered. “Real interest rates are aligned with the local risk premium as well as with the strength of legal rights,” said the World Bank. The institution suggests that were crowding out a reality, real interest rates would be higher in Jamaica.

“If high domestic government debt is crowding out financing in the private sector, interest rates, if they reflect shadow prices, should be above the level expected from examining international standards based on economic development or financial depth,” the WB concluded.

Crime is the number One scourge to businesses

The World Bank also found that cost of financing is generally perceived as a business constraint worldwide. However, when responses are compared between Jamaican and world firms, the first hindrance for Jamaica is crime, followed by cost of electricity and workers’ skills. “These are the factors Jamaican firms complain about disproportionately compared to businesses in the rest of the world,” noted the WB. In this comparison, access to financing is actually ranked sixth and cost of financing tenth.

According to the World Bank, access to financing may actually seem as though it is a major constraint because in the list of possible constraints, items such as access to financing, tax rates and macroeconomic stability are more easily understood and firms can more easily understand how they impact on profits.

Access to financing

Interestingly, the research also highlighted that Jamaican firms are more likely to complain than their international counterparts, even where international benchmarking- as is the case with access to financing- indicate that these firms are in a better position than their counterparts.

A 2006 Investment Climate Survey (ICS) examined access to finance across the world, including in Latin America and the Caribbean (LAC), the Middle East and North Africa and South Asia. In all instances Jamaica reflected better than LAC regarding the percentage of firms using banks to finance investments, using banks to finance expenses and the value of the collateral needed for loans or the percentage of the loan amount.

The percentage of firms using banks to finance investments was 20.66 per cent in the LAC versus 37.04 per cent in Jamaica. The percentage of firms using banks to finance expenses was 36.34 per cent in the LAC versus 57.35 per cent in Jamaica and the value of collateral needed for loans or percentage of loan amount was 133.9 per cent in the LAC and 114.4 per cent in Jamaica.

If the complaints regarding access to finance were to follow the trend, then LAC countries should be more concerned about access to finance. However, 27.76 per cent of firms in the LAC identified access to finance as a ‘major or very severe constraint’ versus 43.82 per cent of firms in Jamaica. The apparent paradox show the propensity of Jamaican firms to complain more, noted the WB.

“A cross-country comparison finds Jamaican firms complain more about credit conditions. It is possible that the results are affected by the small sample size. In addition, the Jamaican firms seem to be more negative in general than their counterparts in other countries. They are more likely to report any factor as a major or severe constraint,” noted the World Bank.