SPEECH TO FIRST LIFE'S SALES AND LONG SERVICE AWARDS BREAKFAST AT THE TERRA NOVA HOTEL

I begin by expressing pleasure at having been invited to be the guest speaker at this function which has the twin objectives of honouring your leading salespersons as well as giving public recognition to those who have served First Life over an extended period. In both areas, those who are being saluted must have demonstrated the characteristics that are essential ingredients for the success of a life insurance company. In the first place, there is stability, as reflected by those staff members who have been with the company over an extended period. In the second place, there is the performance of both long-established as well as new staff members, who have excelled in bringing new clients into the fold of the company, thus reinforcing its position in the financial sector.

This is an extremely interesting period for any company in the financial sector given that the entire sector, whether we are looking at a commercial bank, a merchant bank or a life insurance company, has been the focus of much attention over the past several months. Within this context, the general public has been exposed to a great deal of information and, I may add, also a great deal of misinformation. Nonetheless, as the discussions proceed, it is hoped that more light will be thrown on the subject and it will become possible to have more facts and analysis than at present, where rumours, gossip and just plain misinformation continue to dominate much of the debate.

This morning I wish to discuss four issues with you. Each of them could easily be the subject of a full length speech and so the exposition will not be comprehensive. Hopefully, I will provide food for thought and lay the basis for more extensive discussion at some other time. The four areas which I wish to discuss relate to:

1.      Macro-economic indicators;

2.      The prospects for growth in the economy;

3.      The health and future of the financial sector; and

4.      The need for increased ethics and morality in the financial sector.

THE MACRO-ECONOMIC INDICATORS

Considering that I gave a nearly three-hour long presentation in the House last Thursday, I can guess that you have no desire for a repeat here. However, in reporting on the major macro-economic indicators to Parliament and to the nation, I indicated that although the figures for March are not yet available, the expectation is that the data for fiscal year 96/97 will confirm that inflation for the fiscal year has been slashed to a third of what it was in fiscal year 95/96. In any book, this is an important achievement not only that it reflects a sharp moderation in price increases, in line with the targets which were presented at the beginning of the fiscal year, but also because it lays the basis for other important positive developments. I speak here of two.

The first one is sharp moderation in the wage demand being made. We realized that as long as inflation increased at a rapid pace, it was logical to expect that workers would make wage demands with the hope of allowing them to "catch up" with prices. The result was a never ending cycle of exorbitant wage demands, high inflation and devaluation which then led inevitably to further high wage demands. In this whole cycle, the chicken could not be differentiated from the egg. All we knew is that the cycle had to be broken. The clear policy objective laid down at the beginning of the last fiscal year was to sharply reduce the rate of inflation and so put ourselves in a position to break the cycle.

The second major achievement relates to stabilization of the foreign exchange market and, as a consequence, the rate of exchange. Again, it is not of fundamental importance to focus on whether the foreign exchange instability led to inflation or vice versa. The fact is that in a situation where there is continuing devaluation, continued inflation is also inevitable. The achievement of stabilizing the foreign exchange market over the fiscal year, is again one worthy of note.

An associated benefit is the reduction in interest rates consistent with the reduction in the rate of inflation. Whilst there continues to be justified complaints about the slow rate at which these benefits have been transferred to borrowers in the productive sector, the fact is that there has been a downward movement in general interest rates. To phrase it more diplomatically, there clearly is scope for discussion as to whether the movement has taken place in line with the expectations of borrowers who feel that they have continued to pay too high a level of interest, despite the downward movement of rates on Government Paper.

When we take these positive achievements together we can see that significant forward progress has been made. It does not mean that we can now relax; rather we must ensure that the gains achieved are maintained even as we seek to achieve the other targets which we would establish in terms of macro-economic policy.

GROWTH

Having laid the base for macro-economic stability, we must turn to the question of how to stimulate expanded production. I do not know how many of you listened or watched my opening presentation in the Budget Debate when I made the point that there has been little growth in the economy since 1981. In fact, the data I gave for the eight year period 1981-1988 showed that there were two years of negative growth and the average growth rate for the period was 1.75% per annum. For the eight year period 1989 to 1996, there was one year of negative growth and an average real growth rate of 1.93% per annum. Basically, the point I was making is that no Administration over a 16 year period had been able to put together the correct set of policies to facilitate sustained levels of growth in the Jamaican economy.

As a country we need to analyze the reasons for this inability in recent years to stimulate growth. At one point in time, the restrictive foreign exchange market and the artificially contrived exchange rate system, as well as severe price controls were all factors which contributed to the lack of investor confidence. In the latter period, post foreign exchange liberalization, instability in the market and the corresponding high rates of inflation gave very little encouragement to long-term investors to commit resources to activities which could bring about the growth they so badly craved.

We believe that the recent achievements on the macro-economic front, to which I have made reference, give us a unique opportunity within the context of a liberalized economy for sustained growth to take place over the medium-term. The increased macro-economic stability, although not a sufficient criterion for growth stimulation, does imply that the base has been established for potential investors to make long-term commitments aimed at either new ventures or the expansion of existing ones. It is important that an institution such as First Life, represented by its sales staff or other individuals, is convinced that the prospects for growth have indeed improved.

The reason I make this assertion is that unless the staff of First Life "buy into" the fact that stability provides the basis for expanded production and hence, increased investment, they will not be able to convince clients that it is in their interest to postpone consumption and put their savings into long-term investments which will reap rewards further down the road.

The basic point which I am making is that issues such as macro-economic stability - as reflected in low rates of inflation and certainty in the foreign exchange market - are not subjects to be left to politicians, bureaucrats or talk-show hosts. These issues are of fundamental importance to the future of the country and, from the point of view of enlightened self-interest, of importance to individual job security.

THE FINANCIAL SECTOR

Obviously, I could not speak to a gathering such as this without saying something about the financial sector. One pleasant point which can be made is that there has been relative stability over the past several weeks following the Government purchase of the Eagle Financial Network. The establishment of FINSAC (Financial Sector Adjustment Company), has effectively addressed the issue of the institutional mechanism through which Government's intervention will take place.

There are two points which I think must be made about the Government's decision to intervene in the financial sector. The first is that this intervention was absolutely necessary as, failing that, we may have had the collapse of a whole range of institutions - commercial banks, merchant banks, insurance companies, etc. In certain cases, this collapse would have been brought about not through a realistic assessment of the state of affairs in an individual institution, but more so, because of the panic resulting from the dissemination of less than total information or a situation where an institution was unable to meet its obligations on a particular day. Hence, in the interest of all those who would have been affected by a systemic failure - the hundreds of thousands of depositors, pensioners, policy holders, etc. - the Government had to act.

We now turn to the issue of the manner of the action. Let me begin be indicating that the Government has no interest in taking control of any company or any part of the financial sector, as a matter of specific policy. Rather, having decided to intervene, for the reasons outlined before, the Government has a duty to taxpayers to ensure that the resources committed are fully protected. Hence, resources will be committed only after specific agreements have been reached on a wide range of performance criteria. It must be stated that the Government has no desire to enter any company, and in fact I would be extremely pleased if a company having initially signalled a need for FINSAC's funds, were simply to write or call me indicating that the need no longer exists.

This discussion leads logically to the issue of FINSAC's exit from a company which has received support. Once again, I wish to reassure the public that FINSAC's objectives are limited to attempting to resuscitate the sector in general and specific institutions in particular. As soon as FINSAC has recouped its investment or as soon as it is convinced that a given company has the wherewithal, not just in terms of financial resources, but also in terms of human resources to take back control of the institution and run it properly, then FINSAC will be ready to take its exit. In summary, although FINSAC is initially an unwilling partner, its objective is to exit the partnership as soon as possible after it is convinced that the fundamental problem which necessitated its entry has been fully addressed.

Another area which I wish to bring to your attention relates to the revision of a wide range of legislation and regulations governing the financial sector. These have been outlined by me on different occasions and they include amendments to the present acts governing deposit-taking institutions, the industrial and provident societies, as well as the legislation to allow for the creation of a Deposit Insurance Scheme. This Scheme will protect depositors in commercial banks, merchant banks and building societies, up to a maximum of J$100 000 per account. Ideally, all these pieces of legislation should have been in place prior to the liberalization of the financial sector. The story of why this was not done is an interesting one by itself. Suffice it to say that we are now about to embark on this needed revision and broadening of the powers of the authorities to regulate the financial sector.

One particular amendment which must be closely examined, relates to the ability of the authorities to take control of a deposit-taking institution which is in trouble and keep it operating without the support or authorization of the majority shareholders. This facility exists in most other jurisdictions, but to date it has not applied in Jamaica. The negative repercussion from this deficiency in the present regulations has been extremely costly and we have a very recent evidence of this.

As we are speaking about the financial sector, I must indicate that very little publicity has been given to instances where problems have been resolved and depositors have been protected. In terms of the case which has attracted most attention to date - that of the Century Financial Institutions - a formal announcement will soon be made concerning the entity with which we will initiate discussion leading to a scheme of arrangement which would facilitate all depositors in these institutions regaining access to most of their money. The successful development, acceptance and implementation of such a scheme of arrangement would, hopefully bring a most unfortunate period in our recent history to a close.

Given the propensity of the society to conduct discussion of serious issues based on the latest rumour in town, I think it is important to provide information about the cost of the Government's intervention to date. Government has to date provided $24.5B of support which is equivalent to 12% of GDP in 1997, to support the financial sector. Of this amount, $12.5B has been provided in the Budget and the remainder by paper held by FINSAC. This is indeed a significant amount of resources. However, we should note that Chile which is now a success story, was forced to spend as much as 20% of their GDP in 1987 to restructure the financial sector.

This figure, however, does not represent the net amount invested by the Government. In time, with the sale of assets and repayment of loans, etc., the cost of Government's intervention will be reduced to less than the total figure indicated above. Whatever the final amount is, we remain convinced that the intervention was justified given the importance of the sector.

ETHICS AND MORALITY

I turn to this issue with some fear, in that I do not wish to seem to be taking a "holier than thou" attitude on the matter of ethics. Nonetheless, my job as Minister, has given me access to a great deal of data and information on the behaviour of various persons who have held critical positions in the private sector. Whilst I am not for one moment suggesting that the problem of loose ethical standards is one to be found only in the private sector, the fact is that it is becoming apparent that for many business dealings, the guiding rule seems to be "let us do it as long as we can get away with it". Hence, apart from the persons involved, there are professionals who would seem to contribute to a situation whereby the various revenue departments are defrauded. Furthermore, there are instances when the public pays over taxes to businesses which do not in turn pass them over to the relevant authorities.

One may say that it is the responsibility of the authorities to address these situations. To a large extent, it is a position with which I concur. However, that the State has the duty to monitor and track corruption does not absolve others from their obligation as citizens or as professionals. Hence, my appeal to you here this morning, as professionals, is to determine which side of the line you intend to come down on. It cannot be that there are those who are able to violate all codes of behaviour, simply because they are able to mobilize huge sums to purchase the services of professionals who will assist them by various means to escape paying what is their fair share of duty and taxes.

CONCLUSION

In closing, I wish to restate that this is a particularly interesting time for the financial sector. I need not say that a vibrant domestic financial sector is a necessary building block for expansion of the economy, especially in an increasingly liberalized global situation. Hence, regardless of the problems which we are facing at present, the answer, particularly for those involved in sector, is not to throw our hands up into the air in surrender but rather, to identify the weaknesses, to learn from the mistakes and to redouble our efforts in addressing the deficiencies which have come so much to the fore in recent times.

First Life and its associated companies have a critical role to play in the resuscitation of the domestic financial sector. Contrary to views which are being expressed, I am convinced that there is a bright future for this sector but it will require the strictest adherence to international standards and a refusal to seek special allowances on the grounds that this is "a Jamaican company" and hence, cannot be required to abide by the same rules which hold elsewhere. First Life and its parent company Pan-Jamaican Investment Trust, have demonstrated the willingness to take tough corrective measures and the Administration applauds this. We are confident that given the increased stability in the macro-economy, the stage is set for the Pan-Jam Group, given its strong asset base, particularly in the real estate field, to enjoy sustained growth in the medium to long-term. Within this context, I once again extend my most sincere congratulations to those who are about to receive awards for their long years of service, as well as those who have distinguished themselves in terms of their sales record.