A decade ago, between 1998 and 2000, Dr Alexander Livshits, former minister of finance, Russian Federation, and deputy head of the Russian government, presided over the Russian debt-restructuring operations.

He has a great deal of hands-on experience with sovereign default and debt restructuring.

In 1998, low petroleum prices impacted severely on the Russian economy.

As a result, market confidence declined in the wake of the Asian crisis, on the ability of the Russian government to implement domestic policies that would address the fiscal imbalances in the economy.

This led to a capital account crisis that culminated in the devaluation of the rouble, problems in rolling over the large stock of Treasury bills held by foreign investors and ultimately to default.

Defaulted on loans

Russia defaulted on its Treasury bill obligations in August 1998, on its restructured loans (PRINs) in December 1998, on the MinFin-3 bond in May 1999, and on interest arrears notes (IANs) in June 1999.

Russia had also been in arrears to its Paris Club creditors since 1998, which it regularised in July 1999, while it also sought to get some non-Paris Club bilaterals treated similarly to its Paris Club 1996 agreement.

On Tuesday, Livshits, who is currently the UC Rusal director for international and special projects, was a presenter at the first annual Jamaica Chamber of Commerce economic forum in Kingston.

Given his considerable experience, it was sobering to hear the major points made about the Jamaican economy.

Jamaica should, he suggests, seriously consider placing a definite cap on new debt. New borrowings should be limited to the refinancing of existing debt on more favourable terms. In this regard, he suggested that there should be a special Government decision, or better yet a law should be passed which would establish a long-term framework for new borrowing.

Time for a return

Given Jamaica's excessive debt burden, Livshits believes the time has come for the Government to start negotiations with the London Club of creditors to reach a restructuring deal with the private holders of Jamaican foreign debt, which accounts for approximately 60 per cent of Jamaica's total external public debt.

He noted that he was surprised that the Government was not currently talking to them, and it was definitely time for a return to discussions with the club.

The same procedure could be considered in relation to sovereign creditors - both multilateral and bilateral.

He pointed out that Jamaica dealt with the Paris Club of sovereign creditors during the 1984 to 1993 period in which the GOJ signed seven restructuring agreements of a total of US$1.1 billion in sovereign debt obligations.

In terms of the country's fiscal situation, Livshits thinks that consideration should be given to increasing the level of General Consumption Tax (GCT) from the current level of 16.5 per cent by, say, a further four or five percentage points to, say, 20 per cent. This, he said, is the easiest tax to collect.

Dr Livshits also noted that Jamaica and Russia are currently two of only 10 countries in the world with a flat rate of income tax.

Jamaica's is at 25 per cent; Russia's is at 13 per cent.

Progressive taxation

However, he believes that serious consideration should be given to switching to a progressive tax scale, with the most prosperous having to pay, say, 40 per cent income tax instead of the current 25 per cent.

One of the most humorous moments in his presentation was when Dr Livshits noted that as minister of finance he used to keep a sign on his desk that said 'No money'.

He showed this to various ministers when they came to him with their requests, and told them that he would be willing to discuss football, oil prices, etc. - anything but money.

He pointed out that perhaps the most difficult and unenviable task for public debt managers is cutting Budget expenditure as this involves a revision of all investment projects.

Typically, some of them may go on, they may be delayed or some are cancelled altogether. In reviewing the Jamaican situation, Livshits stated that he feels that it will be impossible for the Jamaican Government to avoid a serious "downscaling of administrative expenses (that is, wages and salaries) that currently account for almost 30 per cent of the total Budget expenditure."

Premature and ineffective

He cautioned against the divestment of public companies at the bottom of a financial crisis as this "always seems to be rather premature and ineffective. One of the ways that might be contemplated at the moment is some form of lease [arrangement] to private investors with eventual buy-out".

However, the bottom-line position is that public companies should not be allowed to generate new debt.

Ultimately, in order to ease the debt burden in the medium term, the Jamaican economy needs economic growth.

So one of the most important means of debt management is stimulation of economic growth by means of taxation, tariffs, customs duties, etc.

Other strategic national projects like achieving cheap energy generation based on LNG or coal, and/or construction of a major maritime transport hub, might be keys to achieving growth.

He concluded that Jamaica's debt woes are a long-term problem that cannot be solved on a partisan basis. Rather it needs national consensus that, if Jamaicans stand united, would ultimately succeed.

renee.shirley@yahoo.com