Financial Literacy: The Real Crisis

The average Jamaican does not understand the impact of inflation and interest rates on their purchasing power.

When Thinking back to the People’s National Party (PNP) general election campaign of 2016, I vividly remember how important it was for the team to let the general population know that we had fixed the economy. We incorporated it into messages such as: “Never before has Jamaica had a budget surplus”; “We were able to pay our public sector workers who resisted”; “We are reducing our debt-to-GDP ratio [gross domestic product] report”; “Jamaica is on the right track”.

The resilience of our economy rests on the foundations laid by our former finance minister, Dr. Peter Phillips, between 2012 and 2016, and the administration led by Portia Simpson Miller.

Their courage reversed a 40-year trend of deficit spending, creating an economic environment with a 7.5% budget surplus, reducing our debt-to-GDP ratio by 140% to manageable levels, which is the basis on which this current low level interest rate environment has been built. This low interest rate is the main reason Jamaica’s economy hasn’t been devastated in 2020, and we should extend credit where it’s due.

However, in February 2016, the PNP lost 14 of its 42 seats and became the opposition. How was this possible when the International Monetary Fund (IMF) and other multilateral bodies praised the then PNP government for making the right decisions without encountering riots equivalent to what happened? went to Greece?

Many would say that a combination of elements created the perfect storm for defeat. But the truth is, if you want to drive a group of people to a destination, they must first understand the overall value of the trip and why they should trust you to take them. The fact is, the people of Jamaica have never understood the importance of a budget surplus, the positive impact of reversing deficit spending, or how lowering the debt-to-GDP ratio would increase their purchasing power. to buy more or improve roads and water conditions in their communities.

Either way, the Jamaica Labor Party (JLP) took advantage of the situation and told the people: vote for us and you will receive $1.5 million tax-free to improve your life.

However, this discussion is not about who had the best political slogan; rather, it is about identifying what is needed to get Jamaicans to appreciate macroeconomic issues, particularly interest rates, and how they affect their daily lives.

Has the PNP failed to deliver its message, or is financial literacy the real crisis of our people?

It would have been hard not to notice that, since the beginning of the year, the stock market in the United States has lost almost 15% in response to the Federal Reserve raising interest rates by a half percent two weeks ago. The Fed has declared its intention to continually raise interest rates to rein in the 8.5% inflation rate in the United States, which is the highest in 40 years.

A full appreciation of the impact of interest rate increases is that a 3% increase in the rate would cost the US government more than its national defense budget based on current US debt.

If, as analysts predict, the US Federal Reserve rate moves to 4% or more by the end of the year, people around the world will be looking to convert their currencies into US dollars and put them in US banks and securities. In response, banks in other countries will raise their local bank savings rates to discourage people from converting to US dollars. This increase would be at least four percent above the Fed rate. Add to that possibility a bank’s inclusion of its administration and profit margin, and you can see the likelihood of double-digit lending rates by the end of this year.

If this happened, the result would be a significant reduction in a person’s disposable income, as their mortgage, car loan, and lease-purchase payments would increase. So, interestingly, even though the Fed’s decisions are beyond our control, they have a direct impact on the wallets of ordinary Jamaicans.

At home, the Bank of Jamaica (BOJ), which operates as an independent body and monitors local inflation as one of its main responsibilities, has set a target of 4-6%. However, in April 2022, Jamaica recorded an inflation rate of 11.8%.

To counter inflation, the BOJ raised the policy interest rate from 0.5% in August 2021 to 4.5% in March 2022. The next review is scheduled for May 19, 2022 (after submission of this article) and could see the BOJ hike the rate again. What would add more fuel to the fire of inflation is to return to deficit spending, which the PNP eradicated during its last term. And if Jamaica went back to the days of borrowing money to finance spending, spending more than the country earned, such a move would result in even higher interest rates.

Therefore, the BOJ needs to explain to Jamaicans whether it can have an impact on inflation when to a large extent it is driven primarily by external factors.

Why? Many Jamaicans do not understand how inflation or interest rates affect them and do not know how to plan or budget if they rise. Furthermore, they cannot establish a direct link between soaring oil prices on a global scale; the devastating impact of the Russian-Ukrainian war on grain, fertilizer and cooking oil prices; and supply chain disruptions from China eroding their purchasing power.

MONEY MATTERS

One of our core responsibilities as leaders is to do all we can to improve the Jamaican economy, thereby increasing the disposable income of our people to give them more purchasing power. But we also need to teach them how movements in interest rates and inflation affect their ability to buy goods and services.

Financial literacy is the knowledge and understanding of essential financial skills, from budgeting and saving to investment and retirement planning, and the ability to put them into practice. Several countries have included financial literacy in the curricula of their schools.

For example, financial education is compulsory for students in grades 7 and 9 in Denmark. In addition, teenagers take part in an annual event called Global Money Week, organized by Finance Denmark and the Danish Union of Mathematics Teachers, where finance professionals speak to students from local schools.

In 2014, Israel mandated the teaching of personal finance in schools and trained its high school students through a month of financial education in the school system during which banking, investing and l general economics were taught.

Today, the dilemma facing all governments operating in this extreme financial environment is their inability to communicate the issues and their impact on people and national goals.

Our government should first have a wide range of public consultations with people across Jamaica to help them understand economic fundamentals, and more importantly, they should introduce financial literacy into our secondary school curriculum. These measures would go a long way in helping the average Jamaican understand the solutions a country needs to budget, save and invest, which in turn will help them plan their domestic affairs.

But if they continue to talk to our people instead of with our people, it will only lead to misinformation, rigidity and more social unrest. Also, beating them with extensive financial jargon won’t help them if they can’t make ends meet.

Jamaicans will come if they trust you and understand the objectives. It’s time we started to effectively explain the economy to our fellow citizens, hear how they are affected, and find common ground in the best interest of our country.

Lisa Hanna is MP for St Ann South Eastern, People’s National Party Spokesperson for Foreign Affairs and Trade and former Cabinet Member.

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