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Gaining control in a recession

Sunday, June 3, 2018

The report in the May 27 Sunday Business by Marla Dukharan entitled, “T&T Mid-Year Fiscal Budget Review: Fact Check” in taking such a narrow view of the government’s impact on the performance of the economy, did the country and herself a disservice.

In general, there was nit-picking in the report as to the accuracy of information presented in the mid-year review and an accent on the apparent deterioration of the economy as the available statistics seem to suggest a kind of blame game.

For example, under the report topic of Oil Prices the mid-term review stated that oil prices fell “from US$108 in 2014 to US$26/bbl in 2016.” The MD report sought to correct this by saying oil prices reached US$105.20 in June 2014 and averaged US$43.20 in 2016, a decline of 59 per cent and not 76 per cent as the review suggested.

The review was making the general point of the large variation in oil prices while the report was addressing the drop in revenue as it related directly to prices.

Again, under the document’s heading, Foreign Reserves, the MD report appears to decry the fact that our reserves have been declining since December 2014 from a peak of US$11.5billion and in three years we have lost over US$3billion—the reserves in April 2018 fell by US$942 million or by 10 per cent to US$8.1billion and in March had dipped below US$8billion, the lowest since May 2008.

The question one has to ask is: what are our reserves for given that we have a highly volatile export economy and the normal reserves held by Central Banks are of the order of three months to support their import regimes, and we have today some eight to nine months cover.

Further, the reserves are a measure of the TT$ liquidity in the market that directly affects the demand for foreign exchange. The MD report claims that the decline in reserves at an ever accelerating pace tends to happen as people lose confidence in the exchange rate—an amazing conclusion!

The MD report was also concerned about our increasing debt and the fall in GDP. Further, it says that we have had near zero growth on average for the past ten years, hence it is hard to see any departure from the trend/average which indicates that we are in long-term stagnation.

The conclusion of the report is that to combat this stagnation we should have diversified the economy into exports over the past ten years and so reduce debt, create jobs and balance the budget.

Dynamic economic model

The crowning comment of the report is that we have an overvalued currency which subsidises imports at the expense of local producers. Note that generally the energy sector generates some 80-90 per cent of our foreign exchange income (local export production on-shore is minimal).

A devaluation of the currency would decrease the expenses of the foreign investor in the energy sector, so reducing further the foreign exchange which stays in the country. I recall in my undergraduate economics course asking my esteemed lecturer if, according to him, we should devalue in a foreign exchange based recession does that imply that when the economy is booming and foreign exchange is expanding our reserves, we should revalue the currency? His response was that he had not considered that.

Another trite comment of the MD report was that the government should not take the credit for the good performance of the HSF since it is managed by foreign fund managers, not the government.

My concern really with the MD report is that it does not consider the dynamic model of our economy, the external disturbances on it (which we cannot control) and the controls we can impose locally so as to mitigate the damage that these disturbances can impose on the population at large. These disturbances cannot be made to go away but our local controls can soften their impact.

Let us re-look at the performance of the economy so controlled in the current recession.

The T&T’s economy can be described as a small open (plantation) economy in which we cannot produce locally most of what we need to support a comfortable life.

Hence we must import and to do so we must export to earn the foreign exchange to pay for the imports.

The energy sector is the major exporter and earns in general some 80 to 90 per cent of our foreign exchange. Hence the foreign exchange from that sector is the lifeblood of the economy.

When, for whatever reason, this income from the energy sector drops and stays so for some time, the economy falls into recession since we cannot afford to import all that is required to support the on-shore activity.

The objective of the government in this period is to control the economy, take it to a soft landing in the hope that in the short term the foreign exchange income rebounds and the economy recovers.

The options at the government’s disposal include decreasing the economic activity, decreasing the GDP, at a rate that is tolerable to the population.

The available tools are; the foreign exchange reserves and the stabilisation part of the HSF can be used to support the purchase of necessary imports; taxation/tariffs to control general demand for imports and hence foreign exchange; debt to support the necessary spending of government since the drop in its income was some $20billion—this can also be supplemented by the sale of assets.

Diversification in recession

Since some of these measures can cause unemployment the government can initiate some on-shore capital projects but care must be taken to ensure that they do not increase foreign exchange demand.

If these controls work then we can expect to see; decreases in GDP; decrease in the foreign reserves (now still way above the norm); spending from the HSF, which has been recouped by earnings of the fund itself; increase in unemployment which is today 3-4 per cent compared with 13-15 per cent in the 1986 recession; shutting down of marginal firms whose activities were based in imports; increase in government central debt and debt/GDP (debt/GDP exceeded by Barbados, Jamaica, Japan, UK); inflation which is still some 2-3 per cent (10-11 per cent in 1986 recession) compared with the overall inflation a devaluation would have caused; reduction in subsidies.

The MD report has indeed looked at the above results of the controls imposed on the economy and appears to be concerned about the departure of the economic indicators from those associated with a flourishing economy, the good times, which were indeed the intent of the controls. Since we cannot prevent the external shocks on the economy the best we can do is manage their impact- in this respect the government has done well.

However, the report and I can fault all of our governments (and the private sector) over the years for not diversifying the economy, providing other sources of foreign exchange income besides the energy sector, even considering the failed negative listing attempt.

But this aside we have to rate this government’s performance in the current recession based on our plantation model and what it, the government, has done under the current circumstances to contract the economy and the impact of this on the population.

Diversification of the economy is a longer-term process than managing a recession. However, successive governments have misunderstood what has to be done. So much so that this government, in ignoring the lessons of history is still betting on foreign investment, foreign concessionary loans, to provide jobs, to develop our economy.

May I remind all that according to Lloyd Best, foreign investment in the hinterland, in the plantation, was about economic development of the metropole, not us.

St Augustine


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