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Sense make before book: Why Colm Imbert made right call with 2017 Budget

“Devalue, the book sense people insist, he must devalue! He has to let the $TT find its true value!

“They know book but they don’t know chapter…”

Local economist Warren Thompson takes a different view on the Minister of Finance’s 2017 Budget and tells Wired868 why he thinks Colm Imbert got it right:

Photo: Finance Minister Colm Imbert. (Copyright i95.5FM)
Photo: Finance Minister Colm Imbert.
(Copyright i95.5FM)

Only 15% on cigarettes and 20% on liquor? Well, there is also a 7% tax on online purchases. 

Daiz all? Phew!  We gehway!

You could almost hear the population breathe a sigh of relief, you could almost touch the air coming out of their nostrils. Like little children who had misbehaved while Papa was away, we were all expecting licks, licks and more licks from Papa Colm. Instead of a good cut-tail, a rap on the knuckles was all we got.

The Finance Minister has cut expenditure but not as far as those steeped in the wisdom of the economics textbooks would have liked him to. He has also refused to countenance a devaluation—he should go as low as ten TT to one US and that still wouldn’t be murder, some say—leaving the management of the exchange rate squarely in the hands of the relatively new Central Bank. And who could forget what happened to the last Governor? 

So we know that the MoF is not afraid to give debit where debit is due

So his estimated revenue is only $47.4bn but he plans to spend $53.5bn. That means that, for 2017, the projected deficit is $6.1bn or 3.9% of GDP. For a third consecutive year, the size of the economy as measured by GDP has contracted in real terms, -2.3% in 2015/16 following successive years of 0.6% of what political correctness now styles “negative growth.”

Photo: The price of crude oil remains low. (Courtesy Newstide247.com)
Photo: The price of crude oil remains low.
(Courtesy Newstide247.com)

He has not, say the book specialists, cut expenditure enough!

I disagree. In Trinidad and Tobago, government is still a major player in the economy and still a major, if not the major, customer of the private sector. Hear Papa Colm last week:

To bring expenditure in line with revenue too quickly would remove the income of many of those in the private sector, not to mention [cause] massive unemployment and the concomitant social fallout.  Further, the private sector usually awaits the government’s lead where investment and expenditure are concerned.

Makes a lot of sense to me.

Devalue, the book sense people insist, he must devalue! He has to let the $TT find its true value!

They know book but they don’t know chapter. Listen again to what Papa Colm had to say in his statement on the subject during his budget presentation:

“As has been demonstrated in many regional economies—including Jamaica, Guyana and most recently Suriname—a free-floating exchange rate carries enormous risks for small developing countries. These include serious inflationary pressures, the possibility of a wage-price spiral and, as a consequence, adverse income and distribution effects.”

Photo: Tribe revellers let loose on Carnival Monday in 2015. (Courtesy Allan V Crane/Wired868)
Photo: Tribe revellers let loose on Carnival Monday in 2015.
(Courtesy Allan V Crane/Wired868)

The texts say that often devaluation—or a freely floating exchange rate—leads to growth in exports and helps to engender economic recovery. 

Of course! In large diversified economies. But not in these parts, no sirree!

And I want to ask this: is there any guarantee that devaluation would lead to a reduction in the price of our non-oil exports?  Is there any empirical evidence to suggest that the [devaluation-driven] inflationary pressures on imported inputs added to domestic inflation as the very devaluation works its way through the system would not lead to higher prices of non-oil exports, thus negating the desired effect of devaluation?

So, sensibly, I think, Papa Colm has opted for stability.  It’s a wise choice, both in economic and in political terms. One remembers the downturn of the late 1980s and the social disaster that ensued on ANR Robinson’s imposition of IMF/World Bank conditionalities.  There were massive cuts in social sector expenditure and unemployment rose above 20%!  In terms of today’s labour market, the 22% of that period translates into some 136,000 people. 

Can anyone imagine 136,000 people out of work in the guava season that Trinidad and Tobago is already experiencing in 2016? Brudder man, man will bite off your ears, throw some kuchela and slight pepper and eat it like doubles. Normal!

Photo: Protest in La Brea. (Copyright Trinidad Guardian/Rishi Ragoonath)
Photo: Protest in La Brea.
(Copyright Trinidad Guardian/Rishi Ragoonath)

These book theorists mad or what?

The post-oil boom 1980s also saw large numbers of people leaving—fleeing?—this country. It spawned the concept of ‘barrel children’, a whole generation of young people with the surname ‘Foster’, all left in the care of grandparents, uncles, aunts, nennens and even neighbours. 

But times have changed and, with tougher US immigration policies in place, migration now is not the easy option it was then.

Stability and restored confidence in the economy are critical to any chance at recovery! Without them, no plan would work. 

So I think Papa Colm has done the wise thing by ignoring the experts. Our economic fundamentals are still good;  import cover is still 11 months or thereabouts, unemployment is still under 5% and there is still excess liquidity in the system. That means that there is still enough of a buffer in the system for the necessary adjustment to be gradual and, by extension, relatively painless. 

Papa Colm has adopted a practical and common sense approach to the critical task of saving us from ourselves.  My considered view is that it will work, particularly if the private sector responds positively to the Minister’s call to play its part in the recovery effort.

Photo: Finance Minister Colm Imbert. (Courtesy Ministry of Finance)
Photo: Finance Minister Colm Imbert.
(Courtesy Ministry of Finance)

About Warren Thompson

Warren Thompson is a Tobagonian by birth, a life-long student of cricket by preference and an economist by profession. His formal training came at QRC, The UWI and the University of Wales but the assets/skills of which this father of three girls is proudest come from the School of Hard Knocks.

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  1. He has book sense.common sense none.

  2. What’s the plan for making access to foreign exchange easier both for small businesses and citizenry?

    • Leaving the dollar as it is. The tt dollar has always been overvalued, even in the 70s during our first golden era so to say now that the dollar is overvalued is hogwash. As ash said, the purpose of devaluation is to kick out the small and medium users and traders by decreasing the incentive by increasing the price. E.g one jamaican dollar is now worth over 120 dollars. Clearly only large corporations can afford access to foreign exchange. These large corporations because Jamaica in IMPORT HEAVY have to buy equipment from usa, germany, japan etc. The increase in the price of foreign exchange makes the price of equipment higher. Who do you think is going to feel the brunt of the increase manufacturing and operating costs. You the customer. Your purchasing power has already been decreased by the harsh economic environment and to compound that you nowhave to face increased prices at the cashier because the manufacturers and retailers are now making sure that they get back the full weight of the increase from you the customer. Due to the economic environment, because no one devalues when times are good, you are now extremely careful with what you buy and from where you buy. If you realize that you cannot afford one of these items or it isn’t necessary, the manufacturer has just made a wasted investment. Investors look at the whole picture. An investor will not go into a market where he believes he cannot make a decent profit. He knows that he cant make a profit in a place where the prices sky rocket due to devaluation and the purchasing power of his potential customers has been significantly reduced.

  3. Devaluing the dollar is suicide for small countries. In economics texts, it mentions thtee countries that devalued: UK, USA and Japan. These countries are export heavy which means that they export more than they import. Trinidad is import heavy. Our manufacturers have to buy foreign machinery and parts. When the devaluation occurs, the cost of those parts reaches you. It makes goods more expensive not cheaper. That therefore would make customers less than willing to spend their money. The purpose of devaluation usually is to make life easier for manufacturers by decreasing the incentive, I.e the low price, to access foreign exchange while keeping out lower players. If nobody is buying due to the high prices that the manufacturers have to charge. As TT citizens become poorer, our purchasing power will decrease and no investor will come to a country where the risk of not making a serious profit is present. Jamaica’s trade balance as late as 2013 worsened to 17%. Similar things happened to Suriname and Guyana. For small economies, it simply does not work

    • Yea fr Other countries will quicker buy our produce but the population feeling it in their pockets cause our money has no buying power …always have to spend more on an item

    • Yuh sure yuh do want the MoF wuk, boy? Or yuh cud take a wuk as the Personal Advisor or the Communications Officer. The dumbest Wired868 reader, daiz me, understand what yuh just say and, I telling you, getting me to understand anything in economics and/or mathematics is climbing Everest.

      Or you might prefer to put into words your own take on the 2017 Budget. I feel sure Wired868 would consider publishing your Letter to the Editor, is that not so, Lasana?

  4. you understand when I say economist job is the confuse us, who do we believe? We have heard so many different take on the budget. Reality, I have to count my pennies and live within my budget.

  5. Exactly it’s like shooting yuhself in the foot when trying to kill a cockroach

  6. Devaluation works to stem the outflow of foreign exchange by making imports more expensive but it also makes exports cheaper. The problem with devaluation’s effect on exports is that so much of the raw material we need to manufacture goods for exports, are themselves imported thus negating any benefit to export cheaply.

  7. And the engineer is very pragmatic but he needs to be more forceful and fly rather than creep

  8. I’ve said this time and time again, we’ve tried the economist, we’ve tried the banker as minister’s of finance and they both failed miserably, I’ll take the engineer.

  9. This is only half the story. The countries cited are drowning in debt. Free floats are suicidal but were forced on them as the price of openness. We aren’t that heavily indebted by a long shot. As for inflation, well that’s kind of the point.

  10. “Give debit where debit is due” =D

  11. As I said elsewhere, all the economists bawling devalue could easily move and live comfortable – the average Trini won’t be able to.

  12. Agreed

    Devalue would cause a vicious cycle

  13. “Only 15% on cigarettes and 20% on liquor? Well, there is also a 7% tax on online purchases.

    Daiz all? Phew! We gehway!”

    What about the increase in the price of diesel? That will cause everything to go up.

  14. Wise move.Once you begin to devalue,that’s all she wrote.