“[…] Ultimately policy is made by politicians who of course, may have other considerations which influence their decisions. However, just as it would be folly for politicians to ignore the advice of medical professionals in dealing with the coronavirus public health crisis, so too the laws of Economics are inexorable.
“Ill-advised economic policies eventually come to grief, especially for the very poor and vulnerable in whose interests politicians usually claim to be acting…”
The following is the first in a two-part series by economist Dr Terrence Farrell, submitted to Wired868, on the Trinidad and Tobago economy:
Economists are not ‘seer-men’ or prophets of gloom and doom, or anything else.
Just over five years ago, I wrote an article in the Trinidad Express, The Imperative of Adjustment, which argued that in the face of the 2014 oil and gas price shock, this country needed to embark quickly and decisively, on a self-imposed programme of adjustment which recognised:
- Oil and gas prices would remain low for an extended period and hence our real incomes had already declined;
- The external account (the balance of payments) had to be the focus of the adjustment and that while some loss of foreign exchange reserves was to be expected, exchange rate policy, fiscal policy and monetary policy had to cooperate to bring the external account into balance quickly;
- The adjustment should take no more than two years as we needed to have enough reserves left to resume growth, or to weather another external shock if that were to happen.
Relatedly, the Economic Development Advisory Board had recommended splitting the Heritage and Stabilisation Fund, with ministerial control and flexibility in the use of the Stabilisation Fund, but parliamentary control over the Heritage Fund.
In 2015, an election year, the UNC administration did nothing by way of adjustment and in fact made the situation worse with unprecedented fiscal profligacy leading up to the general election.
Faced with a difficult situation, this PNM administration chose the path of a ‘soft landing’—making easy cuts in spending while signalling that the population should maintain its ‘lifestyle’. Rather than use the exchange rate pro-actively, the government handcuffed the Central Bank by fixing the exchange rate and mandating it to drip-feed foreign exchange into the banking system, while asking the commercial banks to pursue an ill-defined and futile policy of exchange controls.
After four years of these policies, adjustment remains incomplete. The foreign exchange reserves continue to fall despite having borrowed about US$2 billion within that time period, including the amounts taken from the HSF.
In the face of rising foreign liabilities, commercial banks have had to clamp down on credit card transactions. With net errors and omissions on the balance of payments of over US$2 billion, the claim of a current account surplus on the balance of payments is almost certainly over-stated, especially as companies are struggling to get foreign exchange for reinsurance, dividends, and other legitimate payments for services.
Debt, domestic and external, is mounting. Moreover, the measurement of debt does not include VAT refunds, nor the now hard-core overdraft at the Central Bank. Between the Covid-19 shock which has only just begun, and the collapse of the oil and gas market into a price war, we now have the perfect storm; two massive external shocks for which we are underprepared.
We put all our eggs in the oil and gas basket, even, it would seem, at the expense of the viability of the petrochemicals sector, which is now in further and deeper trouble. Ammonia and methanol prices, already low, will be further depressed as oil and gas prices fall and as the global economy enters recession. We’ve done nothing to encourage export diversification.
In fact, we have punished exporters with an overvalued exchange rate and a climate in which it is increasingly difficult to do business efficiently, what with crime, delays in work permit and passport issuance, slow decision-making everywhere in the public sector, and a parliamentary opposition which obstructs and delays legislation in the national interest at every opportunity.
Ultimately policy is made by politicians who of course, may have other considerations which influence their decisions. However, just as it would be folly for politicians to ignore the advice of medical professionals in dealing with the coronavirus public health crisis, so too the laws of Economics are inexorable.
Ill-advised economic policies eventually come to grief, especially for the very poor and vulnerable in whose interests politicians usually claim to be acting.
Even without these two new shocks, the prognosis for our economy was not propitious. The international oil and gas companies operating here have been less than enthusiastic about our policies and our prospects relative to other places where they can operate, and are themselves challenged by the inexorable decline in global demand for fossil fuels and the fall in oil and gas prices.
Our export manufacturers are investing elsewhere, in Jamaica, Costa Rica and even further afield. Others, like Unilever and Nestle, have been downsizing. The petrochemicals industry is at a point of inflexion, tilted now even more to the downside, as evinced by the Methanex decision.
We have taken no meaningful steps to effect a step change in the tourism industry or to build an innovation eco-system that would encourage ideas and the formation of small and medium-sized companies in the creative industries, in ICT, and in food and beverage manufacture. The agenda for diversification and innovation remains still-born.
Given the depressing outlook, the ratings agencies are not likely to be impressed. Expect to be down-graded.
The measures announced to deal with the short-term effects of COVID-19 are appropriate. However, combined with the collapse of gas prices and a global economy which will surely tip into recession, the adjustment that we failed to make adequately will be thrust upon us, with much less room for manoeuvre than we had five years ago.
And with nothing coming in to replace it, the Heritage component of the HSF, our grandchildren’s money, is likely to be consumed in a few years, leaving the cupboard bare.
Editor’s Note: Click HERE for Part Two of Dr Terrence Farrell’s column, A Perfect Storm.