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Where are we at the start of 2018?

Thursday, January 11, 2018

The economic record of T&T since 2008 does not make good reading. The economy grew rapidly at a compound rate of growth of 15 per cent per annum from 1999 to 2008 on the strength of the export of LNG and the rising prices associated therewith.

Since then the economy has regressed. GDP in nominal terms has fallen from $167 billion in 2008 to $154 billion in 2017 according to the 2017 review of the economy. The balance of trade and the balance of payments are now negative, and the government’s fiscal position in persistent deficit.

The key to all of this has been the decline in gas production which started circa 2012 and the dramatic decline in world prices which occurred in 2014. Gas production at its highest amounted to 4.3 billion cubic feet and now stands at 3.3 billion cubic feet per day. This is not enough to meet installed plant capacity far less to meet new demand. Investments by BP, Amoco and others suggest that the decline will be arrested, and we should see some a modest increase in production. But the outlook for prices is weak and technological developments and climate change suggest that there is a more modest role for hydro carbons in the future.

These developments must be addressed. We have been this way before. In the 1983-86 period, we opted for a soft landing, running down the several reserve funds that had been established at that time, keeping the same economic policies. But those funds eventually ran out and by 1986, the foreign exchange situation was dire. Emergency action was required in the form of IMF loans and conditionalities.

Recovery was slow and painful. The NAR was voted out. The new PNM in 1991 broke with the past and adopted more pragmatic policies. It continued the privatisation of state enterprises started by the NAR; adopted a new floating rate exchange mechanism; simplified the tax system; removed the tariff walls, adopting a more open trade framework and facilitated foreign direct investment by removing the aliens’ landholding restrictions. Finally, it changed the gas utilisation policy, initiating the development of liquefied natural gas. A policy revolution of sorts.

It was not smooth sailing. It took 15 years to weather the storm of the last structural adjustment period and here we are again. Both the current Prime Minister and Minister Imbert were part of the cabinet which undertook the turnaround process in 1991. They are not neophytes and touted their experience in the last electoral process. There is no evidence to date that they remember the lessons they ought to have learned in that first outing.

In his three budget speeches to date, Colm Imbert has outlined the problems pellucidly, as has the Prime Minister. They have noted that government revenue has been compromised by the current softness in energy production and prices. Both have correctly pointed out that the expenditure profile, in its current form, is unsustainable. both have complained that the fiscal incentives of their predecessors have encouraged new drilling activity, but exacerbated the revenue shortfall. The state and statutory enterprises, as currently managed, are not helping.

But having diagnosed the problems, they have prescribed no remedies. The revenue situation remains intractable; taxation revenue is weak at $40 billion or less. Expenditures down from $60 billion to $50 billion approximately, are still $10 billion more than the revenue. Partial privatisation of state assets has blunted the impact. The debt ratio has ballooned, as has the size of the deficit as we head to unsustainability. Our international credit rating has declined and will decline further in 2018.

To plug the gap, Minister Imbert has increased the burden of taxation on the corporate sector, increased indirect taxes and widened the VAT net. These measures have had little impact and appear permanent with no analysis of the long-term impact on the structure of the economy. Apart from some vague initiatives to the construction sector, which have had no impact, no new direction has been crafted, nor the private sector engaged. Business as usual?

The evidence suggests that whilst there will be some improvement in gas production, it will not return the economy to a growth path. The forex situation remains intractable with the economy in the doldrums. The country needs to know what is planned and the direction that is being crafted to help us survive, sustainably, in an increasingly complex and challenging world. Borrowing to facilitate our life style is unsustainable.

Mariano Browne

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