By GREGORY McGUIRE
Management of a resource-based economy in times of plenty is by no means an easy task. In many situations, a Government must choose between what is politically appealing and what is economically correct. A prudent Government would seek to strike the right balance the two perspectives. Over the last five years, this Manning administration has demonstrated beyond any doubt that its decisions are influenced primarily by politics and not economics. Nowhere is this more evident than in the 2008-09 Budget speech delivered by Finance Minister Karen Nunez-Tesheira.
The fiscal package pays cursory attention to economic or social realities while pressing ahead with a narrow politically-motivated agenda. It is not surprising, therefore, that the Budget is distinguished by several flaws, omissions and inconsistencies, which render it vacuous as a tool for macro-economic management
The first flaw is the failure to take full cognizance of and to articulate a position on how developments in the international context will impact on the T&T economy over the next twelve months. The Minister was very brief to the point of dismissive in her treatment of the international financial crisis and the prospect of a slowdown in world economic growth. While the world’s major Central Banks, and indeed our own Central Bank, are preparing for the worst effects of the contagion, the Minister proclaims “at this point no one can be certain how the ongoing turbulence in the financial markets will impact Trinidad and Tobago”. Her treatment of oil prices was equally cursory, leaving the impression that the Government was going to persevere with a conservative position, and indeed going on later to contradict what she seem to be saying in the review. But perhaps the most glaring blunder was the failure to even mention the EPA – which is so fundamental to the future of the non-energy productive sector of the economy. Trinidad and Tobago is at the front of the line to sign on to the EPA, yet the Budget does not even recognize that this is a major environmental factor that should influence its policy direction.
There was no mention, for example, of new fiscal measures to support firms, old and new, who are prepared to confront the challenges posed by the EPA. A 2006 promise to provide “assistance to domestic firms to be re-engineered with greater state-of-the-art technology and processes”, remains in abeyance. Equally ignored were the future of regional initiatives such as the CSME and the Caribbean Court of Justice which are critical to intra-Caribbean trade and the future of the regional integration movement. In contrast, the Minister maintained a blinkered focus on those developments which were either favourable to T&T or which served the purpose of showing that “we were not doing too bad”. Her lengthy discourse on the issue of global inflation, for example, amounted to nothing more than an unabashed attempt to place the blame for domestic inflation elsewhere.
Even more troubling was the Minister’s analysis of the domestic economy. Her boast that economic growth of around 3.5 per cent in the last year was on par with that achieved by the major industrial countries was sheer obfuscation of the fact that economic growth is leveling off. The facts are that fiscal 2008 represented the third consecutive year of reduced economic growth in T&T -The Vision 2020 target of economic growth in per capita GDP of 10 per cent per year was ambitious from the start and now seems more improbable with each passing year. In addition, oil production has declined by more than 20% over the last fiscal year and the rate of expansion in the gas industry has slowed considerably. The facts are that a combination of high capital costs, higher gas prices, and unfavourable market dynamics have brought investment in new downstream plant to a virtual halt. For the third straight year, no new plant will be commissioned in the downstream gas sector. The Government remains silent on these facts quietly hoping projects still on the cards- Alutrint, Essar, Polypropylene and Maeleic Anhydride will in fact come to fruition.
On the external account, 90% of export earnings came from energy sector exports, a situation very similar to 1982. However, non-energy exports are also down for the fourth consecutive year, meaning that the economy is losing its capacity to generate foreign exchange outside the energy sector. In the meantime, consumer goods imports continue to soar. What all this means is that given the rate of consumption of imports, the economy could be running into an external deficit which would result in a rapid drawdown of foreign exchange in a manner similar to 1982-86.
The omissions or errors of judgment in the analysis of the domestic economy are compounded by a third flaw in the use of oil and gas prices that are overly optimistic and inconsistent with market realities. Several negative forces in the oil market , including the prospect of a global economic slowdown, volatility in prices and flagging cohesiveness among OPEC members, suggest that this was the year to be conservative with respect to oil and gas prices. But political motives would not permit such reasoning. As a result, the Government entreats the population to save while adopting the profligate attitude of presenting a Budget which seems to calculate first what it wishes to spend and then imagine an oil and gas price to foot the bill. Just consider what would happen if householders were to live like this!
In the current scenario, savings to the Heritage and Stabilization Fund become a residual and will occur if, and only if, realized oil and gas prices substantially exceeded projected levels. Another problem with the price forecasts is that while the Government, opposition and some commentators continue to place emphasis on oil prices, it is natural gas that contributes upwards of 85% of total hydrocarbon production and generates a larger share (50-60%) of Government revenue than oil. Ironically, the gas price forecast used in the Budget has no meaning to anyone because the Government has never explained what it means.
Is it the export price of LNG? Is it the average well-head price of all gas sold in Trinidad and Tobago? Is it the LNG netback price? We have never been told whether the realized gas price was above or below the budgeted price. Moreover, because the natural gas business is characterized by different prices for different applications and end use market segments, Government revenue from gas becomes incalculable in the absence of more precise information. The oil and gas producing companies can contribute to greater clarity in the process by publishing exactly what they pay to the Government.
The fourth flaw is the Government’s blatant refusal to accept that its spending is fueling the flames of inflation. The Minister states in part that one objective of the Budget is “to reduce the rate of inflation to a sustainable level of 6 per cent”. She continues: “the objective is to reduce the non-energy fiscal deficit from its current level of 16% of GDP to a range of 10-12% of GDP by fiscal 2011”. The latter statement is more consistent with Government actions than the first. This year’s Budget shows no evidence of intent to reduce inflation in the short term. Rather than put the brakes on expenditure, the Government takes full advantage of a high commodity price scenario to project higher revenues so that the spending can continue, notwithstanding the capacity constraints and spiraling inflation. Fresh plans are announced in practically every sector for more and accelerated infrastructure expenditure.
Highways, housing, early childhood education centres, water distribution, new hospitals, health and community centres constitute an ever expanding list of planned projects. The Government seems oblivious to the resource constraints that impact negatively on the economy. With the unemployment rate at 4.5%, one would have expected Government to reduce allocations to URP and CEPEP thereby freeing up some underemployed labour to take up more meaningful jobs in other sectors. Instead, plans are announced for the formation of a special purpose CEPEP company, which at best will institutionalize underemployment. Underlying the approach to development is the belief that faster is better. Sadly, the population knows only too well how easily a lack of planning can transform faster into slower and more into less.
The fifth flaw is the message from the Minister that the balances in the Heritage and Stabilization Fund represent an adequate level of savings, because it exceeded our outstanding external debt. I hope the Minister is not suggesting that there would be no need for an HSF if the country’s foreign debt was zero? With the injection of US$1.3 billion in fiscal 2008, the HSF now stands at US$2.9 billion. The Government continues to applaud the growth of the Fund as a significant achievement. However, the relevant questions are not asked or answered. Is there a target set for the optimal size of the fund? How much do we need to save to get to the target in say 20 years? In a speech to the PoS Rotary earlier this year, the Central Bank Governor suggested that at current rates of deposits, and assuming no withdrawals and a real rate of return of 4% , the total Fund balance would rise to a mere US$ 11.3 billion in the next 15 years. He called then for a “more robust rate of accumulation” equivalent to about 20% of annual energy tax collections. Unfortunately this approach of targeting a rate of savings does not appear to appeal to the Government, which seems prepared to leave saving purely to the dictates of the market. It is tantamount to an individual depending on Play Whe or Lotto to meet pension obligations.
In medicine, improper or inaccurate diagnosis would invariably lead to the wrong prescriptions which could worsen the patient’s condition. The same is true for the economy. It is not surprising, therefore, that the policy prescriptions or lack thereof, with respect to some of the productive sectors seem out of line with the reality. A look at the some of the policy prescriptions in two key sectors- energy and agriculture- would support this assertion. In the case of the energy sector, tax reform aimed primarily at the Exploration and Production business, and promised since 2006-07, remains outstanding while oil production and drilling slide. While the PM speaks about wanting to negotiate a better deal with LNG producers, the Budget remains silent on the matter only reiterating the Government’s intention to “increase its participation throughout the value chain”.
Nothing was said about Petrotrin, the state enterprise that sits on the largest acreage among all the companies in the country. In the context of declining oil production, it would have been useful to hear what Petrotrin plans to do with respect to its E&P business. What is the future of the refinery business particularly in light of the loss of markets due to Petrocaribe? Will the Government continue to pump money into upgrading the old plant or will it invest in a new refinery? While the move to reintroduce CNG is commendable the strategy seems to be a carbon copy of the one used in the early 1990s which achieved only minimal success. Shouldn’t CNG be the direct responsibility of NGC? Perhaps CNG would become more attractive when the Government finally develops the courage to cap the fuel subsidy on all fuels.
With respect to the agriculture sector, the Manning administration’s plans seem biased towards mega farms and new institutional arrangements while several long standing issues faced by local farmers endure and food prices continue to soar. These include purposeful action against praedial larceny, access roads and flood mitigation. Interestingly, none of these problems are likely to fall under the portfolio of Government’s new super technocrat Noel Garcia, who, in addition to his position as Executive Chairman of HDC, now has responsibility for ADB, NAMDEVCO and EMBDC.
The Government is clearly signaling its belief that centralization of agriculture agencies is the answer to the sector’s woes. The tardiness and skewed focus of policy initiatives in agriculture do not suggest that this Government recognizes the existence of a “food crisis”. Ironically, perhaps the best example of a nation dealing with crisis is Cuba where new policies and practices introduced during the post Soviet Union economic crisis, created a fundamental transformation in agriculture production .It is interesting to note that decentralization and the break-up of mega farms, ecologically-based agriculture and urban agriculture were some of the new measures introduced by the Cuban government.
The Government has delivered a ” good news” Budget, deliberately refusing to speak of anything negative. It is consistent with its new endemic tendency to deny reality- no dengue outbreak, no food crisis, no worries about an inflation rate above 10%. The result is that the population is being shielded from the real facts about the condition of the economy, the state of key productive sectors and the possible implications of the global financial crisis. It creates an illusion of a robust economy insulated from threat. In this context, the Budget is business as usual, following the pattern set in the two previous statements. It increases welfare payments, mainly to the aged and vulnerable and continues expenditure in the key sectors – education, health, housing and national security. It makes tentative steps to dealing with both the gasoline subsidy and the number of cars on the road. It is important to note, however, that the expenditure profile is supported by rents derived from the energy sector to an increasing extent. Those revenues streams remain vulnerable to price and volume swings in the oil, LNG and petrochemicals. The current global scenario suggests a softening of prices across the board, a situation for which the Government appears completely unprepared as it continues to saunter down the garden path, feet off the ground and head in the clouds.
It all amounts to the failure of Government to take an objective honest look at things and to ask the population to begin to make adjustments in order to preserve our gains. It is a recipe for disaster!