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Cooking The Books

Sunday, September 7, 2014

When he delivers his last budget speech tomorrow, Finance Minister Larry Howai is likely to have much to boast about. Unemployment, for example, reached 3.75 per cent over the last fiscal year and satisfied the political, if not the economic definition of full employment. Economic growth, projected at two per cent, is in line with some of the major economies in the world, although it has us in ninth place in the Caricom region.

The nominal exchange rate has stabilised at a politically acceptable level of approximately TT$6.44 to the US dollar and the budget deficit has been dramatically reduced, which might even suggest the attainment of a balanced budget ahead of the minister’s prediction of 2016.

The minister is also likely to boast that inflation, as a result of the caring policies of the PP administration, is at the lowest level for some time, with headline inflation now at just over two per cent. T&T, he is likely to say, is now poised for economic take-off.

Don’t believe a word of it. Unfortunately for the minister, tomorrow’s budget presentation is being delivered following last week’s publication of the International Monetary Fund Article IV Consultation Report on the T&T economy following its last visit which ended in June 2014. 

Throughout the report, the IMF economists expressed their concern over the reliability of the data from T&T. For some inexplicable reason, the Ministry of Planning has allowed the Central Statistical Office to completely collapse, so that it is now incapable of providing reliable economic statistics to guide fiscal planning and projects. The absence of data meant the IMF was forced to make projections based on numbers on which it could not truly rely. And the numbers which it did have did not mean what they suggested.

The Minister of Finance is likely to boast, for example, that he has been able to significantly reduce the budget deficit as a result of greater-than-expected revenue receipts and the prudent fiscal management employed under his tenure. The IMF warns, however, that the improved revenue receipts are partly due to improvements in the non-energy sector, but are also due to “ad hoc” interventions by state enterprises which are paying huge dividends to the Corporation Sole to boost its fiscal outcome.

“While the Government should reap rewards from its ownership of profitable enterprises,” the IMF noted, “staff cautioned that excess reliance on such dividends could, in the long run, undermine company finances.” And in the most telling paragraph of the report, it concluded by stating: “Staff welcomed the authorities’ intention to maintain discipline on current spending in the run-up to the 2015 elections.”

The Government’s fiscal position was strengthened last year by the First Citizens IPO which netted $1.05 billion and this year the Fund notes: “Dividends from non-financial SOE (State Owned Enterprises), excluding the National Lotteries, already totalled one and three-quarter per cent of GDP in the first quarter of FY 2013/14, compared to 0.8 per cent of GDP budgeted for the whole fiscal year. This includes a dividend from National Gas Company equivalent to three-quarter per cent of GDP.”

It may even be tempting to believe that the fiscal performance has been so great that it is a good thing we avoided Patrick Manning’s Property Tax. Well, not really. The Finance Minister has gone ahead and quietly implemented the Property Tax. The first phase, originally intended to begin in June this year, will target business and commercial enterprises and work is already proceeding apace according to the assurances given to the IMF. The third phase, which targets householders, will not kick in until 2016, after the general election, and will help the minister fulfil his promise to balance the budget.

The budget is an exercise in politics as well as economics and both need to be balanced well if the country is to grow while avoiding the social upheavals that have seen some of the best laid economic plans come to naught. As a finance minister, Howai has perhaps done a good job in attempting to keep the economic fundamentals in line while pleasing the real politicians at whose behest he serves.

The problem is, he remains by nature a banking CEO. The financial world is replete with examples of CEOs who earned huge bonuses from their firms ($11.5 million is a drop in the bucket) by ensuring they met and surpassed every key performance indicator (KPI) during their tenure, only for the enterprises to crash following their well-timed departure.

On the face of it, most of the KPIs Howai will announce tomorrow will suggest that we are on the cusp of economic take off. But there will be no meaningful attempt to deal with the most pressing budgetary issues—like the $5 billion fuel subsidy or the fact that more than 50 per cent of the budget is consumed by transfers and subsidies.

The reality is: unless there is a dramatic intervention, we are headed for a slow decline as our energy sector revenue continues to evaporate and the non-energy sector struggles to compete extra-regionally to compensate for the shortfall.


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