The price of oil has dropped by over 50 per cent, gas prices are expected to follow and the local revenue from both is aggravated by the reduction in local oil production and a gas shortage as experienced by the Pt Lisas processors for the past two years. This situation is accompanied by an apparent shortage of foreign exchange in the market, which the Central Bank (CB) Governor denies, but is evident in the actual rationing taking place by the commercial banks.
People are being accused of hoarding which one prominent businessman admits–his company buys anything available at any time so as to keep importing to resell on the local market. We have sold some 10,000 new cars in ten months last year.
But this is reminiscent of the situation predicted by the then Deputy Governor of the CB, Dr Euric Bobb, in June 1981. Listen to him (E Bobb, The Role of Financial Policies in Economic Development-with special reference to T&T):
"...it is very likely that the price of oil will rise only moderately or even decline in the near future. This is combined with our declining output of crude petroleum and falling refinery output–which is itself a reflection of recession in the major economies of the world–will mean in real terms declining export receipts and government revenues, together with continued high levels of imports and government expenditure, may open up the prospects of government deficits and balance of payments deficits. The high levels of the country's foreign exchange reserves and government's accumulated surpluses will cushion the adverse effects of these deficits from a period of time, but for only a period of time. The adjustments to lower levels of expenditure and income, particularly on an inflationary environment may be difficult and painful."
The global and local economic circumstances eventually forced the country to the IMF in November 1988.
Dr Bobb's comment above could adequately describe the situation we find ourselves in at present. Though one does not know what will happen to oil and gas prices, given our declining oil production and gas shortages and the facts that the world is in the process of restructuring its petroleum industry and the threats of global warming and climate change, one can expect in the worst case a prolonged price slump for our energy export earnings.
The 1981-88 experiences and monetary and fiscal interventions by the CB and the Ministry of Finance could stand us in good stead, particularly the mistakes that were made. As the reserves began to fall in 1982 the CB considered devaluation of the T&T dollar and a dual rate mechanism. It was concerned that a devaluation would not quickly impact demand for imports and was concerned that the unions could alleviate this impact by asking for salary/wage increases.
Hence the CB introduced the EC-0 to quickly reduce imports. The CB then increased its Repo to help drive up interest rates. By 1984 the CB was again looking at a devaluation to reduce the balance of payments as the reserves were still declining. It tried to increase the deposit rate of the commercial banks at the CB, but this had marginal effect.
Eventually in the budget of 1985, three years later, the exchange rate was devalued for most items and the original rate kept for certain items, eg food, drugs, agricultural requirements. By 1986 the reserves had fallen giving import cover of less than three months and the dual exchange rate was unified in January 1987. By 1988 we were drawing down funds from the Compensatory and Contingency Financing Facility and by January 1989 we were under the formal standby arrangement of the IMF.
Given the above experiences, the question that should be uppermost in our minds then is what monetary and fiscal steps should we take now given the current situation and the need not to retrace the road to the IMF? Clearly the demand for imports has to be immediately reduced. Given the fact that local business activity is short-term debt-based as is consumer acquisition of capital goods, it is important to increase interest rates that commercial banks charge on loans.
Since the liquidity is high in the market the Repo is of little use and the CB should invoke the power the CB Act gives it to increase these interest rates by decree. In the 1981-88 adjustment the devaluation of the TT$ was delayed until the road to the IMF had become unavoidable.
Today, the initial impact of the interest rate increase has to be monitored closely since devaluation will be called for if the reserves were to decline. However the Government has to restrict its spending, cut out any waste (for example in subsidies and Gate) and prioritise its capital spending. The implementing of other taxes–property tax–could add to these fiscal constraints. But all of this could come to nought if salaries and wages are allowed to increase inordinately.
We are in a difficult situation and as Dr Bobb said many years ago–the adjustments...may be difficult and painful. This is a message that the Government has to get over to the population and the fact that an election is nigh is no reason to downplay the severity of the current predicament.
Mary K King