Social protection programmes (SPP) should be adjusted to better ensure recipients are getting skills training, referrals and the other necessary assistance to improve their self-sufficiency.
And caution must be exercised regarding a “welfare dependency syndrome” in T&T, according to a working paper by the Central Bank titled, “The Impact of Declining Central Government Transfers and Subsidies on the Household Sector: Implications for Financial Stability” penned by Yannick Melville and Nikkita Persad of the bank’s research department.
It noted Government allocated significant financial resources to transfers and subsidies – 53.6 per cent of total expenditure in fiscal year (FY) 2021.
“Transfers to Households” amounted to $9.2 billion in FY 2021 and accounted for the largest share of expenditure (33.9 per cent) under transfers and subsidies.
According to the paper recently, due to energy market pressures and COVID-19, the Government’s fiscal space has narrowed.
Consequently, to ensure fiscal sustainability, it sought to reduce “large ticket items” under transfers and subsidies (for example, the fuel subsidy and government assistance for tertiary education).
Further, in the budget statement for FY2022, Government alluded to making additional reductions in transfers and subsidies, by shifting towards a market-based pricing approach for electricity and water utilities and increasing the retirement age.
However, the paper noted that while these changes may improve the countries fiscal balance, households may have to adjust especially those where a large share of household income/expenditure is supported by transfers (senior citizens’ grant, public assistance, etc) and subsidies (transportation, utilities, education, healthcare and inter-island travel).
And for heavily indebted households, this in turn may trigger debt-servicing difficulties, leading to a higher incidence of loan defaults and lower income and profits for financial institutions.
Recommendations:
The paper’s micro-analysis found that reductions in transfers and subsidies may significantly weaken already vulnerable households as SPPs may not be providing sufficient coverage (as they are based on outdated poverty statistics).
Further, the paper noted that over 20 per cent of the population lives below the poverty line (CF 2013) and there are high levels of income inequality – 80.3 per cent of those surveyed in the Continuous Sample of Survey of Population (CSSP) indicated that their gross income averaged between $0 and $5,000 while 3.3 per cent had a salary of $10,000 or more.
At the same time, while acknowledging that vulnerable households are not always the recipients of Government financial assistance, there are concerns of a “welfare dependency syndrome” in T&T.
“There have been reported incidents of ‘double dipping’ and overqualified SPP recipients. These occurrences serve as another barrier in the fight against poverty by reducing the stock of financial assistance that can be directed to those in need of social support,” the paper explained.
And although it is necessary to correct benefit leakage, it should be noted that the decline in transfers and subsidies to households caused a decrease in commercial banks’ income as credit growth contracted – as these institutions adopted a ‘wait and see approach,’ the paper also detailed.
“Their cautious approach allowed commercial banks to reinforce their financial positions. Credit unions and unregulated loan providers, on the other hand, took a different approach to their banking counterparts, as they continued to extend credit to households despite the negative implications of the fall in transfers and subsidies to their main customer base -vulnerable households,” the paper said.
Although data on the financial soundness of credit unions and unregulated loan providers was sparse, the paper cited that the Impulse Response Functions (IRFs) found that credit unions increased their reserves during this period of transition.
However, it should be noted that reserves (the financial resources set aside to meet possible credit delinquencies) grew at a much slower pace than that of loans.
As such, it is uncertain if other key loan providers possess sufficient buffers to mitigate possible transition risks associated with falling transfers and subsidies to households, the paper said.
The paper further advised that based on the results of the micro and macro analysis, emphasis should be placed on restructuring social development programmes and strengthening the supervision of credit unions.
And while SPP recipients need skills and the other assistance required to improve their self-sufficiency this could be implemented alongside a database that tracks the “status” (income, occupation, training received, assistance received, etc) of SPP recipients to improve resource allocation by removing “double dippers” and overqualified recipients, the paper suggested.
In July 2005, Government initially agreed that the supervision of the financial activities of all credit unions should be integrated, under the aegis of the Central Bank.
The Government also agreed that the Co-operative Societies Act, Chap. 81:03 (CSA) should be amended to remove the supervision of the financial activities of credit unions from the mandate of the Commissioner for Co-operative Development – the Central Bank’s supervision mandate would be fulfilled under the establishment of a Credit Union Act (CUA).
A policy proposal document for the CUA was published in 2009.
The paper noted many of the macroprudential criteria outlined in the document would greatly improve the financial stability of credit unions as they are also in line with World Council of Credit Unions recommendations.
However, the paper said the responsibility of supervision and prudential regulation of credit unions may have been subject to a rethink.
The Credit Union Bill was introduced on November 14 2014, but lapsed (on June 17, 2015) upon dissolution Parliament.
To date the Bill has not been re-introduced.
In this regard, there is a case for fiscal (reduction in transfer and subsidies) and financial stability (institutional resilience) measures to be considered collectively, the paper advised.
In budget statements, SPPs are often recorded under “transfers and subsidies” – non-repayable grants/benefits paid out to private and public enterprises (World Bank 2021).
The 2021 review of the economy noted total transfers and subsidies for fiscal year (FY) 2020/21 was $27.2 billion (53.6 per cent of total government expenditure).
The largest share of expenditure under transfers and subsidies was attributable to “transfers to households” (which stood at $9.8 billion).
According to the paper while the review did not decompose transfers to households into transportation; utilities; education and health care; and inter-island travel, it can be anecdotally assumed that every citizen benefits in some way from these subsidised services.
However, the paper further explained that many of these SPPs are procyclical; they were either set up or expanded during periods of energy market buoyancy. As such, following the collapse of oil prices (by more than 50 per cent in 2014), in 2015 the Government announced it will be scaling back SPPs.
“Though facing less fiscal revenue, the Government had delayed consolidation and instead temporarily amplified transfers and subsidies due to the financial impact of the COVID-19 pandemic, adding that with the threat of COVID-19 on the retreat, a reversion to the policy stance of consolidation of transfer and subsidies has resumed.
