Geisha Kow­lessar-Alon­zo

The re­cent state­ment by the IMF press con­firms what is al­ready know: that the T&T econ­o­my is out of bal­ance on both ex­ter­nal and in­ter­nal ac­counts, ex­ac­er­bat­ed by the nec­es­sary re­sponse to the COVID-19 shock, says econ­o­mist Dr Ter­rence Far­rell.

On Fri­day No­vem­ber 19, the In­ter­na­tion­al Mon­e­tary Fund (IMF) con­clud­ed its two-week an­nu­al vis­it to this coun­try and pub­lished its in­de­pen­dent as­sess­ment

In the con­clud­ing state­ment of the IMF’s 2021 Ar­ti­cle IV mis­sion to T&T, the Wash­ing­ton DC-based in­sti­tu­tion said the do­mes­tic econ­o­my is ex­pect­ed to grow by 5.7 per cent in re­al terms in 2022.

The growth next year will be “re­in­forced by the con­tin­ued pol­i­cy sup­port and the an­tic­i­pat­ed re­cov­ery in oil and gas pro­duc­tion.”

The IMF state­ment al­so said the Gov­ern­ment “act­ed de­ci­sive­ly” to con­tain the pan­dem­ic.

Mean­while in May 2020, in the midst of the pan­dem­ic and in a con­text of wreck­ages in the oil and gas mar­kets, Moody’s had put a neg­a­tive out­look to T&T’s cred­it rat­ing.

This was main­ly based on COVID-re­lat­ed fis­cal slip­pages.

Re­cent­ly, Moody’s an­nounced that it down­grad­ed T&T’s out­look.

And in re­sponse to Moody’s down­grade, Fi­nance Min­is­ter Colm Im­bert ar­gued; “This de­ci­sion by Moody’s col­lides with the pol­i­cy ad­vice we have re­ceived from all in­ter­na­tion­al or­gan­i­sa­tions to pro­tect our coun­try and sup­port the re­cov­ery in the cur­rent cir­cum­stances.”

Ac­cord­ing to Far­rell al­though the re­ports came al­most si­mul­ta­ne­ous­ly, the two or­gan­i­sa­tions have fo­ci.

He ex­plained that the IMF is con­cerned with the coun­try’s ex­ter­nal and in­ter­nal (fis­cal) bal­ances and its oblig­a­tions un­der the IMF Ar­ti­cles while Moody’s is con­cerned with the coun­try’s ex­ter­nal debt pro­file and its abil­i­ty to meet its oblig­a­tions to cred­i­tors over the medi­um and long term.

“Nei­ther or­gan­i­sa­tion is ex­pert in de­vel­op­ment pol­i­cy and what is re­quired to en­gi­neer growth in an econ­o­my like ours,” Far­rell said.

He not­ed that the IMF staff, who are “en­joined to be pos­i­tive about mem­ber coun­tries and not to be overt­ly and pub­licly crit­i­cal, see grad­ual im­prove­ment in the near-term due to im­proved pro­duc­tion and prices in the en­er­gy sec­tor.”

Fur­ther, he said, it is al­so oblig­ed to ac­cept the Gov­ern­ment’s promis­es about what it will do to re­store bal­ance on the ex­ter­nal and fis­cal ac­counts, even if past ex­pe­ri­ence sug­gests oth­er­wise.

For ex­am­ple, Far­rell said, im­prove­ments in tax ad­min­is­tra­tion have been pro­posed for sev­er­al years now in or­der to re­duce avoid­ance and eva­sion and which in his view are nec­es­sary.

“But even the wa­tered-down Rev­enue Au­thor­i­ty pro­pos­als could be de­railed and, even if im­ple­ment­ed, will take sev­er­al years to bear fruit.

“Same with the vexed ques­tion of trans­fers and sub­si­dies and with the size of the pub­lic sec­tor. The ob­sta­cle to im­ple­men­ta­tion in those ar­eas is al­most en­tire­ly po­lit­i­cal,” Far­rell said.

He added that with­out tough ac­tion to ad­dress pub­lic rev­enue and ex­pen­di­ture and by sup­press­ing forex de­mand and with a de­lib­er­ate avoid­ance of us­ing the ex­change rate to help re­store ex­ter­nal bal­ance, “we are stuck, hop­ing and pray­ing” that oil and gas prices will re­main high and that gas pro­duc­tion will re­bound.

“Hope and prayer are im­por­tant, even es­sen­tial, but need to be ad­duced in aid of sen­si­bly craft­ed macro-eco­nom­ic and de­vel­op­ment poli­cies, not as a sub­sti­tute for such poli­cies,” Far­rell said.

Mean­while, the For­mer Deputy Gov­er­nor of the Cen­tral Bank said be­cause Moody’s was chas­tised for its con­duct lead­ing up to the fi­nan­cial cri­sis, it is very ag­gres­sive in en­sur­ing that its rat­ing de­ci­sions can­not be seen as com­pro­mised.

While S&P, Far­rell added, in the face of ris­ing debt lev­els, may have been as­sured some­what by the im­plic­it mort­gag­ing of the HSF and hence en­cour­aged to set­tle for a neg­a­tive out­look and not to down­grade,

“Moodys is clear­ly not as­sured and sees a weak­er cred­it pro­file even with a re­bound in growth over the next cou­ple of years,” Far­rell said.

How­ev­er, the find­ings of nei­ther re­port help T&T with the growth and de­vel­op­ment poli­cies it needs to for­mu­late and im­ple­ment, nor should the coun­try be look­ing to those in­sti­tu­tions for help in that re­gard, Far­rell ex­plained.

“But we know, or ought to know what we need to do,” Far­rell said.

He sug­gest­ed the coun­try in­crease the in­vest­ment rate (on which there is no da­ta); to di­rect in­vest­ment to the right ar­eas, that is, ac­tiv­i­ties which ad­dress the glob­al mar­ket­place and can gen­er­ate for­eign ex­change earn­ings and those ac­tiv­i­ties have to lever­age re­sources that T&T has (agri­cul­tur­al, lo­ca­tion, cul­tur­al), but al­so utilise knowl­edge in­no­v­a­tive­ly to pro­duce goods and ser­vices to sell to the world.

Fur­ther, Far­rell em­pha­sised T&T has to put “twice, three times as much ef­fort, time and re­sources” in­to eco­nom­ic di­ver­si­fi­ca­tion as it does on the en­er­gy sec­tor.

Ad­di­tion­al­ly he sug­gest­ed this coun­try needs to en­gen­der a cli­mate in which the pri­vate sec­tor can be pro­duc­tive, em­pha­sis­ing that means in­ter alia, re­duc­ing crime and mak­ing the coun­try safe; im­prove in­fra­struc­ture—wa­ter, telecom­mu­ni­ca­tions, pay­ments sys­tems, roads and pub­lic trans­porta­tion; root out cor­rup­tion and dis­re­spect, and weed out the cul­ture of de­pen­den­cy and en­ti­tle­ment which is a drag on pro­duc­tiv­i­ty.

“This re­quires hard, sus­tained dis­ci­plined work over many years with­out the dead­weight of in­ternecine con­flict which has poi­soned our pol­i­tics and dri­ven many right-think­ing cit­i­zens to the edge of de­spair. Moody’s and the IMF can’t do any of that for us; we have to do it for our­selves,” Far­rell added.

Ac­cord­ing to econ­o­mist Dr Roger Ho­sein, the IMF’s growth pro­jec­tion for 2022 of 5.7 per cent is very wel­come news and could help the econ­o­my to pay some of its bills and re­duce its debt to GDP ra­tio.

“Note though, that giv­en that parts of the econ­o­my in 2020 and 2021 were closed be­cause of COVID-19 re­stric­tions, one would ex­pect for the FY 2022 once we are ful­ly “re­opened” the growth per­for­mance would be high­er than the years in which we closed. Thus, part of the growth is the “open­ing back up of the econ­o­my growth,” Ho­sein ex­plained.

He cit­ed that even with this growth pre­dict­ed by the IMF for 2022, the econ­o­my would still be small­er than in 2019 (and of course sig­nif­i­cant­ly small­er than in 2015).

Ac­cord­ing to Ho­sein, a clos­er look at the da­ta al­so in­di­cat­ed that the ma­jor­i­ty of the growth is com­ing from the en­er­gy sec­tor.

But he ques­tioned whether this is the growth the coun­try wants.

“Af­ter the ex­tent of eco­nom­ic stag­na­tion this econ­o­my un­der­went in 2009 to 2021 and the de­pres­sion from 2016 to 2021 that growth from any­where is good and should be cel­e­brat­ed. How­ev­er, we al­so have to be wary as it is this same en­er­gy sec­tor that played a sig­nif­i­cant role in caus­ing the econ­o­my to be in its cur­rent sti­fled po­si­tion,” Ho­sein ex­plained.

Fur­ther, he said these num­bers al­so mean the struc­ture of the econ­o­my drifts more to­wards a greater lev­el of de­pen­dence on the en­er­gy sec­tor.

Pol­i­cy mak­ers, Ho­sein ad­vised, would al­so have to now mon­i­tor the in­fla­tion rate as well, which ac­cord­ing to the IMF re­port, is ex­pect­ed to move north.

He added that ris­ing prices and a de­cline in nom­i­nal per capi­ta GDP (com­par­ing 2016 and 2022 on­ly) are not a good com­bi­na­tion.

“In­deed, the IMF re­port al­so care­ful­ly points out that the cen­tral gov­ern­ment pri­ma­ry bal­ance re­mains in deficit and even more, the non-en­er­gy as­pect of the pri­ma­ry bal­ance widens: not good at all,” Ho­sein said.

Con­tin­ued on page 9

Fur­ther, he not­ed that a care­ful look at the da­ta pre­sent­ed by the IMF al­so showed that for FY 2022 bud­getary rev­enues are set to in­crease but the bud­getary rev­enues are set to im­prove main­ly be­cause of the en­er­gy rev­enue com­po­nent which ris­es from 8.4 per cent in FY 2021 to a pro­ject­ed 10.6 per cent in FY 2022. Cap­i­tal ex­pen­di­ture is set to re­main at 2.1 per cent of GDP for FY 2022, the same as in FY 2021.

“Very wor­ry­ing­ly the con­clud­ing state­ment shows that by the time FY 2022 has elapsed, the ex­ter­nal debt would have climbed to a lev­el 41 per cent high­er than in 2017 and ba­si­cal­ly equal to the stock of re­serves (which at the end of FY2022 is ex­pect­ed to stand at around US$5.7bn),” Ho­sein fur­ther cit­ed.

He al­so not­ed that the stock of re­serves in FY 2022 is pro­ject­ed to be 32 per cent less than in 2017 (or 50 per cent of the 2014 lev­el).

“All of the de­riva­tions by the IMF are premised on a price of nat­ur­al gas price of US$3.50 per mmb­tu and if for some rea­son the ac­tu­al price of nat­ur­al gas were to fall be­low that lev­el, then all of the num­bers above would need to be ad­just­ed down­wards,” Ho­sein added.

T&T’s debt ca­pac­i­ty

In the last six years the econ­o­my de­clined by 16.6 per cent and stacked up a fis­cal deficit of over $61 bil­lion,

ac­cord­ing to econ­o­mist Dr Vaalmik­ki Ar­joon.

He said this deficit didn’t al­low T&T to save – hav­ing en­tered the pan­dem­ic with al­ready high debt lev­els of 75.5 per cent of GDP, bal­loon­ing to a cur­rent val­ue of 87 per cent giv­en the fi­nan­cial stress of COVID-19.

Ac­cord­ing to Ar­joon, T&T is now deemed even riski­er by the glob­al com­mu­ni­ty for meet­ing its debt re­pay­ment oblig­a­tions, hav­ing been fur­ther down­grad­ed in the spec­u­la­tive grade cat­e­go­ry to Ba2 in the re­cent rat­ings ex­er­cise by Moody’s.

He ex­plained this rat­ing was an­tic­i­pat­ed, as last year’s rat­ing of Ba1 car­ried a neg­a­tive out­look.

“The out­look gen­er­al­ly pre­dicts the like­ly out­come of the next year’s rat­ing ex­er­cise, with a neg­a­tive out­look sug­gest­ing an ex­pect­ed down­grade (pos­i­tive and sta­ble out­looks pre­dicts an up­grade and no change to the rat­ings re­spec­tive­ly),” Ar­joon said.

Not­ing that T&T’s ca­pac­i­ty to car­ry this debt lev­el is “very slim” Ar­joon sug­gest­ed the on­ly so­lu­tion is to en­sure the econ­o­my not on­ly achieves pos­i­tive growth, but this growth must be sig­nif­i­cant and con­sis­tent to bring about rev­enues that will be able to cov­er the debt with much left to spend on mean­ing­ful de­vel­op­ment. “At this point, our eco­nom­ic per­for­mance in terms of GDP is close to 2005 lev­els,” he said.

Fur­ther, Ar­joon said while the IMF has fore­cast­ed a growth of 5.7 per cent next year, T&T’s GDP will still be worse than where it was over 2006 to 2019.

He added that in 2022, in­creased oil and gas pro­duc­tion, to­geth­er with en­er­gy de­riv­a­tive com­modi­ties such as methanol will bring the econ­o­my back to pos­i­tive growth.

How­ev­er, Ar­joon out­lined, the ex­tent of the growth de­pends on the na­ture of the pan­dem­ic and the in­fec­tion rates, adding that the coun­try is still a long way from achiev­ing herd im­mu­ni­ty, hav­ing on­ly 45.4 per cent of the pop­u­la­tion ful­ly vac­ci­nat­ed.

Ad­di­tion­al­ly, he said high­er en­er­gy prices are like­ly to per­sist well in­to 2022, and this will au­gur well for T&T’s rev­enue earn­ings bring­ing the deficit down to ap­prox­i­mate­ly $9 bil­lion.

These per­sis­tent deficits, Ar­joon iden­ti­fied, are gen­er­al­ly fi­nanced by debt, sug­gest­ing that the debt bur­den will con­tin­ue to pile up.

And high­er en­er­gy prices, he said al­so mean the State will be plac­ing more funds in­to the HSF, as the leg­is­la­tion gov­ern­ing the fund re­quires that a min­i­mum of 60 per cent of ex­cess en­er­gy rev­enues must be de­posit­ed in the fund - glob­al en­er­gy prices are cur­rent­ly much high­er than prices which the bud­get is pred­i­cat­ed on (an oil price of $65 and a gas price of $3.75).

“A key down­side risk is the con­tin­u­ing glob­al sup­ply chain is­sues and ship­ping costs that con­tin­ue to dri­ve up costs in the pri­vate sec­tor. The US is our largest trad­ing part­ner, and is cur­rent­ly fac­ing a 6.7 per cent in­fla­tion rate – the high­est in the last thir­ty years,” Ar­joon al­so not­ed.

He said giv­en T&T’s de­gree of im­ports cou­pled with the per­sis­tent­ly high ship­ping costs from Asia, and the high­er prices of raw ma­te­ri­als from for­eign sup­pli­ers, this coun­try will con­tin­ue to ex­pe­ri­ence price in­creas­es well in­to the third quar­ter of 2022.

And while in­fla­tion is pro­ject­ed by the IMF to be an av­er­age of 2.4 per cent in 2022 , it is like­ly to be high­er than this in the first half of the year, Ar­joon added.

He al­so ad­vised that giv­en the surge in in­ter­na­tion­al spend­ing ac­tiv­i­ties glob­al­ly from the pan­dem­ic pent-up de­mand, it is im­per­a­tive that lo­cal man­u­fac­tur­ers are bet­ter poised to take full ad­van­tage of it.

The EX­IM bank has pro­vid­ed much forex sup­port to the sec­tor but it is com­mer­cial bank that sup­ple­ments ac­tiv­i­ties of the banks.

Ar­joon ad­vised there­fore, that au­tho­rised deal­ers in­crease the pro­vi­sion of forex to these man­u­fac­tur­ers, to fa­cil­i­tate their in­creased pro­duc­tion and ex­ports, adding that this will con­tribute to healthy growth next year, as al­ready sev­er­al en­ti­ties in the pri­vate sec­tor have shut down op­er­a­tions ow­ing to the fi­nan­cial stress of the pan­dem­ic lock­downs and their in­abil­i­ty to af­ford the high­er prices from their sup­pli­er and ship­ping costs.

Fur­ther he said as the IMF would have rec­om­mend­ed, it is al­so im­per­a­tive the State ad­vance its tax col­lec­tion which will help to close the fis­cal gap.

And if suc­cess­ful the TTRA can gen­er­ate ap­prox­i­mate­ly $12 bil­lion in un­col­lect­ed tax­es, Ar­joon not­ed.

Ad­di­tion­al­ly, he ad­vised it is al­so es­sen­tial Gov­ern­ment ag­gres­sive­ly push cap­i­tal ex­pen­di­ture projects that were stalled due to the pan­dem­ic and oth­er im­ped­i­ments in­clud­ing bu­reau­crat­ic de­lays in the pub­lic sec­tor.