“We are in a perfect storm… in a vessel which is poorly engineered to take sustained pressure and under the command of officers who apparently cannot bring themselves to face up to the realities of the storm or the inadequacies of the vessel they are navigating! So the crisis is not ‘impending’, it has been with us for some time.”
That is the view of Economist Dr Terrence Farrell as he spoke with the Business Guardian on the state of the economy days before the Finance Minister Colm Imbert’s 2022 budget presentation.
Dr Farrell who was a former head of the Economic Advisory Board and one of the country’s leading economic minds insisted that the issues of no economic growth in the last ten years, rising debt to GDP, falling official foreign reserves and the energy sector facing major challenges to long-term sustainability are really symptoms of the underlying, continuing crisis which is a dependent, rent-seeking economy which has been rocked by two significant external shocks.
The shocks he explained are the structural change in the global energy markets which began in 2014 and is ongoing, and the Covid-19 shock of 2020 which is also ongoing. When shocks occur, Farrell posited, adjustment is the first imperative. If the shock is minor and short-lived, you ride it out; but if it is major and structural, you have to adjust.
He said both external shocks encountered local conditions which were unpropitious for effective adjustment.
“Our domestic energy policy has been in disarray since 2007 and led to production declines (both oil and gas), and then impacted adversely the downstream petrochemicals industry, itself a major source of foreign exchange earnings. We suspended property taxation, and recklessly spent money, including NGC’s reserves, on failed projects like Petrotrin’s gas-to-liquids, LifeSport, Beetham wastewater, WASA, state enterprises which add no value, and on and on!” Farrell told BG.
Secondly, and consistent with our cultural predilections he noted our policymakers chose to interpret the first shock as temporary and elected to ‘ride it out’, drawing down our foreign exchange reserves, borrowing locally and abroad, making token adjustments in expenditure, and suppressing foreign exchange utilisation. The Covid-19 shock simply made things worse because it demanded a response which required expenditures to be maintained and even increased in some areas, and hence forced access to the Heritage and Stabilisation Fund (HSF) and even more borrowing the economist noted.
For Dr Farrell our cultural predilections is the proclivity to want to enjoy the omelette, but not break any eggs.
“The dependency-entitlement syndrome which energy sector rents have fostered over the last 50 years he asserts make it difficult for politician and citizen alike to contemplate a different paradigm.
This results in citizens wanting government to subsidise everything “because we have plenty oil and gas” although he argued after 100+ years in the business we still have no capability to explore and find oil and gas and we have weak capability to negotiate with and monitor the multinationals who do have the capability. Farrell noted.
The former deputy Governor of the Central Bank of Trinidad and Tobago said we persist with wasteful subsidies for water, fuel, electricity, transport to Tobago, though we still can’t get water 24/7, electricity goes frequently, and there is inadequate public transportation. For him there is a need to envision and embrace a more disciplined, tolerant and productive society, which is not prepared to live ‘like crabs in a barrel, fighting for access to the energy sector rents’.
He said adjustment is the first imperative noting it is harder to get growth going if the economy is not stabilised.
For the former head of the economic advisory board, growth will follow from the other two imperatives — Diversification, and Transformation.
Dr Farrell said, “Fundamentally, growth results from Investment. We don’t have National Income Accounts so we don’t know what our investment rate is. The recent S&P report estimated that our investment rate was about 12%. I don’t know where they got that number from and I don’t know if it’s gross or net investment. Whatever the source and whatever the measure, if it’s anywhere close to reality, it is pathetic! We need to have an Investment/GDP ratio of around 30%. If we are not investing how can we expect the economy to grow?”
But even if we get investment Dr Farrell said it has to be in the correct areas. For example he said increasing investment in import substitution projects which have no hope of scaling up into exports is, frankly, a waste of time. We have to invest in projects which address the global marketplace or have the potential to do so. They can initially be small, but they must have the “DNA of an elephant,” he reminded.
In trying to transform the economy and have sustainable growth Dr Farrell argued we should not look to rebuild what we had because to do so would be to rebuild a dependent, rent-seeking economy, driven and dominated by the government sector.
The rents from the energy sector he asserted will be much lower going forward, in part because we have to incentivise the multinationals to find and produce as much gas as possible, at as competitive a price as possible, competitive for both the downstream Petrochemicals industry and for LNG. We will need those energy sector rents to fund investment, not to fund consumption through the government budget he observed.
“The traditional way of thinking in terms of ‘Manufacturing’ or ‘Agriculture’ is simply not helpful in today’s world. The questions we have to be asking and trying to answer are: “Where can we create or add value?” and “What global markets can we penetrate with our value-adding goods or services?” When Arthur Lewis addressed similar questions 75 years ago, the answer was ‘Manufacturing for export’ because he could identify a range of manufactured goods where our low labour cost could confer a competitive advantage. Today, the answer is more complex and does not rely on low labour costs, but on a range of factors — location, technology, logistics, price, scale, product uniqueness— usually in some combination....
“So our success going forward will depend on investing in entrepreneurs and businesses that are looking to identify problems, finding solutions that add value, and implementing those solutions. Some solutions may fall into ‘manufacturing’ or some into ‘services’. It matters not! In some instances implementing solutions will require collaboration between government, industry and universities for funding, technological support and R&D, and marketing and management. Besides funding (not through any government ministry!), government can assist by enlisting our strategically placed foreign missions in market penetration, and engaging our West Indian diaspora for opportunities to collaborate,” Dr Farrell advised.
He said the recently announced agriculture projects like ANSA McAL’s berry farm in Tobago is an example of what is needed going forward.
He revealed, “Tobago has a Draft Medium Term Policy Planning Framework through a exercise which I led a couple of years ago, and also has my views on how Tobago can maximise the benefits of resort tourism. In summary, Tobago’s tourism has to scale up to reach one million visitors per year, and grow from there. Scale is important and it is the only way a new airport terminal makes sense, or else we are building another white elephant! To get to those numbers from both international and domestic visitors, you need at least three ‘Sandals-scale’ resorts. Once you’ve got those numbers, and you’ve negotiated well with the resort owners, Tobago can invite entrepreneurs in agriculture using modern hydroponic and aeroponic technologies to produce some of the fruit and vegetables that the resorts consume. In other words, your investment in resort tourism drives the kind of agricultural initiatives that you incentivise and pursue. The Infrastructure plan for Tobago - public wifi, pedestrianisation, water and sanitation, heritage sites — will also generate opportunities for business on the island. The key to unlock all that in my view are the resorts.”
Dr Farrell admits the increase in debt is understandable in the present situation saying as part of a sensible, proportionate adjustment programme, some increase in debt and some drawdown of foreign exchange reserves would have been necessary and appropriate. But added adjustment really involves reducing expenditures in both the public and private sectors in line with reduced real incomes so that both Debt and Reserves are kept at sustainable levels. As debt increases, its servicing absorbs more revenues and pre-empts other expenditures. As foreign exchange reserves fall, they may reach a level at which future growth, which requires access to foreign exchange, is compromised. A sensible adjustment programme establishes those targets and then crafts measures for expenditure reduction and expenditure switching which enables the targets to be met Dr Farrell told BG.
He said, “In my view, those measures must include using the price mechanism to help manage what and how much we consume and produce. As far as I am aware, we’ve established no such targets. So again, consistent with our cultural predilections, we chinks, we procrastinate, we obfuscate and we kick the can down the road, hoping that since God is a Trini, He will find us more natural gas, raise energy prices, and allow the fete to begin again.”
Dr Farrell also expressed support for the Revenue Authority as a means of increasing government’s tax take by bringing more people into the taxation system but warned we could end up re-creating the BIR if we are not mindful.
He also called for a reduction in the size of the public service calling it bloated and in need of transformation.
The economist said the use of the HSF does not create fiscal space, since it is merely financing the emerging deficits. He insisted that we needed to have a Heritage Fund under the control of Parliament, separate from a Stabilization Fund accessible by the Minister of Finance for the purpose of stabilising expenditures in the face of a major shock, such as Covid-19.