The T&T economy is in deep trouble and the Finance Minister cannot avoid cutting the size of the public service and increase utility rates.
In a devastating critique of the government’s economic performance, economist Dr Terrence Farrell said the country is running out of time to take strong action to live within our means.
“So absent a miracle, there is no way that the level and composition of government expenditure cannot not now be addressed; and that will involve reducing head-count in the public service, closing state enterprises, and increasing rates for water, electricity, and transportation. As an economist and a citizen, I get no joy from stating this. But the reality is that we will have to come to learn to live within our means,” Dr Farrell told the Business Guardian via email on Tuesday.
The former Deputy Governor of the Central Bank said he was not surprised by the minister’s revelation that the country was now borrowing money to pay public servants salaries.
He said those who understand what is happening in the economy and paid attention to the budget presentation recognised immediately that the revenue projections were extremely optimistic and therefore all the risk in respect of the budget deficit was to the downside.
He said: “There seemed to be a curious notion that the non-energy economy and hence non-energy revenues are completely independent of energy sector revenues, which is not correct.”
The senior economist admitted that the country was now running out of fiscal space to make the changes to the structure of the economy that is required.
“As I have maintained from the outset in 2015 in my occasional commentaries, the critical constraint is and has been the external account, the balance of payments. That is where the shocks emanate, and that imbalance is what needs to be addressed, first and foremost. The fiscal deficit derives from the collapse of energy sector revenues, due to falling prices as in 2015, and due to falling production, as obtains today.
“We have failed to address what I believe is a structural imbalance in the external accounts because it has been represented as a cyclical downturn, and as a result we have allowed the foreign exchange reserves to decline far too far and resorted to external borrowing and HSF drawdowns.”
The economist rubbished the possibility of a “soft landing” as a “delusion and simply bad policy.”
He pointed out that former Prime Minister George Chambers elected to do that in 1982-1986 with disastrous results.
He said, “Lengthening the ‘glide path’ to adjustment of the external and fiscal imbalances just uses up scarce foreign exchange and fiscal resources (eg transfers and subsidies paid out) which will never come back. Import cover is a shorthand, but potentially misleading, indicator of reserve adequacy, made more so by the informal exchange controls we have introduced since 2016.
“The government was advised back in 2015 and in 2016 to adjust quickly, let the Central Bank use exchange rate adjustment proactively to eliminate exchange rate over-valuation, eliminate immediately all the fuel subsidies, and restructure and reform the portfolio of state enterprises.”
Dr Farrell noted that the World Bank advised further on public expenditure reforms. The EDAB also counselled separation of the HSF so that the Heritage component could be protected and used for long-term development and transformation not, as now, to pay public service salaries and the IMF’s reports supported these views and recommendations as well.
“So we are seeing now a replay of Chambers’ policy mistakes, coupled with a puzzling indifference or even hostility to advice, whatever the provenance of that advice, and a delusional view that the energy sector will turnaround and deliver us from collapse. But when critical decisions are postponed and the can repeatedly kicked down the road, the eventual reckoning becomes all the more difficult and painful as we saw in the 1987-1992 period.” Farrell warned.
Dr Farrell said the real questions are: how do we develop and transform this economy, and how do we maximise growth which is ultimately the way to reduce poverty and sustainably increase wealth? How we choose to answer those questions should then define the role of the government.
He noted that for the last 50 years, the Government, gifted with oil and gas revenues, has seen itself as the “prime mover” in the economy. He said what it has done instead is, through transfers and subsidies, including a subsidised exchange rate, fostered dependency throughout the economy, and sidelined or ignored the private sector.
“That is why the productive sectors—agriculture, manufacturing, tourism—have not performed, and why lamentably, there are now apparently 90,000 public servants, not counting those ensconced in the many state enterprises and statutory bodies. There is really no aspect of fiscal policy that is driving economic growth and development.
He said what we have as “budgetary policy” is an annual exercise in bookkeeping or “arithmetic” as Lloyd Best used to say.
“And even the numbers are misleading because government continues to use cash accounting which allows it to simply not pay VAT refunds and other payables, delay wage negotiations, and then claim a misleading budgetary outturn, which of course would be contradicted by proper accrual accounting.” Farrell lamented.
He said if there are strategies for growth he does not know what they are. The economist asked what has become of the Roadmap to Recovery?
He pointed to the continued problem of the quality of economic data available for decision making as being terribly deficient.
Dr Farrell told the Business Guardian “Our unemployment data (and unemployment is a lagging indicator) are almost two years out of date, not to mention other key labour market indicators (wage rates, productivity, etc.) which are important in any modern economy.
“We have no national income accounts; we don’t know what the investment rate is, and where in the economy investment is taking place; we don’t know the domestic savings rate; we can say nothing about consumption.
“Key data on fiscal operations and on trade are reported with unacceptably long lags. The detailed balance of payments reports are also dated.
“Ask yourself: how would you feel to be in a plane high up in the air with a pilot who doesn’t know where he is or how high, how fast the plane is going, or how much fuel he has left. That’s where we are in terms of the data supporting economic management here today.”
He said judging by the quality of the presentations in the last and previous media conferences, he is deeply worried about the quality of technical expertise available to the Finance Minister and the advice and support he is getting internally.