Consequences of increase in public debt

THE EDITOR: The Auditor General has issued a severe warning that our public debt in Trinidad and Tobago is rising rapidly. It has increased by 20 percent in the first year of the People’s National Movement (PNM) administration from 20 billion to 24 billion TT dollars. What are the reasons for the increase in public debt? Essentially they are three-fold:

Firstly, it is that there is a lack of internal control in the administration of the public finance. This implies that public officials are not obeying the controls that are imposed by The Exchequer and Audit Act, Chapter 69:01 of the Laws of the Republic of Trinidad and Tobago. Secondly, adherence to the mechanism to ensure that funds are dedicated and employed for the purpose for which they were approved. Thirdly, at the Ministerial level inferentially, there are directions to use funds other than the purpose for which they were approved, and yet to find funds on the basis of original approval.

The consequences for engaging in such mis-management can be devastating to the economy. These are as follows:
1) It causes the economy to become inflationary. This is because the additional funds as stated by the Auditor General are to finance Current Expenditure, derived from the General Revenue of the country. This means that the scope and level of services within the economy do not change. Hence, there is no increase in productivity but an increasing claim on the same goods and services within the economy.
2) It impacts upon the term structure of interest rates. This is the rate charged by banks to borrow funds from the public, and for the public to lend the banks funds in the form of deposits. It results in a “Catch-22” paradigm. The banks will only obtain funds from the public for a short time, because they need it to finance their consumption expenditure; in like manner, the public will give the banks these funds for a short time since they require it to finance their household expenditure.

The combination of these activities creates increased prices in property values and household sector, since there is a money illusion within the domestic economy. The cumulative effect of 1 to 2 above, is that there is depreciation in the value of the currency, with the result of an increase in price levels for food, clothing and consumer durables. This results in an increase in the standard of living. This increase in public debt impacts adversely on the effectiveness of monetary policy. The Central Bank can through open market operations, “mop up” the excess liquidity created by the lack of controls in public expenditure. However, when this public expenditure is used to finance current consumption, open market operations are not an effective instrument, since the depositors are there with their deposits on demand.

The commercial banks cannot take this form of demand deposit and respond to the call by the Central Bank through open market operations. Similarly, the commercial banks will pressure the Central Bank not to increase the Reserve Requirement ratio. This is because the funds that are in the commercial banks that originate from an increase in public debt are short term funds needed to finance current expenditure of households. All of the above begs one fundamental question. Why is this happening? It points in the direction that the Minister of Finance does not realise the importance of controlling the public debt, as a percentage of the Gross Domestic Product (GDP) and the expenditure from the revenue derived in the economy.

He should realise that the policy that ought to be pursued is the repurchase to facilitate the decrease of expenditure for household items in the economy; however he is engaged in over-spending. Mr Minister of Finance, in the event that this is not ceased immediately very soon you will be told by the International Monetary Fund (IMF) you have to devalue the Trinidad and Tobago Dollar. This is not far fetched. The Republic of Ghana was engaged in these acts and it had to devalue its currency by 100 percent. Alternatively, Mr Minister of Finance, have you outlived your usefulness (if any) in the Ministry of Finance?  I submit, that your point of departure is not four Ministers in that Ministry.  The Parliament of the Republic should take heed!

DR SHASTRI MOONAN
Attorney-at-Law
Laventille