Vital to cut expenditure says economist

Business as usual will not work and all hands on deck are required as we recalibrate the economy moving forward.” He said Imbert should set his revenue target at between $45-$55 billion and, if possible, closer to $50 billion and the budget should be based on a price of US$35 for a barrel of oil.

Hosein said the price of oil and gas will most likely remain dormant over the next few years and that in the period 2017 to 2021 the country can expect an oil price in the bracket of US$40 to $45 or even US$40 to $50 and the price of gas will remain similarly dormant to what it is at present “so that the economy getting bail-out from a price increase does not seem likely.

“At the same point in time, the State seems to be waiting for the price of oil to increase and this is not likely to happen, so in turn what needs to be pushed is the production of natural gas. Increasing natural gas production is a very useful strategy but it will not immediately lead to the type of diversification benefits other forms of intervention would trigger.

“Indeed, the State would probably need to consider an overhaul of the formula for the Heritage and Stabilisation Fund so a greater amount of savings can take place from any revenues generated by the energy sector to help the economy cater for rainy days as we are now in.” The International Energy Agency (IEA) has projected that demand for oil in 2017 is likely to grow at a slower rate than this year, due to a weaker global economic outlook. The IEA said in a report that global demand for oil will grow by 1.2 million barrels per day (bpd) in 2017, down from 1.4 million bpd this year.

Hosein said the price of oil has declined substantially in the last 18 months and particularly in 2016 the price of oil was even lower than what was budgeted.

He said, “What all of this means is that the current account balance in the economy will likely worsen.

And if the price of oil continues to be around $40-$45 per barrel in the next five years the consequence is that the current account balance is likely to remain in deficit. If the current account balance remains in deficit and the stock of international reserves are as a consequence eroded then this would put pressure on the economy.

The exchange rate could depreciate and this is something that the State needs to look at carefully.” He added that the Government has been borrowing to enhance the amount of revenue which is at its disposal, but expenditure continues to remain at or around $60-$63 billion and with revenues at or around $40-$43 billion, it means that the economy is running at about $20 billion in deficit in terms of the gap between its revenues and what it is spending.

Hosein said continuous borrowing cannot be the solution because “before we know it our stock of external debt would increase considerably.

The solution has to be in some way to live more within our means so that our expenditure will have to be cut at some point in time and brought to a more manageable level.”