Central Bank: Inflation a major worry

In presenting the 2005 annual economic survey at the Eric Williams Financial Complex yesterday, Deputy Central Bank Governor Dr Shelton McNichols said the economy continued to record strong growth last year with real Gross Domestic Product (GDP) increasing by seven percent. McNichols said that growth was due to an increase in crude oil production and increased output from the petrochemical industry.

He said the non-energy sector recorded four percent growth in 2005, with manufacturing and construction sectors being the main drivers of that growth. The construction sector especially benefitted from Government’s major infrastructural development and housing thrust as well as strong private sector construction activity.

Continued buoyancy in the non-energy sector resulted in the creation of 11,600 jobs and the average unemployment rate in TT declined from eight percent to “a historical low” of 6.7 percent in the fourth quarter of 2005.

These jobs were created largely in the construction and services sectors of the economy. However McNichols said inflationary pressures driven by rising food prices remains a concern for the Central Bank.

The survey showed that inflation accelerated in 2005 as large-energy financed fiscal injections supported a strengthening of domestic demand, while supply-side factors continued to drive increases in the cost of food and high global oil prices contributed to the cost of imports. Food prices remain at the heart of TT’s inflationary concerns, with headline inflation (driven in large measure by food prices) reaching 7.2 percent in 2005 as the increase in food prices reached 22.6 percent. Core inflation, which excludes food prices, rose from two to 2.7 percent in 2005.

Noting that the domestic agriculture sector performed poorly last year, McNichols said measures must be implemented to create a greater level of domestic agricultural sustenance.

The economy’s absorptive capacity was put under stress last year with the accelerated pace of execution of government projects and easy private sector access to credit led to reported shortages in some construction materials and skilled labour. There were also signs in 2005 that a 74.8 percent growth in energy sector revenues saw a widening of the non-energy deficit from 7.9 to 9.7 percent of GDP. However, public debt declined from 48 to 40.7 percent of GDP last year. McNichols said these developments pointed towards a need for ways to boost domestic savings and the bank would play its part in helping to achieve that goal. McNichols’ fellow deputy governor, Joan John, said Government is addressing the economic concerns outlined in the survey.

The survey also showed the labour front was quiet in 2005 but wage pressures could emerge as TT approaches full employment. The survey added that wage increases must be kept in line with productivity growth.Central Government’s finances were also healthy in 2005 with more than half of last year’s surplus, a total of $5,2013 million being saved in the Revenue Stabilisation Fund.