Mismanaging a recession

He said this money needs to be spent in order to provide job stimulus and investment and to recover from our recession — one generated from the onshore demand for foreign exchange exceeding its supply.

Further, the minister is considering giving manufacturers priority access to the limited foreign exchange in the market, since they are employing people, generating economic activity and exporting goods made in TT.

The minister claims that two years ago, TT was earning $19 billion a year from petroleum, but now it is earning a mere $2 billion. Hence the Government’s income shortfall is being financed by local and foreign borrowings, sale of assets, the Central Bank’s overdraft, and drawdown from the Heritage and Stabilisation Fund; all of which are not medium to long-term sustainable.

What these can do together with the depletion of our foreign reserves is to take the economic activity slowly downwards towards a position where the income from the energy sector can satisfy the onshore demand for foreign exchange.

If this income remains too low the economy will collapse (low gross domestic product, high unemployment, high inflation) in the medium term — this is the characteristic of the plantation economy we operate where economic activity of the majority of the population depends on the foreign exchange income to the country.

It is a simple fact that our small open economy survives because the energy sector traditionally provided in the order of 90 percent of the foreign exchange that allows the onshore private sector to import the requirements of the population.

When the foreign exchange drops as it has now, it is impossible in the short term to export new products and services, and/or replace any substantial set of imports by local production and, hence, service the demand for imports.

The minister tells us that government spending provides investment that helps recovery from the recession; this is only so if it provides exports or reduces imports in the short term. He asked whether the Government should stop building roads. This last activity does nothing to earn foreign exchange, so it does nothing to alleviate the recession.

The minister also tells us that this spending provides job stimulus.

If these jobs are not producing exports in the short term or replacing imports, then this stimulation does nothing to alleviate the recession.

None of these measures is medium- term sustainable.

The minister is considering implementing a scheme, reminiscent of the Exchange Control, to give manufacturers priority access to the little foreign exchange earned by the country. The manufacturers who call themselves exporters should have on average no need for foreign exchange, since to be termed an exporter one has to be a net earner of foreign exchange. Further, the Export- Import Bank of Trinidad and Tobago helps these exporters as to immediate income on a foreign sale via post shipment financing payable in either local or foreign currency.

The manufacturer that imports to provide products for the local market (possibly simple assembly) contributes directly to the demand for foreign exchange that has to be reduced and provides the same kind of semi- and low-skilled jobs as the larger group that imports, marks up and sells. So giving this priority to our onshore manufacturers seems to make little sense.

I again wish to refer to Dr DeLisle Worrell, the ex-Central Bank Governor of Barbados, who tells us that in small open economies, like TT, during a recession the immediate task is to reduce aggregate demand in the country, since such economies cannot respond with new exports or replace imports by local production.

Hence spending by the Government to maintain employment, economic activity, simply props up aggregate demand and the demand for foreign exchange in a scenario wherein the supply has dropped precipitously.

If the demand remains as before then the system will attempt to correct itself with the local market devaluing the TT dollar and, as one businessman has already told us, business is already budgeting its cost of foreign exchange significantly higher than the official rate with the concomitant product price increases.

Surely, targeted taxation on imported goods and services is more efficient and effective than returning to the days of the exchange control or the present black market.

I wrote another article which stated that the long-term solution is the diversification of the economy to produce for the global market competitive goods and services.

In the medium term we can seek to benefit from our comparative advantages and provide incentives that encourage foreign investment in, say, offshore financial services, back-office operations, data storage, even tourism where our advantage will not be knowledge, highly skilled personnel or innovation, but financial incentives, ie, we would be competing in the world on what incentives we can give.