Govt erred in Budget oil price peg

According to the regulations governing the HSF, all profits over ten percent of the budgeted price automatically go into the Fund.

“The trick here is if we go at US$48 per barrel and the price of oil increases and the difference between actual and forecasted energy revenue does not supersede that 10 percent then all the revenues from the increase in price remains with the treasury and can be used for spending. It’s not an intelligent strategy. In fact this is the same strategy that crashed the economy in 2007 and after,” he said.

Instead, the government should have erred on the side of caution and gone with an oil price of US$40/barrel. Hosein noted that in the midyear review in April the oil price was US$35/barrel.

“Somehow from then to now there was a 37 percent improvement in confidence for oil prices and 12.5 percent for natural gas prices.

Why? We were able to bring down expenditure and run the economy on US$35 a barrel,” he said.

This year, Hosein said, is “the mother of all evils” in macro economic management for the country, especially following a decade of systematic mismanagement during the “golden era of growth” from 2002-2010, where the despite making $285 billion the country only saved $30 billion. “That period will go down in the economic history of this country as one of the worst bouts of management.

We made enormous amounts of money. We had production (in the energy sector increasing) and price increasing and we had one big party and spent out most of it,” Dr Hosein said. The country took 4.4 billion barrels of oil and gas equivalent from below the ground from 1999, he said, monetized it and did nothing to diversify the economy, so in classic Dutch disease style (where one sector booms at the expense of others) after natural gas production peaked, economic activity peaked and when natural gas production fell, economic activity followed.

CEPEP, WORST BLUNDER He said one of the biggest policy blunders in the history of the country will be the creation of the The Community-based Environmental Protection and Enhancement Programme (CEPEP), he said. “In 2002 we introduced CEPEP which personally I believe will go down as the worst technical error we ever made since 1956 (when the country held its first general elections),” he said.

CEPEP was introduced at a point in time when the unemployment rate from 1999 was on the decline, he said, and real gross domestic product (GDP) was growing aggressively.

“The absorption of labour into the economy was moving quickly and we had contractually determined hundreds of billions of dollars coming in from the Atlantic (liquefied natural gas) deals and we could have forever killed poverty in this country. [Instead] they wasted the damn money,” he said. Hosein said was he could not conceive why such a programme would be introduced in an economy where unemployment was already falling by virtue of real economic growth absorbing the labour force. Even if it was well-intended, he added, the whole thing “became a political camp and backfired.” “So today we have the number of people working in manufacturing falling from 58,000 in 2004 to 48,800 today and agriculture from 40,000 in 1991 to today around 21,000. All those agroprocessing announcements in the Budget are going to fail because we need workers to produce and no rational economic agent will leave a job like CEPEP and go work in a regular job. It needs to be differently incentivized,” he said.