Forewarned, forearmed

BMI Research maintains that capital inflows are unlikely to cover external financing needs as Trinidad and Tobago has utilised one-off divestments of foreign assets held by State-owned enterprises and withdrawals from the country’s Heritage and Stabilisation Fund to generate hard currency. Trinidad and Tobago’s ability to issue external debt will likely be limited by a less favorable external environment and it is also expected that external debt will rise from 15.4 per cent of GDP in 2016 to 19.1 per cent in 2017.

If any of what is projected by BMI Research holds true, then it is essential that we review our current fiscal and monetary policies to ensure that we have adopted the best policies to match our present economic environment. Thomson Fontaine PhD, an economist at the International Monetary Fund, in his paper entitled Caribbean Country Experiences with IMF Stabilisation Programmes within the Context of Globalisation, reminds us as to where we were not too long ago – with the fall in oil prices in the early eighties, the country began experiencing balance of payments difficulties reflected in expanding current account deficits, and the eventual signing of a stand-by agreement with the International Monetary Fund in 1989, with an additional agreement being signed in 1990.

From the mid-seventies to the early eighties, Trinidad and Tobago benefited immensely from the rise in international oil prices recording current account surpluses in seven of the eight years between 1974 and 1981. At the same time, there was a consequent increase in the level of foreign exchange reserves. During the oil boom, the public service expanded rapidly leading to a significant increase in government’s recurrent expenditure. With the large inflows of oil revenue, the government also invested in major capital expenditure projects. When oil prices deflated in 1981, both the government and private consumption levels continued to increase with a general reluctance for individuals and government to adjust their lifestyles to which they were accustomed. Within a few years, a significant amount of the stock of foreign reserves was depleted. Between 1982 and 1987, the Trinidad and Tobago economy registered six consecutive years of negative economic growth. Over this period, earnings from the petroleum sector fell by close to one half, and the rate of unemployment more than doubled from ten to 22 percent. In addition, real GDP in 1987 was 28 per cent below the level of 1982, and foreign exchange reserves fell by over US$2.8 billion mainly due to servicing external debt.

Subsequently, we entered into IMF arrangements with large fiscal deficits, and adopted stabilisation programmes that have generally been of a contractionary nature. Typically, this involved fiscal measures aimed at reducing the levels of government spending and the broader public sector coupled with measures aimed at stimulating private sector activities, and reforming the tax regime.

In 1986, the government of Trinidad and Tobago was forced to reduce the public-sector wage bill by suspending cost of living allowances and merit pay increases, and by reducing nominal public sector wages by ten percent. A voluntary severance programme was also introduced aimed at reducing the size of the public sector. The government also reduced its holdings in several energy companies and liquidated many State enterprises. An attempt was also made at tax reform through the abolishing of several taxes and the introduction of a 15 per cent value added tax (VAT) covering all goods and services except for exports and some basic commodities.

Although it might be tempting to assume that policy makers are fully cognisant of what is taking place in the economy and have the ability to achieve macroeconomic goals such as economic growth and stability through monetary or fiscal policies, there are limitations to which these polices are exposed which include the timeliness of the government’s response to changing economic conditions, the politicisation of economic problems and the uncertainty of policy co-ordination.

An adage says that “those who do not remember the past are condemned to repeat it”. The economic environment like that of the 1980’s seems to be looming – forewarned is forearmed – hopefully we are equipped to make better decisions.