Home' Trinidad and Tobago Guardian : February 15th 2015 Contents FEBRUARY 15 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COMMENTARY | SBG3
Given the likely depletion of this country s
energy resources in the next 12 years, the
most significant economic challenge fac-
ing the administration formed after the
upcoming general election---whether party
in power then is UNC or PNM---would
be to set T&T on a path of replacing the
energy sector as the country s premier
source of tax revenue and foreign exchange.
It is safe to assume that the T&T energy sector currently
provides about US$4 billion in taxes, which is about 43 per
cent of the Government s revenue in the 2015 financial year and
more than 90 per cent of the available foreign exchange that
allows the citizens of T&T to buy foreign goods and services.
If in the next dozen years, the non-energy sector (broadly
defined) needs to generate enough taxes and foreign exchange
to replace the energy sector, it seems obvious that all of the
country s economic and financial policies would need to start
favouring the development of the foreign currency-earning,
non-energy sector almost immediately.
That is because the transformation of an economy that has
been dependent on its energy sector for more than a century
is not a task that can be done overnight and it is not a task
that can be achieved without the guiding hand of the State.
There are several policies that would need
to be implemented in short order to give the
country the opportunity to make the shift
from dependence on the energy sector to a
more balanced economy, from which a majority of tax revenues
and foreign exchange comes from the non-energy sector:
1. Fiscal policy would need to be adjusted so that it incentivises
the promotion of the foreign exchange-earning, non-energy
sector in much the same way that is now done for the energy
2. Labour policy would need to be adjusted so that the new
businesses to be established in the foreign exchange-earning,
non-energy sector would have the manpower needed;
3. The mechanism for funding start-ups in the sector would
need to be revolutionised; and
4. The bias in the exchange rate policy and the allocation of
foreign exchange will have to shift from promoting imports and
consumption to promoting exports and production.
There should be no doubt in anyone s mind that T&T s current
exchange rate policy---which is a managed float with an emphasis
on defending the stability of the main TT/US rate---promotes
imports and consumption.
Last week, the Central Bank was asked a question on T&T s
real effective exchange rate---which is simply the exchange rates
adjusted for inflation---and whether it was promoting the com-
petitiveness of the country s exports.
The Central Bank responded: several definitions of national
competitiveness exist with no general agreement on any given
one due to conceptual and measurement challenges.
"The most popular and widely used measure of national
competitiveness is the real effective exchange rate given the
easy availability of the data.
"An appreciation of the real effective exchange rate is associated
with a loss in a country s international competitiveness, while
a depreciation of the real exchange rate implies an improve-
"The Central Bank uses the trade-weighted real effective
exchange rate (TWREER) to measure the international com-
petitiveness of T&T s exports, as well as T&T s non-exported
goods that face competition in the domestic market from trading
partner s imports.
"The TWREER is calculated as the weighted average of a
country s currency relative to a basket of other major currencies
adjusted for the effects of inflation.
"In 2014, T&T s TWREER increased by 4.1 per cent on
account of higher domestic prices relative to the country s major
trading partners coupled with a marginal appreciation in the
"Domestic inflation climbed by 5.7 per cent in 2014, surpassing
the average inflation rate of 0.2 per cent for Trinidad and Tobago s
major trading partners.
"On average, the T&T dollar appreciated by 0.5 per cent in
2014 compared with the average depreciation of 0.1 per cent
in the exchange rates of our major trading partner currencies.
"The faster rate of domestic inflation when compared with
that of our major import and export markets contributed to an
appreciation of the real effective exchange rate."
The most important takeaways in the Central Bank s statement
were that an appreciation of the real effective exchange rate is
associated with a loss in a country s international competitiveness,
while a depreciation of the real exchange rate implies an improve-
ment and the fact that T&T s trade-weighted real effective
exchange rate appreciated by 4.1 per cent in 2014. What that
means is that T&T s foreign exchange earning sector was 4.1
per cent less competitive with its trade rivals last year.
The picture gets worse.
In a paper he presented at a seminar on the diversification
of the T&T economy late last month, former Central Bank Gov-
ernor, Ewart Williams suggested that the loss in this country s
international competitiveness had achieved cataclysmic pro-
portions in the period between 2007 and 2014.
In a paper on the Heritage and Stabilisation
Fund (HSF) as an instrument of diversification,
Williams stated that T&T collected $210 billion
in energy sector taxes between 2007, when
the HSF was established, and 2014. Of that amount, only $16
billion was placed in the HSF, which is about 8.0 per cent of
the total energy revenues.
Williams argued that a significant percentage
of the energy revenues was spent on trans-
fers and subsidies, which may have pro-
moted more aggregate demand in the econ-
omy and greater drawdowns of foreign
reserves than would otherwise have been the case.
Williams then said: "Because of the inadequate savings per-
formance, the HSF has not contributed to the envisaged control
of domestic demand so as to produce a beneficial impact on
the real exchange rate. (the Dutch Disease phenomenon).
"Even with the downward bias of the retail price index, the
data show a real appreciation of the exchange rate of around
40 per cent since 2007.
"Data are not available, but the real appreciation is likely to
be much larger if measured on the basis of unit labour costs.
"This real appreciation, along with a pronounced decline in
labour productivity, has contributed to the loss of competitiveness
and the formidable challenges facing the non-energy export
So Williams is arguing that between 2007 and 2014, T&T s
productive sector became 40 per cent less competitive inter-
nationally and that is not even counting the decline in labour
Does this mean that the T&T/US exchange rate needs to
depreciate by over 40 per cent for this country to get back the
international competitiveness it had in 2007?
The equation is probably not as direct as it seems because
there are some important areas in which T&T has suffered very
little inflation in the period between 2007 and 2014....areas
such as the cost of electricity, water, telecommunications costs
But it is useful to note that the TWREER measures the
disparity between rates of inflation in different countries and
does not go to the issue of labour productivity, which increases
the cost of everything.
But, the question needs to be asked whether it is prudent
for the real effective exchange rate to appreciate by 40 per cent
in the period 2007 to 2014 with no adjustment in the nominal
rate of exchange?
In Thursday s BG View, "Is steelband sponsorship good
for the title sponsors?" it was stated that Phase II, the
steelband led by Boogie Sharpe did not have a title
Petrotrin president Khalid Hassanali got in touch on Thursday
night to say that that information was incorrect.
The oil company said: "Our support for the development
of the steelpan extends beyond patriotism as we take special
pride in this national instrument, which originated within
our industry. As such, Petrotrin and its predecessors have
maintained longstanding relationships with major steel bands
"Our predecessors contributed significantly to the advance-
ment of the steelpan movement in south Trinidad and, today,
we are the title sponsor of the Single Pan Bands & Small
Conventional Bands National Panorama Finals.
"This year, we continued title sponsorship for four bands:
Petrotrin Phase II Pan Groove, Petrotrin Siparia Deltones,
Petrotrin Hatters and Petrotrin Katzenjammers. In addition
to this sponsorship, Petrotrin provided assistance to 14 other
bands entering the National Panorama Competitions.
"Several of our sponsored and assisted bands made it to
the finals of the National Panorama Competition, resulting
in Petrotrin featured at the top of every category.
"Our sponsored band, Petrotrin Phase II, is last year s
winner in the Large Bands category, while assisted bands Pan
Elders, Super Novas and San Juan East Side Symphony entered
the finals as leaders in the Medium, Small and Single Pan
Does T&T's exchange
sponsors Phase II
Jwala Rambarran...Central Bank Governor
Ewart Williams... former Central Bank Governor
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