Home' Trinidad and Tobago Guardian : October 15th 2015 Contents BG10 VERBATIM
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 15 • 2015
Ihave been paying particular attention
to the budget and the budget debate
seeking to identify solutions for the
stark reality facing us. The recession
has already started and has only been
soften over the past few months by
the large expenditures based on borrowings.
The economic performance in the non-oil
sector appears to be good despite the visual
concerns with the oil and gas sector, hence
forth referred to as the energy sector.
The Central Bank recently reported the
decline in the energy sector by approximately
three per cent and a decline in the non-energy
sector by two per cent.
This gives the impression that the non-
energy sector or private sector behaves inde-
pendently from the energy sector and, in this
regard, there is genuine diversification in the
local economy. This view is reinforced by
politicians call on the non-energy sector to
step up their investments to make up for the
shortfall in the energy sector.
There are many fallacies regarding the econ-
omy and, therefore, very inappropriate solu-
tions are being proffered for discussion. Some
of the fallacies and implications are discussed
Fallacy 1: The private sector could
pick up the slack:
This is not possible given the present struc-
ture of our economy. We have a very high
propensity to import and the economy is sig-
nificantly dependent on the availability of for-
Look around and see the origin of the prod-
ucts you consume. They are either imported
or assembled/manufactured with imported
ingredients. This confirms the reliance on for-
eign exchange to maintain consumption and
our standard of living.
The private sector does not, on their own,
generate foreign exchange. The exporters are,
firstly and most likely, net users of foreign
exchange. Secondly, all manufacturers are
dependent on subsidies from the energy sector.
Another test is to imagine the country with-
out the energy sector. In that situation, where
will the foreign currency come from?
Fallacy 2: The way to diversify the
economy is to develop the service
sector, the ship building sector,
tourism, agriculture etc.
Agriculture, agro processing, waste recycling
may provide opportunities. However, the other
sectors that rely heavily on subsidies are not
candidates to effect diversification unless they
can still be competitive with the withdrawal
of all subsidies in the form on low-cost fuel,
low-cost electricity, low-cost water and low-
cost labour. If they meet this test then they
are to be supported by the Government in the
drive for diversification.
Fallacy 3: Debt to GDP is a good
measure to determine the capacity
This ratio is often used to determine if a
country is in a good position to borrow.
Firstly, governments do not have access to
all the national revenues as measured by GDP
and, if they tax a 100 per cent, then no citizen
would be encouraged to work.
Secondly, each country is different and their
respective ratios should not be compared to
judge ranking in terms of eligibility to borrow.
The ratio should not be relied upon in isolation.
A more important data is the primary balance
(PB) which calculates the amount available to
meet interest payments and surplus to meet
The PB is calculated by deducting govern-
ment s recurrent expenditures (less interest)
from recurrent revenues. If the result is positive
then some funds will be available to fully or
partially meet interest payments.
In the case of the 2015/2016 budget, the
PB is significantly negative and, therefore,
T&T should refrain from additional borrowings
unless a firm plan is in place to address the
deficits within a year or two.
Fallacy 4: We can borrow and spend
our way out of a recession:
This is a common mistake made by gov-
ernments around the world. Countries that
have followed this strategy have failed. See
Ireland, Greece, America, Spain, Portugal and
the list goes on. The countries that bit the
bullet and made structural changes to their
economies---such as Iceland and Lithuania---
recovered much quicker. The countries that
continued to borrow to spend and/or followed
a policy of printing money just kicked the can
down the road which they are still doing long
To adopt such a strategy is unduly spec-
ulative and hopeful that "something great will
happen to reverse fortunes." Suddenly we may
have a massive gas and oil find. Some world
event such as WWW3 will break out spiking
the price of energy. Should we be managing
the country on that basis?
To borrow and spend without a firm strategy
for restructuring the economy is risky, spec-
ulative just plain wrong and should not by
pursued. Unfortunately, the last and present
government seems to be convinced of the
benefits of such a strategy. This is worrying.
Fallacy 5: If banks want to lend us
then we must be doing something
This is perhaps the most costly mistake
many countries make leading them to bank-
ruptcy faster than they expect. Banks are
known to be very aggressive overlooking an
in depth due diligence exercise in order to
book new loans.
Also, if the country s finances are dicey but
they have saleable assets then that could be
the basis for lending. Greece had to sell their
airport and selected islands to assist in settling
creditors. We have many assets to sell in
Trinidad, the airport, the sea port, the refinery,
the oil and gas investments, the NGC etc.
The Government, therefore, must be very
careful in their borrowings and in what they
Fallacy 6: The Government can make
up taxes from the non-energy
The plan in the 2015/2016 budget is to make
up tax shortfall from the energy sector from
the private sector.
In the medium term, the private sector
would contract at a higher rate than the energy
sector unless the Central Bank provide foreign
exchange to meet demand. Such a strategy by
the Central Bank would be imprudent and it
is likely that the private sector would not be
in a position to provide the tax base projected
by the government.
The financial gap could exceed $21 billion
if expenditure adjustments are not made.
Fallacy 7: That the current situation
could be resolved without painful
The economy is not in good health nor is
the energy sector and the Petrotrin goose has
ceased laying golden eggs. Adjustment will
require harsh measures and hopefully the
restructuring of the economy will be done in
the most efficient and equitable manner within
the shortest possible time.
The current situation reminds of the 1980s
except that we are in a more fragile position.
I am not convinced that the seriousness is
appreciated by our members of parliament
who give the impression that plugging the $21
billion financing gap is just a mathematical
exercise. I hope I am mistaken. I am also con-
cerned that a strategy for structural adjustment
has not been put on the table for discussion.
Hopefully, this will be done in a revised budget.
If government pursues a borrow and spend
strategy I am afraid that the can will be kicked
down the road delaying the urgent changes
The drop in oil prices in 1983 was not as
precipitous as the one we just experienced
and the economic depression beginning 1984
lasted many years. It would be interesting to
compare the periods.
Ved Seereeram is a financial consultant.
Major fallacies driving
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