Home' Trinidad and Tobago Guardian : January 29th 2016 Contents Kaelanne Jordan
On December 4th 2015, Central Bank Governor, Jwala
Rambarran officially announced that Trinidad and To-
bago had suffered its fourth quarter of negative growth
and decline and was now in a recession.
Since then, there has been a lot of talk about our coun-
try's financial instability and its effects on our economy,
which seems to conjure panic and weaken consumer con-
fidence among citizens.
In this issue of My Money and Me magazine, we explore
what really happens in a recession- from its impact to
how our economy went from boom to unpredictable over
Q. What is a recession?
A. The textbook definition of a recession is a downturn in
economic activity, characterised by at least two consecu-
tive quarters of decline in the country's gross domestic
Translation? A recession is when government tightens
its belt and the entire nation feels the squeeze.
Q. What causes recession?
A. Whilst there are several traditional explanations to the
phenomenon, here are 5 important signs that usually indi-
cate that tougher days - and a recession are ahead.
1. HIGH INTEREST RATES
The law of supply and demand determines the interest
rate. When consumers save more and borrow/ invest less,
create a surplus of money to lend and a less demand to
borrow. As such, interest rates drop. The transition to
high interest rates, is a tight monetary policy used to cool
down an overheated economy.
Inflation refers to a sustained increase in the prices of
goods and services over a period of time. It is measured
as an annual percentage increase. As inflation rises, the
purchasing power of currency decreases.
3. A STOCK MARKET CRASH
Stocks are a piece of ownership in a company. The
stock market reflects investors' confidence in the future
earnings of companies. When stock falls, investors who
hold that stock may sell and reinvest elsewhere. This indi-
cates a loss of confidence in the economy. When confi-
dence is not restored, it leads to financial turmoil.
4. LACK OF CONSUMER CONFIDENCE
A decline in consumer and business confidence usually
occurs if consumers believe the economy is bad, they are
less likely to spend money. Consumer confidence is psy-
chological but can have a real impact on any economy.
5. OVER PRODUCTION AND UNDER CONSUMPTION
The overproduction of commodities forces businesses
to reduce production in order to clear inventories. Any re-
duction in production implies a reduction in employment.
A reduction in employment, in turn, reduces consumption.
Q. WHAT ARE THE IMPACTS ON THE ECONOMY?
1. Slump in the market
2. Stock prices come down -- Investment suffers
3. Increase in unemployment- People are thrown out of
4. Depression -- Recession causes depression if it per-
sists for a long time.
5. Increase in national debts
Written with information courtesy EconomicsHelp.org, Investopedia
Guardian www.guardian.co.tt Friday, January 29, 2016
Recently, the Government announced
its decision to apply (Value Added Tax)
VAT to items previously zero-rated, come
February 1. Under the last government,
VAT was removed from 7,000 items.
Since this disclosure in early January,
there has been a lot of talk about rising
food prices and how this will affect the
average person's grocery budget.
While many have been voicing concerns,
how many really understand the changes,
why they are being implemented, and how
it can affect consumers? Basically, our
country's revenues are plummeting as a re-
sult of low energy prices, and VAT is a tax
on sales so that the Government could get
revenue to run the country. However, econ-
omist, Dr. Vaalmikki Arjoon notes that the
point of the VAT act was to bring in tax
revenue from value-added items and not
basic food items. In spite of this, some
basic food items such as cocoa, coffee,
mauby and orange juices will incur VAT
when the new VAT measures are intro-
duced. On the other hand, the reduction in
the VAT rate from 15 per cent to 12.5 per
cent will lower prices on existing standard
items by 2.5 per cent.
Even with this reduction in the VAT rate,
the consumer may actually pay more for
items, since retailers and suppliers will be
faced with increased business expenses,
and will have to pass on the impact of in-
creased costs to consumers in order to
stay in business. "Costs are rising due to
higher fuel prices, transportation costs,
utilities and the re-introduction of the
property tax, the business and green fund
levies. Moreover, they can incur additional
costs, as the prices charged by their suppli-
ers could also be higher, as they them-
selves are faced with VAT and higher
business expenses. So when the average
consumer expects to be paying 12.5 per
cent extra, he may in fact be charged more
by certain retailers, owing to their higher
business costs," explains Arjoon.
Market produce may also be hiked up.
"Some local farmers might increase their
prices, not necessarily because their com-
modities would be in high demand, but be-
cause they themselves are now faced with
a higher cost of living. They will incur
higher prices in the supermarkets and re-
tail outlets, and this is soon to be accompa-
nied by higher utility costs. Because of a
rise in their household costs, some may be
inclined to increase their prices."
While it may seem that consumers are
the only ones being affected by higher
prices and household costs, the entire pop-
ulation, in fact, will be affected. According
to economist and former Foreign Affairs
Minister, Dr Winston Dookeran, consumer
incomes are falling so business owners
need to be aware that rising prices may
lead to less consumerism. However, while
business owners will be impacted, lower in-
come earners will be most affected. Char-
tered accountant, Ramnarine Ramdass
explains why this is so, "The average man
spends much more of his income in food
consumption, so he will pay the ultimate
cost. For example, while a higher income
earner may spend only 20 per cent of his
salary on food, the lower income earner's
grocery budget may take up more than
half of his salary." In economics, this is
called the Propensity to consume. It is the
amount from a person's total income that
they spend on goods and services. Families
in the lowest income bracket, for example,
may be forced to go into debt or live month
to month to provide themselves with basic
necessities, whereas these same necessi-
ties require a much smaller proportion of
Faced with the prospect of one's ex-
penses being more than one's income,
there is a need for consumers to make
more responsible financial decisions. Ar-
joon points out that this is an opportunity
for citizens to review household expenses
and cut unnecessary expenditure. He sug-
gests that consumers be "more vigilant
with their spending decisions and be wary
of prices that are higher in some retail out-
lets compared to others". Ramdass recom-
mends that consumers prepare their own
meals as often as possible, eat more fruits
and vegetables and less processed foods,
eat out less often, and do home gardening
if they have access to land.
He goes further to state that Trinidad
and Tobago should try to be as food self-
sufficient as possible, "our country should
try to be able to feed itself, at least the es-
sentials." He says this period can be seen
as an opportunity to boost local produc-
tion, as food importers struggle to keep
prices down by sourcing cheaper, alternate
sources. Dookeran also notes that, "the
time is appropriate to look at financing the
agricultural sector and farmers, and provid-
ing necessary support to them. We can't
simply say 'buy local' and not enact effec-
tive policies to promote the sector". It is
possible that the Government is making an
effort to encourage citizens to venture into
the local agricultural sector; agricultural in-
puts such as fertilisers, pesticides, machin-
ery, and tractors will remain zero rated.
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