The recent statement by the IMF press confirms what is already know: that the T&T economy is out of balance on both external and internal accounts, exacerbated by the necessary response to the COVID-19 shock, says economist Dr Terrence Farrell.
On Friday November 19, the International Monetary Fund (IMF) concluded its two-week annual visit to this country and published its independent assessment
In the concluding statement of the IMF’s 2021 Article IV mission to T&T, the Washington DC-based institution said the domestic economy is expected to grow by 5.7 per cent in real terms in 2022.
The growth next year will be “reinforced by the continued policy support and the anticipated recovery in oil and gas production.”
The IMF statement also said the Government “acted decisively” to contain the pandemic.
Meanwhile in May 2020, in the midst of the pandemic and in a context of wreckages in the oil and gas markets, Moody’s had put a negative outlook to T&T’s credit rating.
This was mainly based on COVID-related fiscal slippages.
Recently, Moody’s announced that it downgraded T&T’s outlook.
And in response to Moody’s downgrade, Finance Minister Colm Imbert argued; “This decision by Moody’s collides with the policy advice we have received from all international organisations to protect our country and support the recovery in the current circumstances.”
According to Farrell although the reports came almost simultaneously, the two organisations have foci.
He explained that the IMF is concerned with the country’s external and internal (fiscal) balances and its obligations under the IMF Articles while Moody’s is concerned with the country’s external debt profile and its ability to meet its obligations to creditors over the medium and long term.
“Neither organisation is expert in development policy and what is required to engineer growth in an economy like ours,” Farrell said.
He noted that the IMF staff, who are “enjoined to be positive about member countries and not to be overtly and publicly critical, see gradual improvement in the near-term due to improved production and prices in the energy sector.”
Further, he said, it is also obliged to accept the Government’s promises about what it will do to restore balance on the external and fiscal accounts, even if past experience suggests otherwise.
For example, Farrell said, improvements in tax administration have been proposed for several years now in order to reduce avoidance and evasion and which in his view are necessary.
“But even the watered-down Revenue Authority proposals could be derailed and, even if implemented, will take several years to bear fruit.
“Same with the vexed question of transfers and subsidies and with the size of the public sector. The obstacle to implementation in those areas is almost entirely political,” Farrell said.
He added that without tough action to address public revenue and expenditure and by suppressing forex demand and with a deliberate avoidance of using the exchange rate to help restore external balance, “we are stuck, hoping and praying” that oil and gas prices will remain high and that gas production will rebound.
“Hope and prayer are important, even essential, but need to be adduced in aid of sensibly crafted macro-economic and development policies, not as a substitute for such policies,” Farrell said.
Meanwhile, the Former Deputy Governor of the Central Bank said because Moody’s was chastised for its conduct leading up to the financial crisis, it is very aggressive in ensuring that its rating decisions cannot be seen as compromised.
While S&P, Farrell added, in the face of rising debt levels, may have been assured somewhat by the implicit mortgaging of the HSF and hence encouraged to settle for a negative outlook and not to downgrade,
“Moodys is clearly not assured and sees a weaker credit profile even with a rebound in growth over the next couple of years,” Farrell said.
However, the findings of neither report help T&T with the growth and development policies it needs to formulate and implement, nor should the country be looking to those institutions for help in that regard, Farrell explained.
“But we know, or ought to know what we need to do,” Farrell said.
He suggested the country increase the investment rate (on which there is no data); to direct investment to the right areas, that is, activities which address the global marketplace and can generate foreign exchange earnings and those activities have to leverage resources that T&T has (agricultural, location, cultural), but also utilise knowledge innovatively to produce goods and services to sell to the world.
Further, Farrell emphasised T&T has to put “twice, three times as much effort, time and resources” into economic diversification as it does on the energy sector.
Additionally he suggested this country needs to engender a climate in which the private sector can be productive, emphasising that means inter alia, reducing crime and making the country safe; improve infrastructure—water, telecommunications, payments systems, roads and public transportation; root out corruption and disrespect, and weed out the culture of dependency and entitlement which is a drag on productivity.
“This requires hard, sustained disciplined work over many years without the deadweight of internecine conflict which has poisoned our politics and driven many right-thinking citizens to the edge of despair. Moody’s and the IMF can’t do any of that for us; we have to do it for ourselves,” Farrell added.
According to economist Dr Roger Hosein, the IMF’s growth projection for 2022 of 5.7 per cent is very welcome news and could help the economy to pay some of its bills and reduce its debt to GDP ratio.
“Note though, that given that parts of the economy in 2020 and 2021 were closed because of COVID-19 restrictions, one would expect for the FY 2022 once we are fully “reopened” the growth performance would be higher than the years in which we closed. Thus, part of the growth is the “opening back up of the economy growth,” Hosein explained.
He cited that even with this growth predicted by the IMF for 2022, the economy would still be smaller than in 2019 (and of course significantly smaller than in 2015).
According to Hosein, a closer look at the data also indicated that the majority of the growth is coming from the energy sector.
But he questioned whether this is the growth the country wants.
“After the extent of economic stagnation this economy underwent in 2009 to 2021 and the depression from 2016 to 2021 that growth from anywhere is good and should be celebrated. However, we also have to be wary as it is this same energy sector that played a significant role in causing the economy to be in its current stifled position,” Hosein explained.
Further, he said these numbers also mean the structure of the economy drifts more towards a greater level of dependence on the energy sector.
Policy makers, Hosein advised, would also have to now monitor the inflation rate as well, which according to the IMF report, is expected to move north.
He added that rising prices and a decline in nominal per capita GDP (comparing 2016 and 2022 only) are not a good combination.
“Indeed, the IMF report also carefully points out that the central government primary balance remains in deficit and even more, the non-energy aspect of the primary balance widens: not good at all,” Hosein said.
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Further, he noted that a careful look at the data presented by the IMF also showed that for FY 2022 budgetary revenues are set to increase but the budgetary revenues are set to improve mainly because of the energy revenue component which rises from 8.4 per cent in FY 2021 to a projected 10.6 per cent in FY 2022. Capital expenditure is set to remain at 2.1 per cent of GDP for FY 2022, the same as in FY 2021.
“Very worryingly the concluding statement shows that by the time FY 2022 has elapsed, the external debt would have climbed to a level 41 per cent higher than in 2017 and basically equal to the stock of reserves (which at the end of FY2022 is expected to stand at around US$5.7bn),” Hosein further cited.
He also noted that the stock of reserves in FY 2022 is projected to be 32 per cent less than in 2017 (or 50 per cent of the 2014 level).
“All of the derivations by the IMF are premised on a price of natural gas price of US$3.50 per mmbtu and if for some reason the actual price of natural gas were to fall below that level, then all of the numbers above would need to be adjusted downwards,” Hosein added.
T&T’s debt capacity
In the last six years the economy declined by 16.6 per cent and stacked up a fiscal deficit of over $61 billion,
according to economist Dr Vaalmikki Arjoon.
He said this deficit didn’t allow T&T to save – having entered the pandemic with already high debt levels of 75.5 per cent of GDP, ballooning to a current value of 87 per cent given the financial stress of COVID-19.
According to Arjoon, T&T is now deemed even riskier by the global community for meeting its debt repayment obligations, having been further downgraded in the speculative grade category to Ba2 in the recent ratings exercise by Moody’s.
He explained this rating was anticipated, as last year’s rating of Ba1 carried a negative outlook.
“The outlook generally predicts the likely outcome of the next year’s rating exercise, with a negative outlook suggesting an expected downgrade (positive and stable outlooks predicts an upgrade and no change to the ratings respectively),” Arjoon said.
Noting that T&T’s capacity to carry this debt level is “very slim” Arjoon suggested the only solution is to ensure the economy not only achieves positive growth, but this growth must be significant and consistent to bring about revenues that will be able to cover the debt with much left to spend on meaningful development. “At this point, our economic performance in terms of GDP is close to 2005 levels,” he said.
Further, Arjoon said while the IMF has forecasted a growth of 5.7 per cent next year, T&T’s GDP will still be worse than where it was over 2006 to 2019.
He added that in 2022, increased oil and gas production, together with energy derivative commodities such as methanol will bring the economy back to positive growth.
However, Arjoon outlined, the extent of the growth depends on the nature of the pandemic and the infection rates, adding that the country is still a long way from achieving herd immunity, having only 45.4 per cent of the population fully vaccinated.
Additionally, he said higher energy prices are likely to persist well into 2022, and this will augur well for T&T’s revenue earnings bringing the deficit down to approximately $9 billion.
These persistent deficits, Arjoon identified, are generally financed by debt, suggesting that the debt burden will continue to pile up.
And higher energy prices, he said also mean the State will be placing more funds into the HSF, as the legislation governing the fund requires that a minimum of 60 per cent of excess energy revenues must be deposited in the fund – global energy prices are currently much higher than prices which the budget is predicated on (an oil price of $65 and a gas price of $3.75).
“A key downside risk is the continuing global supply chain issues and shipping costs that continue to drive up costs in the private sector. The US is our largest trading partner, and is currently facing a 6.7 per cent inflation rate – the highest in the last thirty years,” Arjoon also noted.
He said given T&T’s degree of imports coupled with the persistently high shipping costs from Asia, and the higher prices of raw materials from foreign suppliers, this country will continue to experience price increases well into the third quarter of 2022.
And while inflation is projected by the IMF to be an average of 2.4 per cent in 2022 , it is likely to be higher than this in the first half of the year, Arjoon added.
He also advised that given the surge in international spending activities globally from the pandemic pent-up demand, it is imperative that local manufacturers are better poised to take full advantage of it.
The EXIM bank has provided much forex support to the sector but it is commercial bank that supplements activities of the banks.
Arjoon advised therefore, that authorised dealers increase the provision of forex to these manufacturers, to facilitate their increased production and exports, adding that this will contribute to healthy growth next year, as already several entities in the private sector have shut down operations owing to the financial stress of the pandemic lockdowns and their inability to afford the higher prices from their supplier and shipping costs.
Further he said as the IMF would have recommended, it is also imperative the State advance its tax collection which will help to close the fiscal gap.
And if successful the TTRA can generate approximately $12 billion in uncollected taxes, Arjoon noted.
Additionally, he advised it is also essential Government aggressively push capital expenditure projects that were stalled due to the pandemic and other impediments including bureaucratic delays in the public sector.