In my last article published in the Business Guardian of October 15th, 2015, entitled "Major fallacies driving economic decisions," I suggested that a comparison with the 1980s may be an interesting exercise in order to better understand the current economic situation in Trinidad and Tobago.
Summary findings from the 1980s:
The decade of the 1980s began with oil production of 211,000 bbls (barrels) per day increasing to 240,000 bbls per day in 1981 and declining thereafter to 160,000 bbls per day in 1983. Oil prices were US$37.00 per barrel in 1980 declining thereafter to US$29.00 in 1983 reaching a low of US$14.00 in 1986. With the commencement of the recession in 1984 the economy declined by over 20 per cent spanning the decade.
A major implication of the events was a drastic reduction in the country's foreign currency reserves which declined from a high of US$3.3 billion in 1982 to a low of US$213 million by 1987, a precipitous decline of 94 per cent. Another implication was the rapid rise in unemployment to over 22 per cent by 1987.
Data adjusted for inflation:
For comparison purposes current data adjusted for US inflation at the rate of 4 per cent for 30 years reduces current oil price to US$13.87per barrel and reduces current reserves to US$3.3 billion. Based on this comparison it appears that we are in a more precarious position than we were in 1985.
In an advanced analysis the impact of the gas industry would have to be factored into the comparison and which positive impact may very well be cancelled by the decline in the volume of oil production which declined from 175,000 bbls per day in 1985 to 75,000 bbls per day in 2015.
Other factors to consider:
To further develop and appreciate the period comparison several other factors must be considered, and a few are noted below:
�2 The economy has become more dependent on foreign exchange.
�2 Our propensity to import has increased making our reliance on foreign exchange more acute. Keep in mind that because of the high propensity to import payments to employees in TT$ is in fact an increase in demand on foreign currency and should not be treated as local expenditures.
�2 The wide spread use of credit cards makes it more difficult for the Central Bank to control the use of foreign exchange.
�2 With higher education and exposure through the media, life styles and ambition the citizens have distanced themselves from the land and from agriculture.
�2 Government capital projects have increased recurrent expenditures without a concurrent increase in revenues. Most government projects are not revenue generating and in fact adds a considerable running costs.
�2 Make-work programmes by the government is difficult to reverse.
�2 The economy is not diversified and perhaps less so that three decades ago.
�2 Government's debt has increased beyond its capacity to repay from recurrent revenues and asset sales and additional borrowings are now being undertaken to fill deficits in excess of $20B per annum.
�2 With relaxed lending criteria by the commercial banks and shadow banks, the quality of their loan portfolios could deteriorate significantly in times of increasing unemployment.
�2 The private sector is highly dependent on the availability of foreign exchange and a curtailment of supply would have a leveraged negative effect on business, employment and standard of living.
�2 Our foreign currency reserves and small social programmes would not be adequate to protect the vulnerable.
Major impact of the 1980s recession:
1 Collapse and down-sizing of many companies, particularly in the auto industry, equipment sales, construction, soft drink manufacturer, trading and banking. These included McEnerny Alstons which was bought out by the ANSA group, Trinity Motors, Polymer, Neal and Massy, auto division and Tracmac among others. The list also included the three local banks NCB, Co-op Bank and Workers Bank which were finally resolved in the 1990s.
2 Significant layoffs spiking the unemployment rate to over 22 per cent.
3 Introduction of vat.
4 Removal of Cost of Living Allowance (COLA).
5 High loan and mortgage delinquency.
6 Notable migration from the country.
7 IMF involvement.
8 Devaluation
Relevance for 2015:
The decline in oil prices in the early 1980s was significantly less precipitous than the fall experienced in 2015. Yet still the recession began in 1984 causing considerable damage to the economy and the citizens at large. The major problem was the declining reserves which was quickly used up due to a lack of control and planning by the then Government on the stock of foreign exchange. Once it had dwindled to precarious levels, the country panicked and in came the IMF and its programmes long after adjustments ought to have commenced.
The situation in 2015 is dire and requires quick action by the Government. Listening to the parliamentary Standing Finance Committee it appears that they are oblivious to the current situation and leaves many citizens very worried. We have little time to make fundamental changes.
Recommendations:
Strong leadership is required. While the 2016 budget has been presented and debated, there is urgent need for the government to present to the Country a formal and detailed statement of affairs on the economy and outline some alternative for us to deal with the economic difficulties.
A detailed plan to manage our foreign exchange must be at the core of their overall plan for the country.
The importance of the foreign exchange plan cannot be overemphasized. Such a plan would ultimately include a strategy for all other aspects of the economy.
Time is against us. We are over forty years late in truly diversifying the economy.
In my next article I would suggest ways to manage our scarce foreign exchange reserves.
Ved Seereeram � Financial consultant
E mail �vedseereeram@gmail.com
