High oil and gas prices and a return to normal life will definitely have positive fiscal, external, and growth effects for T&T, says economist Dr Marla Dukharan.
In her Caribbean Monthly Quarterly Economic Report issued on Monday she, however, advised that these effects will be “transient at best.”
According to Dukharan sustained medium-term economic performance will depend on the urgent implementation of reforms to fiscal and foreign exchange management “at least.”
Noting that the International Monetary Fund (IMF) is expecting global growth to slow from 6.1 per cent in 2021 to 3.6 per cent in 2022 to 2023 and 3.3 per cent over the medium-term, Dukharan said global growth below three per cent is considered a global recession.
“And already the IMF shaved 0.8 and 0.2 percentage points off its 2022 and 2023 growth projections just three months after initially publishing them, demonstrating the high level of uncertainty prevailing and downside risks to the outlook,” Dukharan explained, citing that the IMF’s Managing Director recently advised countries that “when the sun is shining, fix the roof.”
And in March, when the IMF released its Staff Report for T&T, Dukharan further noted that this highlighted “the gaping hole in our roof.”
According to Dukharan, in 2019 when most economies regionally were recording positive growth, T&T had posted its fourth consecutive year of economic contraction.
“This is not just a recession. This is a stagnation precipitated by years of relentlessly poor governance and inappropriate if not detrimental policy choices not by COVID or any other exogenous shocks,” Dukharan said.
Further, she added, that T&T has now contracted for six consecutive years; 2016 to 2021.
Dukharan also noted that the IMF also reported “a strong economic recovery is projected for 2022, with downside risks predominating. Still, output would remain below pre-COVID-19 levels well into the medium term.”
According to Dukharan, “strong recovery” puts growth at 5.5 per cent in 2022, three per cent in 2023, then averaging one per cent in 2027, which only returns T&T’s economy to its 2016 size in 2025.
Total debt is expected to increase steadily to at least $113.5 billion by 2027, and is currently estimated at 88 per cent of GDP, with no balanced budget in sight, she said.
Further, Dukharan added that inflation is now projected at 5.5 per cent this year and 3.1 per cent in 2023.
Dukharan emphasised that the IMF highlighted many areas of concern in its report, perhaps the most persistent of which is this country’s foreign exchange regime; “The current system rations individual FX demands, which motivates the creation of schemes to circumvent them. A proliferation of special-purpose facilities at the Eximbank to prioritize FX access to manufacturers, importers of necessities—including SOEs—have produced a hybrid exchange rate system that is prone to inefficiencies. The current account gap is estimated at -3.4 per cent suggesting a currency overvaluation of 11.6 per cent...”
Further, Dukharan noted that the IMF suggested that the Government “eliminate exchange restrictions and multiple currency practices…replace the special purpose windows at the Eximbank to reduce those inefficiencies.” Furthermore, it also reported the net Errors and Omissions item at -US$2.1 billion in 2017, US$2.2 billion in 2018, and US$1.1 billion in 2019.
“This represents a total net outflow of US$5.4 billion in just three years from our FX reserves that the Central Bank/Government is unable to explain. This is about the same as the HSF balance,” Dukharan added.
Additionally, she also cited that other important IMF recommendations include “to publish a COVID-related spending report, including information on the beneficial ownership of entities awarded COVID-related contracts, to strengthen transparency” and “auditing the stock of VAT refunds (estimated at 5.2 per cent of GDP).”
But Dukharan said the IMF’s language in its report is “understandably diplomatic and measured, otherwise the authorities will not release it, which has happened in the past,” adding that many misinterpreted the tone therefore, as ‘positive’ and even suggest that the economy has shown signs of ‘tremendous recovery.”
“The sun is shining now, so let’s fix our roof,” Dukharan stressed.
She also noted that T&T’s inflation reached 4.2 per cent in February 2022 led by food prices up 8.6 per cent and home ownership prices up 8.3 per cent.
Also, she cited that the energy sector grew in Q4 2021 as prices began to rise, though the non-energy sector remained weak.
Unemployment reached 7.2 per cent in December 2020 as the number of people employed decreased by five per cent year on year.
The country’s repo rate was left unchanged at 3.5 per cent in March.
The IMF projects T&T’s energy sector, Dukharan added, will plateau over the medium term, and calls for exchange rate flexibility to achieve external balance and provide space for countercyclical monetary policy.
She referenced that the IMF highlighted, “the current system rations individual FX demands, which motivates the creation of schemes to circumvent them.”
In FY2022 the non-energy primary fiscal deficit is expected by the IMF to reach $21.4 billion, once outstanding value-added tax (VAT) refunds of $2 billion are paid, Dukharan further noted.
The IMF also forecasts growth for this country of 5.5 per cent in 2022, three per cent in 2023, then averaging one per cent to 2027.
And Dukharan maintained, “We also expect a balance of payments crisis to develop this year, absent significant reforms and economic recovery.”
The report also examined the economic health of other countries in the region.
For instance, Dukharan said Guyana’s economy grew 19.9 per cent in 2021 in spite of the floods which heavily impacted agriculture and mining activity.
Its inflation ended 2021 at 5.7 per cent.
She also noted that the country’s Balance of Payments surplus expanded as the increase in foreign direct investment and COVID-related special drawing rights (SDR) allocations from the IMF offset the wider current account deficit, which came as a result of equipment imports related to oil production and service payments. Net international reserves stood at US$742 million or 1.6 months of import cover in February 2022 for Guyana.
