GEISHA KOWLESSAR-ALONZO
geisha.kowlessar@guardian.co.tt
While some importers are calling on the Minister of Finance to intervene and release foreign exchange from T&T’s foreign reserves, economist Dr Vanus James says the minister’s hands however, may well be tied, based on the government’s economic management strategy.
He told Guardian Media yesterday that Government has been running fiscal deficits for many year, which he estimates to be around $7 billion a year. Fiscal deficits can only work if the Central Bank can sell US dollars to the market, which can support the value of the TT dollar.
If the Central Bank does not support the value of the domestic currency, he argued, borrowing rates will need to rise substantially and precipitously. James said the international rating agencies are keeping a close eye on T&T.
“To maintain its deficit budgeting strategy, Government must keep the value of the TT$ stable, and that means ensuring a sufficient level of official reserves to defend it. In fact, this is one of the main functions of the Central Bank, and to do this job it keeps a close eye on the various inflows of foreign exchange into the economy.
“These sources are generally exports, foreign investment, remittances and official transfers. Both exports and foreign capital inflows can be boosted by different but linked policies,” James explained.
He added the country still gets most of its export earnings from the energy sector and has been locked into that dependence since the end of the hegemony of “King Sugar,” adding that manufacturing has offered very modest options, mainly because the sector only has competitive capacity to produce consumer products, and even then can only mainly compete successfully in the Cariforum countries, aided by protective common tariffs.
Therefore, James said the capacity to innovate is just not there.
Energy exports have also been under constant downward pressure.
For several years now, James said, the average prices of oil and gas have been drifting downwards.
Now, he said the price of oil is at $68 per barrel, below the current budget target of US$78; and the price of gas is at US$2.76 per mmbtu, below the current target of US$3.59, adding that the experience was the same last year and the year before.
Moreso, James lamented there has been no serious success in diversifying the economy by developing non-energy exports.
Additionally, James said foreign capital inflows remain focused on the energy sector, noting that not much is being tried to attract foreign capital into other sectors, including appropriate development of the industrialised tourism potential of Tobago and its communities. Moreover, he said the prospects for industrialised tourism in Tobago are also being dampened by the threat of rising crime under current governance arrangements.
These are warnings signs to the Central Bank that its reserves will shortly come under increasingly stressful pressure if something is not done to limit the growth of imports, James said.
“The country’s economy is highly import-dependent, and becoming more so over time, in the face of continuing innovation by foreign economies. So, what government has been doing is keeping its accumulated import cover above seven months, rather than the usual three months, as a self-insurance policy against excessive disruption of international trade.
“The Central Bank may well have also been monitoring the ratio of its official reserves to external debt, to the broad money supply, and even the ratio of its official reserves to foreign exchange inflows, partly because a high level of any of these ratios also serves as a shelter from IMF programming,” James said.
He reinforced the country has been through many rounds of foreign exchange shortages that signal the need for fundamental reforms to drive diversification over time.
