T&T is seeing the benefits of increased vaccination rates from the State partnering with the private sector and various NGOs for mass vaccination, a model which must accelerate over the coming months, advises economist Dr Vaalmikki Arjoon.
He said controlling the virus spread meaningfully is the most essential ingredient to facilitate private sector operations, job creation and employee productivity, reviving some public confidence for spending and attracting foreign investment.
In its recent monetary policy report the Central Bank noted that the projected global economic growth this year of six percent hinges on the speed economies vaccinate their population, achieve herd immunity and the efficacy of vaccines against the COVID virus mutations.
The report also included unconventional emergency lending programmes brought about by COVID-19 as well as a variety of measures undertaken to modify the rate of interest, adjust the money supply through its main tool of open market operations to buy and sell government bonds, its interventions in the foreign currency market, and its reserve ratio, the amount of money banks are required to maintain as reserves.
Among these policies is modification of the repo rate, the rate at which the Central Bank lends money to the commercial banks in the event of any shortfall of funds.
Citing that net foreign investment totalled negative US$1.75 billion in the last five years, Arjoon said this signalled that foreign investors are taking monies out of the country in favour of investing elsewhere.
He advised therefore that the private sector must rebound meaningfully if T&T is to take advantage of the surge in demand, investments and household spending in the US.
The economist also noted that since 2020, the US has approved nearly $6 trillion in fiscal stimulus, or 27 per cent of its GDP.
“This, together with pent-up demand from lower spending in 2020 and the re-opening of their economy, have caused their GDP to grow by 6.4 per cent in the first quarter, and in the last month alone, US jobs have increased by over 850,000, the highest in the last 10 months,” Arjoon explained.
He noted that such increases in economic activity, income levels and overall demand in the US present a golden opportunity for T&T to expand its non-energy exports to them, particularly manufacturing exports, which could improve the country’s current account balance and forex earnings in the last quarter of this year going into 2022.
And for T&T to take advantage of the increase in US aggregate demand, the State must be more aggressive with its stimulus package for the private sector to ensure that many more are able to reopen, and increase production levels for export, Arjoon suggested.
He also noted that in 2020, the Central Bank took an appropriate step to increase liquidity available from the commercial banks through lowering the repo-rate and the minimum reserve requirements for banks.
“This liquidity has, however, been severely underutilised as many in the private sector could not access loans, while many who could, elected not to, given their low confidence in the economy.
“With the current excess liquidity of approximately $8 billion in the financial system, the SME loan facility could be expanded to at least $500 million and extended to 2022,” Arjoon said, advising that apart from ensuring more equitable access to finance locally, T&T also needs to create the right conditions for doing business locally through improving the ease of doing business.
In order to reach more international customers Arjoon urged the private sector to embrace digitisation of their businesses by using digital payment methods.
He noted that the surge in economic activities in the US together with the continued strain in global supply chains and the unresolved US China trade policies are also causing price hikes in the US.
Arjoon said the increase in private sector activities globally is also causing shortages of essential raw materials and secondary inputs for production.
“With a greater cost of production, prices in the US, our major trading partner, are increasing – we will therefore continue to see price hikes in the coming months and shortages of imported items.
“Indeed, over the last three months, forex authorized dealers have sold approximately US$1.2 billion to the public, despite the closure of many businesses. This is US$108 million higher than sales from January to March 2021,” Arjoon explained.
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This higher demand for forex, he noted, may have been caused by companies, including manufacturers, food and pharmaceutical distributors having to pay higher prices in US dollars for the items they import, which is further compounded by higher shipping and transportation costs from China.
At the end of May, T&T’s foreign reserves stood at $6.67 billion, however, a part of this comprises monies withdrawn from the HSF and borrowed internationally.
According to Arjoon, the increase in global oil prices have also benefited this country’s forex export earnings.
He said this can be shown using the forex purchased by authorized dealers, where greater purchases might imply that more forex was earned through higher export revenues.
For instance, he cited that in March 2021, T&T exported 1.96 million barrels of oil, with Brent prices reaching over $69 per barrel. In that month, authorized forex dealers purchased US$527 million.
In November 2020, however, T&T exported 2.3 million barrels but with prices reaching over $48 barrel.
Arjoon said authorized dealers purchased US$284.3 million, or US$242.7 lower than March 2021, highlighting less forex earnings due to low prices.
On the public investment side, Arjoon advised that the State ought to capitalize on the public infrastructure activities and hasten construction projects including the Sangre Grande Hospital and the San Fernando to Point Fortin Highway, especially when more construction workers are vaccinated.
It should also accelerate other projects such as the La Brea dry docking facility and Toco Port, as growth in the construction sector carries much positive spillovers to other sectors, while also providing employment for construction workers out of jobs.
Further, Arjoon said, the dry-docking facility and the new port will also enhance revenues from the transport and shipping sectors.
These infrastructure projects, he emphasized, are also important since private construction activities could be low given the paucity of revenues in the private sector since 2020.
Need for economic transformation
The Business Guardian reacted out to economist Dr Vanus James who noted that on policy interventions in the foreign currency market, the Central Bank provided a subtle hint that all is not well with the availability of foreign exchange to which the country has grown accustomed.
In particular, it reported that “the local market for foreign currency has remained tight thus far in 2021.”
Real life evidence is that the foreign exchange market has been very tight for the past several years, with demand substantially outstripping supply, James said.
On the supply side, he said, the bank reported that “purchases of foreign exchange by authorised dealers from the public amounted to US$1,394.6 million over January to May 2021, a decline of 6.8 per cent relative to the same period a year earlier.”
On the demand side, “sales of foreign exchange by authorised dealers to the public” amounted to “US$1,824.0 million over January to May 2021, a decline of 6.0 per cent relative to the same period a year prior.”
The bank also reported that this was a fall in excess demand by 3.5 per cent over the period.
According to James one can speculate that this was “a COVID effect.”
“The monetary policy move was to support the market by selling US$512.1 million to authorised dealers, essentially drawn from official reserves. In other words, there was no policy to dampen some of the evident excess demand by depreciation of the TT$,” James said.
Notably, he added, the bank also explained that on the supply side “the decline occurred despite a 13.8 per cent increase in conversions by energy companies relative to the same period in 2020.”
“So, the other sectors are not holding their own, especially manufacturing,” James said.
He also noted that in the demand side, the main demand pressures seemed to have come from credit cards (32.8 per cent), retail and distribution (26.8 per cent), energy companies (11.8 per cent) and manufacturing firms (7.5 per cent).
This evidence points to the continuing import dependence of the economy and the urgent need for export transformation, James advised.
He also noted that the country imports most of what is sold to households (credit cards and retail and distribution) and import a lot of what is converted into manufactured output for local consumption or exports (manufacturing firms).
Further, he said, recent policies have also put the country in a position in which it now also imports a lot of its fuel needs (energy).
“Taken together, these signals point to the fact that it continues to be important that the Central Bank treats growth as ‘transformational growth,’ which is to say, growth driven by economic diversification of the right kind,” James said.
He noted that it is this kind of reading of the evidence that provides context for an understanding of the central element of monetary policy in an economy that is still to solve its development problems.
In that regard, he cited how the Central Bank reported on the flow of credit to the economy. Overall, “on a year-on-year basis, lending to resident businesses declined by 3.5 per cent in March compared to a fall-off of 2.5 per cent in the previous year.”
On the sector targeting disaggregated data to March showed declines in lending to distribution (1.8 per cent) and other services (10.9 per cent).
After registering a small uptick in December (0.4 per cent), possibly due to increased activity in the manufacturing sector, manufacturing credit declined in March 2021 (2.1 per cent year-on-year).
On the other hand, lending to the construction sector registered increases in December 2020 and March 2021 of 7.5 per cent and 12.7 per cent, respectively, in part due to the resumption of Government infrastructure projects.
The main issue here, James said, is the choice of sector disaggregation, adding that the targeted expansion of credit to support the capital producing sectors is what creates the vital bridge between the sustained growth the Central Bank wants to promote and the economic restructuring needed to achieve it.
He also referred to either services which saw a decline of 10.9 per cent in its credit flow.
This class, James noted, contains the creative industries, such as music and fashion design, which are key leaders of national capital production and innovation.
It also includes critical producers of human capital such as education and healthcare, which are also major contributors to the national capacity to innovate.
T&T facing “loop-type shock”
Former Finance Minister Prof Winston Dookeran noted that T&T is facing a ‘“loop-type shock,” on both the demand and supply sides at the same time, a fiscal dive that can only be averted by a growing economy, and the more effective use of monetary measures like quantitative easing to finance growth.
According to Dookeran the outlook could look better by accessing IMF resources to anticipate and avert the twin deficits in the current and fiscal accounts, in a wider financial package with IFI’s private sector windows to catalyse private and public sectors growth and widen the social measures in a re-engineered national insurance scheme, along with continuing support to the old and new vulnerable groups in society.
Generally on the report Dookeran said, “The analysis is based on shaky grounds, global recovery is fragile with new surges of pandemic grief; inflationary tremors will transmit adversely to the local economy particularly in the construction sector, oil prices may remain volatile.”
As such, he said, liquidity levels must not be just adequate, but must grow the public and private sector activities.
“The turn around in current account is ‘iffy,’ and the end game of growing fiscal deficits is near, especially so, with no signs of a sustained jump start increase in the level of economic activities required to jolt the economy into a growth trajectory,” Dookeran explained.