Saying that the finance minister has been critical of the IMF would be an understatement as he has often disdainfully dismissed IMF recommendations in the past. The 2023 Article IV report released on May 5 is virtually identical to the IMF’s preliminary report issued in January when it had completed its T&T fieldwork and repeats several recommendations from previous reports, albeit phrased differently. The report also complimented the administration on its handling of the pandemic and projected robust growth of 3.2 per cent for 2023. Mr Imbert was happy to use this positive forecast as an endorsement of his success in managing the economy.
ALL predictions of economic growth must be taken with a pinch of salt. They are based on economic models which capture the effect of variations in major variables that impact a country’s economic performance but not all the variables. Therefore, there will always be some measure of variation. The IMF issues two editions of its World Economic Outlook (WEO) at its twice-yearly meetings, one in April and the other in October. Its projections for the WEO are updated in each publication based on the most recent data. The world is a dynamic place and things change. Even the T&T Central Statistical Office updates and revises its numbers as more information becomes available.
Over the last three years, the IMF projections have shown major variations because of the impact of COVID and a less than robust recovery than projected. The IMF is not infallible; none of us are. In recognition of this and the current world volatility, in its April 2023 WEO it cautioned that “…the fog around the world economic outlook has thickened …Uncertainty is high, and the balance of risks has shifted to the downside” meaning that its forecasts are indicative, and many things can go wrong which could negatively impact the projections.
One must remember that the minister is an elected parliamentarian and therefore wishes to present the best view on the performance of the T&T economy. An endorsement from the IMF is a gift to be used to reinforce his position. As in all previous presentations, the minister took the opportunity to excoriate the supposed ignorance of commentators, especially the Opposition party, lumping any or all critics in this political grouping.
There were many gaps in the minister’s presentation. The oil and gas prices reported by the minister confirm a disturbing trend that was pointed out in last week’s column. The minister confirmed that the average realised oil price had declined from USD 93 per barrel in October 2022 to $73 at the end of March 2023, a 20 per cent decline.
Similarly, the average realised wellhead price for natural gas had declined from USD 11.61 in October 2022 to $4.12 at the end of March 2023, a 40 per cent decline. The trend is negative as prices are falling and have continued to fall in April and May. He omitted to address petrochemical prices where the declines have been deeper.
Whilst the minister estimated that revenue will only be $1 billion less than budgeted for 2023, 2024 and beyond threaten to be difficult years based on the trends revealed by the minister. What is worrying is that expenses are increasing as evidenced by the additional $3.9 billion in expenditure which will increase the deficit. This means additional borrowing whether it is from the Central Bank by way of overdraft, or from the commercial banks. The 2025 electoral countdown has started. Expenditure will only go up and indicate a return to deficit financing.
While the minister provided some relief to those who have been waiting on VAT refunds for years, paying those owed under $250,000 in cash and giving bonds to those who are owed more. Businesses are happy to recover these amounts. But they would have missed the opportunity to improve their businesses or would have had to rely on bank financing to cover the refund/ shortfall. Either way, a refund today is worth much less than if it had been received when it was due five years ago. What was missing was a commitment to pay VAT refunds when due.
Unaddressed was the impact of declining energy prices (natural gas, oil, petrochemicals) on the forex position. Natural gas, petrochemicals, and oil generate 80 per cent of the country’s foreign exchange earnings. Price declines for these commodities mean a return to foreign exchange shortages with corollary effects in every sector. Whilst there are positive signs from the domestic manufacturing sector, it is not large enough to generate the export volume required to fill the forex shortfall created by falling energy prices.
The continuing failure of BP’s infill drilling programme means that BP’s natural gas production is declining thereby reducing total production. Lower market prices and falling natural gas production will lead to another round of plant closures as in 2018-2020, perhaps permanently this time as explained by Prof Andrew Jupiter in his “Red White and Black Gold” page 93.
“By its very nature natural gas is non-renewable and therefore unsustainable.” As an industry insider, he ought to know. The reality is that the country’s economic performance improved because of the “windfall” gain coming from increased energy prices in 2021 and 2022, not to any policy change. Rougher waters lie ahead.
Mariano Browne is the CEO of the UWI Arthur Lok Jack Global School of Business.