 The impact of falling oil prices has profound implications for the state of the Republic, not only directly on the economy, but for what it portends for a recalibration of T&T’s focus. On January 30, 2015, the Trade and Economic Development Unit (TEDU) at The UWI, hosted a pertinent seminar, “The Need for Economic Diversification: Falling Oil Prices and its Implications on the T&T Budget,” which attracted more than 300 persons.
The panel included Professor Andrew Jupiter of the Department of Chemical Engineering, Dr. Anthony Birchwood, Mr. Gregory McGuire, and Dr. Roger Hosein from the Department of Economics. The feature speaker was the former Governor of the Central Bank of Trinidad and Tobago, Mr. Ewart Williams, who is also a distinguished fellow at the Department of Economics.
Prof. Jupiter shared literature highlighting the response of the energy sector to falling oil prices, and surprised the audience when he indicated that oil giants Exxon Mobil, Shell, and BP have all made plans to reduce expenditure by US$5.5 billion, US$9 billion, and US$2 billion respectively, with Shell abandoning a US$6.5 billion petrochemical plant in Qatar.
Some of the far-reaching consequences expected will include increased unemployment within the energy sector, the reduction and/or removal of subsidies related to oil revenues and increased pressures on floating exchange rate regimes.
Dr. Birchwood detailed the implications for the exchange rate in the context of the falling oil prices. He rejected the IMF’s decision to maintain the exchange rate at its present value, and noted that 60% of OPEC countries have already devalued their currencies, and the remaining 40% boast greater reserves of oil than Trinidad and Tobago. He recommended a gradual decline in the exchange rate to allow greater flexibility, whilst removing the pressure on the demand for the US currency. He alluded to the fact that non-banks have become licensed foreign exchange dealers; enabling these entities to acquire US currency directly from the Central Bank of T&T, as well as to purchase currency at the banks.
“This is a double whammy. These companies can get two bites of the cherry,” he said. This came on the heels of the cries of the local business community of a shortage of US currency on the market to conduct business. Dr. Birchwood was alarmed that as of January, the Central Bank had already injected a quarter (US$400m) of the total injection of the previous year (US$1.7b) in order to keep the exchange rate stable. This action was deemed unsustainable.
Mr. Gregory McGuire offered a wealth of information on the facts of the present oil price dilemma. He noted that a significant portion of Government revenues is obtained from the oil sector. From this discussion the audience was made aware of the difficulties of diversifying away from the oil sector, and the challenges of finding suitable alternative sources of government revenues. Both Mr. McGuire and Dr. Hosein believe that the revenues from the oil sector are the engine that will afford the nation the opportunity to diversify into other sectors. Mr. McGuire added that since 2010 there has been no new investment in the gas industry of Trinidad and Tobago.
Dr. Hosein, the Co-coordinator of the host unit, TEDU, highlighted the need for diversification within the very present threat of shale gas to the gas-based economy of Trinidad and Tobago. He noted that the US had approved a bill aimed at increasing exports of LNG to the market that will be game changing for suppliers of neighbouring countries to the US. This threatens the existing and future market of natural gas producers in Trinidad and Tobago. He added that the current economic climate and the shale gas boom introduce characteristics of a new normal to the global economy. He pointed out that the State had absorbed surplus labour, whilst leaving the manufacturing and agriculture sectors starved for labour. He made calls for optimal resource use and labour reallocation as the foundation to diversify the T&T economy. He further added that there was an urgent need to reduce wastage in the economy by amending transfers and subsidies, including GATE and the fuel subsidy, and to open up the economic spaces of T&T via the construction of various highways.
Former Governor of the Central Bank of Trinidad and Tobago, Mr. Ewart Williams, began his speech by giving a brief recap of the origins of the Heritage and Stabilization Fund. He pointed out that with the tumultuous fluctuations in the oil price during the1970s and 1980s, we, as a state, ended up in a standby arrangement with the IMF, A structural adjustment requirement from the World Bank and also sought debt rescheduling from creditors. He outlined the transformation of the Interim Revenue Stabilization Fund (IRSF) to the Heritage and Stabilization Fund and how funds were accumulated since its establishment.
The HSF was expected to represent a device for increasing national wealth and promoting fiscal discipline but this has not happened especially due to the fiscal deficits since 2009; also only about 8% of energy sector taxes were entered into the fund which amounted to TT$16 billion out of the TT$210 billion collected, and finally the high level of spending supported by the energy revenues which ultimately forced us as a nation into a very textbook Dutch Disease situation.
He calculated that we have not saved enough in the HSF and given the lower reserves on the horizon, we need to accelerate the rate of accumulation if the fund is to become substantial. He concluded that permitting the HSF to participate in some high quality domestic investments could carry substantial advantages and recommended that an open discussion of forceful governance partnered with transparency standards to moderate risks and political turmoil can lead to a better balanced HSF.
There was a general sense of consensus that the perpetuation of the current conditions will inevitably lead the country to another 1980s type of recession. This notion was the impetus for the questions and concerns raised by the audience. When the floor was opened for comments and questions, the audience was very eager to express their views, comments and questions. While some comments were more political than others, there seemed to be a general consensus among the audience that the solution for T&T is diversification. The audience generally believed a lack of political will prevented T&T from diversifying.
From these discussions it was clear to the organizers that more opportunities for dialogue are required and as such a decision was taken to host other installments of the seminar focusing on key macroeconomic issues. A tentative date for another session at Presentation College in San Fernando was set for Wednesday, March 25, from 6pm. At this session the diversification discussions will continue.
This report on the seminar was prepared by Don Charles, Nazim Gittens and Akeeta Ali of TEDU.
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