 Trinidad and Tobago finds itself once again in an economic downturn, the last being in 2008 when the global financial market crashed and the oil price plummeted from US$150 to US$30 a barrel. By the end of 2010 the price was back up to $100. Some analysts believe that the current global downturn resulting from the continued fall in the price of oil and gas could result in a more prolonged economic crisis than that experienced in the 1980s, what some referred to as the “lost decade of the ’80s” when within months, Trinidad and Tobago’s foreign exchange reserves were depleted, leading us into an IMF structural adjustment programme with concomitant currency devaluation, cuts in public servants’ salary, COLA suspension, privatization and job losses. The NAR Government paid the political price for imposing severe austerity measures on the population.
I present this context as we take a macro view of where we are today primarily because one of the uppermost questions for many is, “Have we reconfigured the economy following the 1970s, 1980s, 1990s and 2008 crises so that we are not likely to be led down a similar path?”
The answer is simple: no. Not even the collective contributions of all other productive sectors can make up for the financial losses the country is currently suffering due to the global collapse of oil and gas prices. And so, once again, if oil and gas prices continue to fall, we must either make significant adjustments of our own volition or bring in the FUND to do it for us.
Reality check: we have done insufficient since independence to bring corrective measures to address the source of our conundrum: the country’s over-reliance on oil and gas revenues to maintain a dependency model of development. In this model the State uses the largesse during buoyant energy prices to ramp up national expenditure without sufficient spending on productive diversification. Over the last 10 years alone, successive governments have more than doubled the national expenditure, so that in 2016 over $63 billion is needed to maintain living standards, mostly via transfer payments.
In essence, neither for expediency nor necessity have we put the economy on a path to sustainable development where a number of major productive sectors rather than just one generates national income. Instead, as government’s national expenditure – fuelled by energy revenues – has grown, other sectors such as manufacturing, agriculture, tourism and the creative industries have declined.
Are we now in a recession?
Mere semantics.
The economy is in decline
Government, the largest consumer and employer is faced with a serious revenue shortfall which increases daily. At the start of this fiscal year, on the assumption of an oil price of US$45 per barrel, there was already a projected revenue shortfall of $21 billion. Since then, oil has reached US$28 per barrel with global analysts projecting that it could reach as low as US$20 per barrel. Obviously, this has negative implications for the Government’s revenue projections.
Not surprisingly, the Government has mandated a 7% cut in all public expenditure and we await further cuts in its mid-term review this month. Moreover, it has signalled its intent to sell off State assets; draw down $1.5 billion from the Heritage and Stabilization Fund and turned to taxpayers through increased taxation (VAT, land and building taxes, business levy) to make up the shortfall.
Is this enough?
The signs of economic malady are already upon us; unemployment has started to increase with the growing fatalities in the energy and State sectors. In the latter, we have seen the non-renewal of short-term contracts of many young professionals operating this way for more than three years. The foreign exchange shortage continues to worsen as the energy sector, the largest foreign exchange earner, shrinks. Recent statements by the Minister of Finance indicate contractions in oil by 70% and gas by 45%. The fact that demand for foreign exchange continues to grow – whether a reflection of legitimate need or capital flight driven by fear – has led to creeping devaluations of the official band, the most recent movement taking the exchange rate from $6.43 to $6.53 with the black market rate as high as $8. This has resulted in rising prices, made worse by the Government’s initiative to widen the value added tax net in order to shore up its revenue stream. Prices are increasing at an accelerated rate, negatively affecting the cost of living. The Prime Minister and Minister of Labour have made public pleas to the private sector to protect employment. This is not realistic. In the global energy market, when the bottom line is threatened, businesses send people home.
How long will this crisis last?
There are no crystal balls, just best guesses. The international market (outside of our control) will dictate what happens. We are price takers in this game and our fortunes fluctuate (not for the first time) on the basis of the dynamics at play in the global market; whether it is changing geopolitics, deliberate efforts to squeeze competitor fuels off market, or shifts in supply and demand.
Since 2014, there has been a growing global glut of oil and gas. It would take almost a year of consumption at current levels to use up this surplus and bring the market into supply and demand equilibrium. The likelihood of increased demand is constrained by economic slowdown in China, Japan and the Eurozone. In addition, the US, once the largest net importer of oil and gas is today a net exporter thanks to shale oil. While it still imports more than 10 million barrels of oil per day from 80 different countries, with OPEC remaining the biggest supplier, its overall imports are at a 17-year low while the nation’s production rate is at a 24-year high because of hydraulic fracturing.
Even as the oil price falls below US$30 per barrel, OPEC, usually the global price stabilizer, has taken a stand not to curtail production to drive prices up but is allowing the price free-fall, arguably to bring US shale oil to its knees.
Saudi Arabia has the deep pockets to do this with $741 billion of currency reserves and a $15 billion surplus at the end of its last fiscal year. It can run budget deficits for several years without harm to the country’s finances.
Then there is Iran, estimated to comprise the world’s fourth biggest oil reserves. With the removal of sanctions by Europe and the US, Iran has announced its full return to the global oil market by ordering an immediate increase in production, prompting warnings from fellow OPEC members that it risks prolonging the biggest price crash in a decade.
Major oil companies are cutting back. The Brazilian oil company has cut its five-year investment programme by 25%. While this will eventually lead to a slow-down in production, that time is not in the immediate future.
Where does all of this leave Trinidad and Tobago?
If the trends in the global energy market continue, we will experience further revenue decline, worsening foreign reserve, more currency devaluations (whether formal or informal), job losses, price increases, cuts in transfer payments, capital flight, brain drain as more and more young professionals are unable to find jobs, worsening social tensions and criminal activities.
We can either buy time by drawing down on the HSF and selling off assets to prop up an obviously overinflated expenditure while we wait for the price of oil and gas to recover or we can take responsibility for turning adversity into opportunity. I hope for the latter. This requires us to be realistic to the worst case possibilities and get on with the task of deciding what needs to be done to minimize the fall out and return to positive growth in the fastest possible time in such a climate.
Economic Diversification
To repeat my mantra, economic diversification is priority one, two and three. There are no quick fixes to this and it is not an exercise in volunteerism or one where clear responsibility and accountability are difficult to trace. It is also not rocket science and there are many success stories for us to be guided by. It is a full time job needing the requisite expertise resourced and dedicated to the task of determining through robust analysis the areas of focus.
We no longer have the financial luxury of simply identifying a “new growth sector,” say film, setting up a special purpose vehicle, an advisory committee, giving grants to film makers and hoping for the best, without any key deliverables or performance indicators to measure whether we are achieving the stated objective.
We need to determine whether we have sufficient comparative and competitive advantage in the film industry to render it an industry with revenue, employment, and the capacity to generate foreign exchange. A desire for a film industry is not sufficient to justify it being resourced by taxpayer’s dollars. This requires a detailed analysis of the global and local film industries, future trends, competitors, geographic scoping, input-output, value chain; all geared towards evaluating the potential for a profitable industry. The next stage would be to develop a plan of action based on a strategy.
What I am describing here is by no means an exercise in academic report writing but a robust practical approach which has been proven and tested in some of the most competitive countries: Finland and Norway two examples. This requires full-time bodies out in the field gathering data, others on technology analysing data and studying global industry trends and yet others studying competitors and best practices approaches. It requires true collaboration amongst all stakeholders; working together in an industry cluster with a management structure for implementation of strategy. We need political will for such an approach, as it is business unusual for Trinidad and Tobago and necessitates decisions which prefer competence over loyalty.
To sum up, we have to get serious about the business of economic diversification now that money has become a scare commodity, the limited sums must be allocated in ways to maximise the potential for multiplication. Yes, governments have spoken of commitment and resourced diversification, but they have failed at strategy, delivery and accountability because monetary flows from oil and gas dimmed the conditions of necessity.
We are again at this junction of economic decline, not for the first, second or third time. Each time though, it is more difficult to reverse as the level of State dependence is further entrenched, the national expenditure larger and larger and the global dynamics more volatile. Unless there is another war in the Middle East, or it is in the interest of developed interest to see the price of oil climb, we are in for a reasonably long dry spell from oil and gas. The diversification imperative is stronger than ever. We must strengthen our efforts to the task but in new, practical and transformative ways, guided by data-based analysis and strategy.
Economist Indera Sagewan-Alli is the Executive Director of the Caribbean Centre for Competitiveness, UWI St. Augustine. |
