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Placing the budget in context
The recent T&T Country Report from the International Monetary Fund (IMF), which was released just before the 2018/19, Budget indicated the following:
“Economic prospects are expected to improve over the medium term, but remain heavily dependent on the energy sector. The medium term growth, fiscal and external outlook is vulnerable to negative surprises in the energy sector and output, a sizeable primary deficit, and elevated levels of public debt. Possible delays in completing the ongoing fiscal adjustment and reforms, persistence of foreign exchange shortages, tightening of financial conditions, and ongoing regional financial sector challenges also tilt the risks to the downside.”
Risk, in simple English, is an understanding that more things can happen or more outcomes are possible than will actually happen. So when the IMF is speaking about improved economic prospects with risks to the downside they are suggesting that there has been some element of a turnaround but there are still many factors to consider that can negatively impact the T&T economy over the coming years.
It is against this backdrop that the 2018/19 Budget was delivered by Finance Minister, Colm Imbert. The Minister quite appropriately sought to emphasize the improved economic outlook especially as his words carried the backing of the IMF. So the theme of turnaround and green shoots factored heavily in the Budget presentation.
It is not common for a Finance Minister to focus on downside risks in a Budget presentation, unless of course it is politically expedient to do so. An upbeat tone helps to engineer confidence and that confidence can take on a momentum of its own that leads to self-fulfillment. In this respect the Budget speech served a specific purpose.
As the IMF pointed out there are risks and as I just highlighted a risk is not an indication that the issue identified will happen but rather that it is an acceptance that the highlight is possible causing variability to the expected or hoped for outcome.
Understanding the reason
Very early in his budget presentation the minister spoke about the inflation rate in T&T at this time. The current inflation rate is not the most important figure in his presentation. The real emphasis in the Minister’s statement but which has gotten zero attention is the inflation rate in T&T has averaged 7.2 percent over the past 50 years.
An inflation rate of 7.2 per cent means that your purchasing power is halved every 10 years or put another way your disposable income has to increase by 100 per cent every 10 years to maintain your levels of purchasing power, all other things being equal.
For comparison the average inflation rate in the US over the same 50 year period (1968 to 2018) is 4.07 per cent. A difference of 3 percentage points may not seem like a lot but inflation is a compounding effect. To illustrate, $1 in the US in 1968 has the same purchasing power as $7.36 in 2018. However $1 in T&T in 1968 has the same purchasing power as $32.34 today based on the average inflation rate over the period in question.
That represents a significant difference between the purchasing power in the US and TT. The compounding effects of our high average inflation rate is the main reason why so many citizens live in a precarious financial state, why there is a significant income divide in T&T and why the economy consists so heavily of transfers and subsidies. Unless you are asset rich average inflation rates of the magnitude of 7.2 percent will doom large sections of the population to a life of substance living.
Things are there for a reason and few would have linked the significance of the events of 1974 as reported in the Minister’s Budget statement. The highest inflation level recorded in T&T was 24.5 percent in 1974. It was that same year that fuel subsidies were introduced in T&T.
The reality is that many different governments have used transfers and subsidies inclusive of the fuel subsidy to mask the mismanagement of the T&T economy across decades. High inflation is a manifestation of economic mismanagement since it is essentially a hidden tax that allows the rich to get richer because the value of their assets increases and the poor to get poorer as their purchasing power declines. Transfers and subsides have masked that truth by allowing broad sections of the population to afford things that they would not otherwise be able to afford and so maintain a standard of living despite the erosion in purchasing power as highlighted above.
Using the last two decades to illustrate further, my rough estimates suggest that the cost of a two pieces of chicken and fries (a snack box) has doubled in price from 1998 to 2018. Let us use that as a proxy for food price inflation. Salaries and incomes have not increased at the same pace nor has increases at that rate been deserved because productivity has in fact declined.
Again by my rough estimate, home prices have increased by approximately 300 per cent over the same period. So the two basic items of food and shelter have increased in price at an exponential rate relative to incomes in T&T. Someone with access to property as an asset class would be exponentially richer and someone without such access would rely on subventions from the State in order to at best “thread water”.
The presence of elevated levels of inflation and large transfers and subsidies in the economy means that the best form of business activity is to own property for rent and to retail goods and services. In so doing you extract value from two sources both funded by the State.
Inflation causes asset prices to appreciate and with it rents. Subsidies obtained from US dollar energy sector inflows increases disposable income resulting in higher levels of consumption—a benefit for retailers.
If the revenues obtained from these activities in the hands of the private sector are reconverted into US dollars then the inflation differential highlighted above will show that the US dollar will present a store of value against a TT dollar that has to at some stage depreciate over time. Overall this represents a phenomenal return on capital.
If we look at our economic landscape we will see this is exactly how it has played out and that now leads us to the moment that is 2018/19.
We are no longer able to afford the levels of transfers and subsidies although we are still in a mindset of redistribution. We have reduced the subsidy on super gasoline and we are attempting to redistribute this to another segment of society.
The paradigm has shifted but our default action is so rooted that we are not clear on how else to approach the challenges that we face.
The truth is that after 44 years of a particular approach to government and politics in the form of transfers and subsides to the population it is more than a case of simply removing or attempting to redistribute. The economy as a whole has to be reconfigured.
The private sector business model of own property, rent and retail is not going to work to the same extent as in the past. The wider population needs to be taught how to be more entrepreneurial as opposed to the custom of waiting to be given or handed out. There needs to be specific policies that are geared towards changing the behaviors that have developed over the past 44 years. To do otherwise leaves room for social discord.
Such discord may even be anticipated and the emphasis on reforming and revamping the police service while welcome in an absolute sense may also have one eye on the potential for crime becoming more of an issue due to various economic challenges.
At the start I quoted the headwinds that the IMF says needs to be considered.
Energy prices are higher now and that provides us with an element of wiggle room and with it comes an opportunity. We grasp the opportunity if we understand that more than accounting for revenues and expenditures we actually need to overhaul our approach to become more entrepreneurial. That requires direction, guidance and enabling by the State. If any of the risks cause us to experience further downside then it becomes even more difficult to adjust as required.
Now that we understood how we got here over the past 44 years we will appreciate the point that we needed to have more enabling measures if we are to chart a different way forward.
Ian Narine can be contacted via firstname.lastname@example.org
“The real emphasis in the minister’s statement but which has gotten zero attention is the inflation rate in Trinidad and Tobago has averaged 7.2 per cent over the past 50 years.”
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