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The coming economic collapse

Trinidad Express / IN my previous article, I wrote about the “writing on the wall” with regard to the Trinidad and Tobago economy. The facts, coupled with the lack of a viable plan by the Government to address transformation of the economy, give little hope for true transformation. In addition, the Government has embarked upon misguided strategies to turn around the economy and in this regard they are digging a larger hole to bury the economy instead of rescuing it from large-scale unemployment, runaway inflation and the general pauperisation of the population. Let us examine some of the Government actions. Borrow US$ to increase foreign reserves: The recent foray into the international market to borrow US$ was hailed as a tremendous success. First of all, such magnitude of over-subscription meant that the interest rate was too high at that point in time. In other words, we could have raised a lot more money with the same terms of repayment. The Government placed the US$ with the Central Bank and received TT$ in return. Our stock of foreign exchange immediately got a boost but that will be short-lived. The Government then spends the TT$ to meet recurrent expenditures and the recipients then demand foreign exchange to meet their needs due to our high propensity to import. The net result is a rapid depletion in our reserves but an increase in foreign debt. This is indeed a bad idea. Banks often play these tricks by encouraging countries to borrow hard currency to boost reserves and we have fallen for the trick with our eyes open. Borrow to invest in housing, Toco Highway, completion of the Point Fortin Highway, construction of the International Financial Centre, etc: Inappropriate infrastructural projects only serve to burn the stock of foreign exchange and contribute nothing to the transformation of the economy to a sustainable path. These expenditures are not necessarily bad in themselves but with reliance on more debt to fund these projects the question must be asked regarding priorities and the cost benefit of these investments. Very often a country makes investments that have no impact on revenues (local or foreign exchange earnings) but leave the treasury with an additional debt service burden driving us into an inescapable debt trap. It is the last straw that breaks the camel’s back. Yes, these investments create jobs in the short term, but it also increases demand on our scarce stock of foreign exchange with no additional revenues but increased debt. Absence of an investment policy: Had the Government had a pragmatic investment policy to bring about economic transformation then such projects would have been discarded for more urgent projects. Two fundamental questions must be asked when deciding on investments: 1. Would the investment be a net earner of foreign exchange? And, 2. Would the project save on the use of foreign exchange. In calculating the net effect on our stock of foreign exchange it is tempting to consider the payments in TT$ as a local expenditure with no impact on the outflow of hard currency. This is wrong, given our high propensity to import, the payments in TT$ represent a major drain on foreign exchange. The evaluation of the viability of a project against the two objectives listed above must include TT$ expenditures as a drain on our stock of foreign exchange. The debt-to-GDP hoax: This is one of the biggest hoax perpetrated by economists and country planners to determine the health of a country’ finances and its capacity to take on more debt. The experts casually compare the debt-to-GDP ratio with that of other countries to gauge if we are within acceptable limits. The ratio compares the size of the Government debt with the revenues of the country which comprise mainly three sectors, namely Government, corporations and households. The problems with the ratio as I see it are as follows: 1. The Government debt is being compared to the revenues of all the sectors in the economy. It is not unlike a bank evaluating your capacity to repay by measuring your debt service with the collective revenues of other members living in the same house. It just does not make sense. 2. Comparison of the debt-to-GDP ratios among different countries also does not make sense. A country with Government dominating the economy would contribute to a higher percentage of GDP than a country where Government revenues/expenditures are relatively small compared to their GDP. In such a scenario, the debt-to-GDP ratio in the first instance could be significantly higher than the latter and still be in a better position to service its debt. Incidentally Venezuela’s debt-to-GDP ratio at the end of 2015 was under 50 per cent and, according to the Minister of Finance, our debt-to-GDP ratio is above 60 per cent. So, are we worse off than Venezuela? A Government’s capacity to repay depends upon just that, “our capacity to repay”. Do we have enough funds remaining after deducting recurrent expenditures (excluding interest) from recurrent revenues to meet interest and principal payments? No, we do not, and we are woefully short. We are running out of assets to sell and running out of savings to draw on. We are heading in the wrong direction and there are several steps the Government must take if the economy is to be transformed. They are continuing the strategies of the last government which will only hasten the economic decline. We are left to wonder if the democracy we practise is serving us in this time of critical need.

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