Opinion
- Editorial- Commentary
Mary King
:
Managing in a time of less
OUR Prime Minister has confirmed that his Government will use deficit financing, via the raising of local bonds, to finance his trimmed budget, estimated now at TT$43.9 billion (down from TT$50 billion) with the expected revenue of TT$42.2 billion.
The Prime Minister proclaimed that we were saving for a rainy day (the RSF is now at TT$18.2 billion) and the rains have come! However, he will not dip into our savings; instead, he will raise the required funds on the local market which, according to him, would also have the effect of mopping up excess liquidity.
When a bond issue is taken up by the Government, immediately the liquidity position of the market is reduced by its subscription. As our Government spends this money during the budget year the liquidity is reinstated by this amount. Later on, the liquidity is further increased when the bond issue matures and is repaid. When the Central Bank needed to reduce liquidity it froze the funds it raised.
Mr Manning, in speaking about the strength of our foreign reserves, now standing at US$9.2 billion-11 months' import cover-and supported by the Central Bank Governor, dismissed the concern about a devaluation of the TT dollar. The 11-month import cover implies that the energy sector that earns over 90 per cent of our foreign exchange is supplying some US$10 billion a year to importers, of which the Central Bank injects approximately US$1 billion.
Recall that this recession has hit T&T profoundly in terms of the earnings of the energy sector which implies that the supply of foreign exchange for importers will be substantially reduced. The depreciation pressure on the exchange rate depends on the mismatch between the local demand for foreign exchange and the ability of the energy sector to supply it.
The supply is down and if the non-energy sector economy also declines then, as the PM and the Governor think, there will be no pressure on the exchange rate. It is worth noting that reserves do not really determine a devaluation (unless of course they are immense!).
When the demand for foreign exchange steadily exceeds its supply the reserves may act as a buffer as to when and how quickly the devaluation takes place. The unknown now is, how deep and long will the present recession be, and how difficult will the supply of foreign exchange get? But in our managed exchange rate float the Central Bank can always match the demand to any supply of foreign exchange by controlling the liquidity and the commercial bank interest rates.
If our expectation is that the inflation rate will drop then this gives the Central Bank some leeway to manipulate the interest rate in exchange rate control. Care has to be taken since globally interest rates have fallen to almost zero, which puts what little manufacturing and agricultural processing we have at a disadvantage even for local consumption.
In his presentation in Parliament the Prime Minister correctly pointed to the developed and emerging countries' fiscal initiatives to stimulate the real and productive economic sectors in the face of the severe credit crunch.
But it goes farther than that. For example, US President-elect Barack Obama has recognised that the problem is not simply the financial meltdown (and its contribution to the flow of credit) but it is economic in that he has to rebuild the innovative and entrepreneurial sector of the US, to move away from a high credit, high trade-deficit nation to one that is export-competitive. China has also learnt the lesson that it cannot depend on investment mainly for export and even India is restructuring its economy.
The Prime Minister is also correct that we did not have a credit crunch. To the contrary, the Central Bank has been engaged for years in trying to control inflation via credit reduction driven by Government spending. The simple fact is that the global recession has cut the demand for petroleum and its products which are the only products of our one-horse economy, an economy that has to export to survive, and foreign investment is on hold in the sector-hence our depression.
The tactic of our Government is to use whatever fiscal resources it has to keep the present economy ticking over and hope that we can "weather the storm" until the global economy picks up again, until the world demand for petroleum and its products revives. However, unlike Mr Obama, our Government has no discernible strategy (developed nation by 2020?) to restructure the economy away from the petroleum-based-plantation economy that is becoming more unsustainable given our depleting resources and the inevitable turn away from petroleum by the world.
Mary King is a columnist of the Trinidad Express (maryking@tstt.net.tt). Petroleumworld does not necessarily share these views.
This
commentary was originally published by Trinidad Express, Monday, January 19, 2009. Petroleumworld
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