On Tuesday, the price of natural gas fell to US$2.82 per million British thermal units and given the glut of the commodity on the global energy markets, a betting person would wager that the price is unlikely to move beyond US$3.25 anytime soon. If the Government wants to continue spending at closer to the $49 billion level while revenues are in the range of $42 billion, that creates a serious fiscal issue in which the deficit next year would be substantially larger than it is expected to be this year. How will the Government finance its 2010 fiscal deficit? Many would expect that the Government would revert to the local and international capital markets in the next fiscal year as it has done during the current one when it raised an estimated $12 billion. But there is some evidence that Ms Tesheira will do something that no Minister of Finance has done in this country in at least two decades: drawing down from the Central Government’s deposits at the Central Bank.
The hint for this approach can be found in a slide of the PowerPoint presentation made by Central Bank Governor Ewart Williams, during a trip to New York in May, where he and the Minister of Finance met with the rating agencies Standard & Poor’s and Moody’s. In the slide on page 18 of the presentation, Governor Williams points to the revised budget in January, noting that even though there has been a cutback in expenditure, the Government still expected that the budget deficit would amount to $1.8 billion or 1.1 per cent of GDP. “Sufficient fiscal space is available, if required, since the Government can either draw down from its sizeable deposits at the Central Bank or raise money domestically through the issuance of long-term bonds. “As at the end of April 2009, the balance in the Infrastructure Development Fund amounted to TT$5.2 billion; TT$4.5 billion in the Unemployment Levy Fund and TT$1.7 billion in the Green Fund.”
As at the end of April, therefore, the Government held deposits at the Central Bank totalling $11.4 billion. Those funds would have grown somewhat in the intervening five months.
Imagine that!!
The Government has an estimated $12 billion sitting in some accounts at the Central Bank—money which was deposited there over the last few years as part of the savings of the recently-concluded natural gas-led boom. A sum of $12 billion which can be spent without bothering to trouble the Parliament and those pesky Opposition MPs because, the Government will argue, that money has been the subject of prior spending approvals. Imagine having access to $12 billion in spending money with little need of accountability and which the Central Bank would be required to disburse simply by the Minister writing to the occupants of the tower next to hers and instructing them to do so. And so, the Government has an instant $12 billion buffer to spend in case natural gas prices remain too low for too long.
The Government will argue, of course, that these deposits are savings which are available for spending in the way that a family whose income for a particular year dips can draw down their savings. And the Government will argue that it would not even be required to touch the country’s Heritage and Stabilisation Fund savings—for which there are strict rules for disbursement.
While the Government may be tempted by the relative lack of accountability for the $12 billion, there are some drawbacks to these drawdowns. Accessing the Government’s TT dollar deposits at the Central Bank, breaking the piggy bank as it were, and using that money partly to finance the budget deficit, will be inflationary in the classic way because it would be akin to the Government printing money. That spending is likely to reverse the efforts that the Central Bank has been making over the last four years to restrain the rate of inflation which has benefited and will benefit everyone. This culminated in the announcement last week that the inflation rate had declined to 5.9 per cent, down from 15.4 per cent less than a year ago.
Being inflationary, the drawdown of the Government deposits is also likely to have a negative impact on T&T’s foreign reserves as there is clear evidence that of every $1 in income generated in this country, up to 60 cents gets spent on goods and services which ultimately deplete our foreign reserves. It would be better for the Government to finance its 2010 deficit by raising bonds which are likely to be less inflationary than the drawdowns. The other advantage of bonds is that they provide pension plans and insurance companies with risk-free assets for their investment portfolios at a time when the Government has adopted a negative stance against insurance company adventurism. Government’s issuance of bonds in the current fiscal year has served to mop up some of the liquidity caused by the sharp reduction in consumer credit. According to the Central Bank, growth in private sector credit by the commercial banking system slowed to 4.3 per cent from 18.4 per cent in June 2008.
