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It’s not all sunshine and flowers

Thursday, July 12, 2018

Encouraged by the latest International Monetary Fund (IMF) report on T&T, Finance Minister Colm Imbert wasted no time in sharing the good news via a press release and a series of tweets from his Twitter account over the weekend.

The report by the IMF mission, released last Friday following its regular annual Article IV consultation in this country, confirms much of what Mr Imbert announced in his mid-year review of the 2018 Budget in May, so it is easy to see why he would be keen to share when he described as “a very positive report.”

Certainly, there was a lot of encouraging news in the release, including improvements in fiscal and external balances which the IMF attributed to the Government’s ongoing fiscal consolidation efforts. All these are welcome developments after the years of economic downturn with the difficult adjustments experienced in the country over the last two years.

However, don’t take this as a reason to break out in wild celebration—there is still a lot to do to get the economy on a sound footing and Mr Imbert and Finance Ministry staff—in planning their next moves in managing the still recovering T&T economy—would do well to heed some of the IMF’s advice. There was a lot of it in the preliminary report, as well as some lingering concerns, particularly with the forex market, that ought not to be overlooked.

Of course for some citizens, particularly those who lived through those difficult years of structural adjustment from the mid-1980s, it might be hard to see the IMF in any positive light as an adviser and supporter of economic progress.

The agency’s intervention to steer the country out of a severe fiscal deficit involved some painful measures—suspension of cost of living allowances for public sector employees; a voluntary severance programme; credit controls.

However, the recent IMF visit to T&T was not about that but rather helping this country achieve macroeconomic stability by providing policy and advice. Often overlooked is that the agency’s mandate is to reduce poverty—perhaps an idea hard to accept by those who endured the belt-tightening measures the country endured during the years of IMF conditionalities.

In any case, as Prime Minister Dr Keith Rowley has repeatedly assured, this nation is not in imminent danger of having to go back to the IMF. It might be a good idea, though, for those in charge of the country’s economic fortunes, to pay some attention to what the agency has to say.

As the IMF points out in its assessment, while economic improvements in T&T have been driven mainly by last year’s increase in energy prices, it is difficult to predict the “level and direction of change” in those prices. It therefore recommends that mechanisms be in place to maintain the momentum of fiscal adjustment and, not surprisingly, also urged continuation of diversification efforts.

The agency also recommended further measures to put the public debt on a “sustainable, downward trajectory” that would keep central government debt at around 30 per cent of GDP and public debt below 55 per cent.

“Transfers to public utilities continue to represent a significant fiscal drain. Staff concurs with the authorities that raising utility tariffs should be guided by a rate determination exercise by the Regulated Industry Commission, and implemented with urgency,” the IMF stated in a preliminary release following the T&T mission.

Echoing concerns that have been expressed in the recent past by economists and local financial experts, the IMF recommends managing public debt and the Heritage and Stabilisation Fund (HSF) in a manner that limits the need to draw down on that fund.

But of even greater importance is the assessment of the still difficult forex situation. This is an issue that the IMF has addressed in all of its recent reports on this country and this time, while noting that tightness in the market has eased compared to last year, warns that it is still “in a state of disequilibrium with strong excess demand.”

According to the agency, foreign exchange shortages persist despite a seven per cent nominal depreciation in 2016, the current account surplus of 2017, increased inflows from energy companies and regular Central Bank interventions to maintain a stable exchange rate. This, says the IMF, suggests the existence of an informal parallel market.

It further noted that uncertainty about the availability of forex or expectations of a further depreciation might be leading to hoarding, contributing to tightness in the market.

The recommendation to the Government, in the context of further potential volatility in energy prices, is that they take advantage of the current relatively stable period with low inflation to address the shortages, by adjusting the price or supplying foreign exchange at the given exchange rate.

The IMF also had some words of caution on the US$100-million Exim Bank facility introduced in May 2018 to help local manufacturers to finance their inputs, noting that it could add to market distortions if not carefully designed and implemented, creating incentives for misuse “as well as possibly introducing an exchange measure subject to the IMF’s Article VIII.”

The agency underscores the need for the facility to be carefully designed to ensure transparency and consistency with international standards and the authorities to provide sufficient foreign exchange to meet demand for all current international transactions.

The agency also see a more active role for the exchange rate as an automatic stabiliser and to help manage the transition to a more balanced/flexible foreign exchange market.

“The currency remained broadly stable since the depreciation in 2016, while vulnerability to terms-of-trade shocks continues. Greater flexibility, implemented through a mechanism that allows some market force in determining the exchange rate, would facilitate adjustment to external shocks, help restore competitiveness and safeguard foreign reserves.

“Implementing exchange rate adjustment gradually (within more flexible forms of a peg, such as widening bands) would permit two-way exchange-rate variation, and, in so doing, reduce incentives for FX-hoarding and one-way currency bets, while maintaining the exchange rate as nominal anchor,” it states.

On the matter of sustainable growth, Mr Imbert and his technocrats might also want to pay to the IMF’s suggestions for achieving and maintaining sustainable growth, such as introducing reforms to improve the business environment which it says are “crucial to support fiscal adjustment and boost economic growth.”

The report states: “With the economy heavily-dependent on the energy sector, obstacles to non-energy growth must be addressed and diversification efforts intensified. Efforts to support tourism should continue, given its linkages to agriculture, services, and light manufacturing, and obstacles to its growth (eg, air/sea connectivity, cost of doing business, and access to finance) should be addressed.

“Institutional reforms should focus on improving paying taxes and enforcing contracts, and legal frameworks should facilitate legislative-passage of ongoing reforms.”

However, I want to add some emphasis to this part which, in my view, needs to be an area of greater focus because of its debilitating effect on the country’s economic health: “Violent crime, with homicide rates one of the highest in the Caribbean, presents a drag on the economy, with direct crime-related costs from public, private, and social spending estimated at 3.5 per cent of GDP—around the average for the Latam and Caribbean region.

“Staff supports government efforts for crime reduction and suggests a balanced approach with prevention and crime-control programmes.”

All this, of course, is just the tip of the iceberg. The IMF assessment addresses a wide range of issues and these are just a handful of the more pressing matters highlighted in the report.

What will help here is clear headed consideration of all recommendations, strongly resisting any temptations to add any political spin to any of them. After all, the aim should be to put this country on a path to long-term economic sustainability.

This is by no means an easy task and no one should envy the heavy responsibilities now being shouldered by Mr Imbert as Finance Minister. However, the IMF’s recommendations, as well as others from the other reputable institutions keeping a keen eye on the country’s economic progress, could be the basis for policies and programmes.


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