Nov 2010 Financial News

Mary King on the issue of Govt finances: Spending its way out of stagnation

Nov 18, 2010

The Government’s looking to borrow money to spend its way out of stagnation. In the last week, it announced a US$1.3 billion loan from the Inter-American Development Bank. And Finance Minister Winston Dookeran expects to go to Parliament soon to raise the debt ceiling to access a further $25 billion. Dookeran’s intention is to pay people the Government owes and meet its stated financial obligations before Christmas. There’s concern about the increasing budget deficit and the obvious question of whether the money, once it reaches the hands of the people it’s meant for, will be spent. But the Government’s hands are tied. It has to spend.

“The Government, as it waits for better energy prices, has to continue spending, spend on the revamping of our infrastructure, roads, bridges, water, sewage, bus ways, police stations and in the local councils, as soon as possible,” said Minister of Planning, Economic, Social Restructuring and Gender Affairs, Mary King. King noted the business psyche was that the energy sector drove the economy and the Government income, which further drove the private sector and consumer activities. “Hence even if we ring fenced our economy from the rest of the world, the private sector in general would still be expecting government spending on projects to stimulate the economy. “With mainly a trading private sector that depends on consumerism, government spending is still key to our on-shore economic activity.

Hence, the Government is predicting an upbeat in the economy based in payments to contractors and some Clico investors soon,” said King. But isn’t that placing the burden of responsibility of the economy’s turnaround on certain groups of the population? “There is a new government in place, one with massive unforeseen debts, one that is racing to focus its spending to get the most bang for its buck, with an implementation system that has been severely damaged by the last regime,” she explained. “Special purpose companies that have become runaway horses, and others that have virtually shut down, this present Government is fighting fires of the last regime and restructuring its implementation arm. People talk about the lack of appointment of boards as a major problem. But surely had there been good management of these companies in place directed by strong ministers, the lack of boards would have been a minor problem,” she argued.

She said there was a challenge in the local economy exacerbated by the depression of the Caricom markets and the local construction sector. “Also, in contrast to what normally accompanies high liquidity in the market, both consumers and businesses are in a wait-and-see mode, neither of them borrowing and spending. The Central Bank talks about a flat economy and low growth. But, as we have seen with the global collapse, no or little economic growth is really economic collapse,” she stated. To propel the local economy, the Government had produced a budget packed with incentives for the energy sector and small and medium-sized enterprises (SMEs). King noted that Budget 2011 was the country’s largest budget. Spending-wise, she said, it’s hardly conservative and it maintained the social services, with subventions to Gate, URP and Cepep being continued as with subsidies for gasoline and electricity.

The major fear out there is unemployment aggravated by inflation that appears in part due to the effect of adverse weather conditions on food but, to my mind, also on the Ramsey phenomenon: price mark-ups in times of private sector difficulties are done on products whose demands are inelastic. This will get worse given the expected increase in prices of imported food. “The lower speed with which this Government has been able to transform budget allocations into spending and new projects has not helped the situation. This inability has to do with the damage done to the public service; the last government is on record as saying that the public service is not about implementation. Its special purpose companies have created havoc with implementation: Udecott is a prime example,” she told the Business Guardian.

Despite this, King pointed out that the 2011 Budget attempted to continue government spending and hoped to increase private sector activity with tax decreases and envisaged new investment in the energy sector. So just what can the country look forward to in the coming months? “The immediate/short-term situation is a victim of the economic model we operate exacerbated by the concern of both the business sector and consumer on the immediate future of the economy. Lest we ignore it, the people of this country all have televisions, many are Internet, Facebook, etc, users. As a result, they are acutely aware of what is happening in the world. Hence they are cautious with their money, anxious about what is going to happen about employment. “What is happening in T&T—reduced energy sector income caused by the recession, increasing unemployment, relatively high inflation, the instability being projected by the Clico fiasco and the out-of-context demands of unions—fan the fear of the immediate future of the economy,” she said.

She added that the medium- to long-term plans for the Government to revive and restructure the economy surely couldn’t be challenged. “However this Government has initiated projects, more so allocated large sums of money for WASA, road-building, etc, which should reduce the anxiety over unemployment. Spending on repairs, refurbishing and new infrastructure is the immediate key to alleviating the fear of unemployment, even if some of the work is to be found in rebuilding after Tomas.” She pointed out that at this time oil prices, which were trending at around US$80 a barrel, were above the budgeted price and given that the market for petrochemicals had improved, the Government’s cash balance should begin to improve. “Like the Obama’s regime, this new Government understands what it has to do but this takes time and, like the US, the population is impatient. If the local elections were held today maybe we might have also had a tea party effect; God forbid.”


Source:
Asha Javeed
Trinidad Guardian
Thursday November 18, 2010

http://guardian.co.tt/business/business-guardian/2010/11/18/spending-its-way-out-stagnation