Jan 2015 Financial News

Economists on falling oil prices: Cut spending now

Jan 06, 2015

Government’s challenges in dealing with falling oil prices are not only economic but political in an election year, economist Dr Ronald Ramkissoon said yesterday.

“Once the Government takes the necessary measures to ride out this period, it can have an effect on the outcome of the general elections. Specifically it is likely to make it very difficult for the Government to get a second term in office. 

“In other words, the kind of measures that are required in this economy with falling revenues, can severely test the credibility of this Government. It is really a test just like a test for the PNM in 1986. The challenge is not only on economic management but also on political management,” Ramkissoon told the T&T Guardian.

His comments came ahead of an address to the nation on Thursday by Prime Minster Kamla Persad-Bissessar when she is expected to outline measures to be taken by her administration in response to falling oil prices. Yesterday, West Texas Intermediate oil, which trades on international markets within the range of the light sweet crudes produced in T&T, fell below US$50 a barrel for the first time since April 2009.

Ramkissoon said: “Clearly the Prime Minister needs to talk to the population about where the country is in terms of public finances. Secondly, to indicate what measures are going to be taken in the light of the revenue decline. For economists there are standard measures that are necessary.”

He said the Government also needs to look at the macro economic issues: “One needs to take into account the issues of foreign reserves, the exchange rate and wages. In other words, they need to look at the critical dimensions of the economy and how they will adjust to the decline in revenue which is likely to be with us for a few years. We cannot be certain but I think it would be good practice for measures to deal with the fall in income.

“What is required is a different way in engaging the population than we have had in the last 50 years. It is the way in which the Government engages the population to get its understanding, to get it to understand we are facing serious challenges and there are measures that will hurt but which have to be taken in the best long term interest of the country. That is what the prime minister needs to do. Whether they can do it or not is up in the air. It is uncertain.”

Ramkissoon said it would be difficult to attain the gross domestic product (GDP) growth the Government has projected because of a cut back in expenditure.

“The Government had forecasted a 2.5 per cent on average for the next three years. The Central Bank Governor gave his forecast of 0.7 per cent, which is very low growth. 

“Over the last few years growth has been negative or marginal in the economy. If you take measures like cutting expenditure, it can bring an adverse effect on growth which we need to put out there. Cutting back public expenses can have an adverse effect on growth but in the short term it is necessary if we are going to focus on the country’s foreign reserves which is the life blood of the economy or what economists call the external balance. 

“We are in a period where the focus has to be on sustaining or having a decent external balance,” he said.

Moonilal Lalchan, president of the T&T Chamber of Commerce, said 2015 will be a challenging year for the country.

“We do not see any immediate signs of prices going back up as now the prices are depressed. The country will have to do some belt tightening and some of the capital projects will have to be deferred or even stopped altogether,” he said.

Dr Roger Hosein, senior lecturer in Economics at the University of the West Indies (UWI), St Augustine, said Government will have to revise some its subsidies in 2015 to deal with falling oil prices.

“The government will also at some point have to consider modifying its ‘dole like make work system’ so that more labour becomes available to the private sector rather than being locked into areas of underemployment as occurs with our various make work programmes,” Hosein said.

Source:
Rapheal John-Lall
Trinidad Guardian
Tuesday January 6, 2015

http://www.guardian.co.tt/business/2015-01-06/economists-falling-oil-prices-cut-spending-now