May 2016 Financial News

CDB chief economist Justin Ram...Diversify or die

May 12, 2016

T&T is in a good position to diversify its economy. So says DR JUSTIN RAM, director of economics and research at the Caribbean Development Bank (CDB).

Given the current economic slowdown T&T is experiencing, Ram says the lessons learned from this experience (and those before) should form the basis for creating a more diversified, sustainable platform to foster long-term economic growth and development.

In an interview with the Business Guardian, Ram, a Trinidadian born-and-bred economist, discusses the relationship between T&T and the CDB, where the economic circumstances place us today and his outlook for the future.

Ram holds the view that economic diversification and a strong plan towards achieving such should be among the main priorities of the present administration. He said: “The Government really needs to lay out a strong plan as to how it expects to diversify the economy away from its traditional dependence on oil and gas. No more time should be allowed to lapse on this.”

Expanding on the point, Ram said that T&T has the capacity and wherewithal to really foster dynamic diversification.

“Tourism, financial services and even maritime services provide wonderful platforms for economic diversification. If we can get the configurations in these areas right, along with making doing business in T&T much easier, we have significant levers we can pull on to create long term economic growth.”

Ram pointed out that our model for economic growth and development must change if we are to truly achieve our diversification objectives.

“For far too long we’ve had a government-led model of economic development. That now needs to start shifting towards greater reliance on the private sector with the government being facilitator in terms of dealing with the inefficiencies that hamper private sector growth.”

T&T’s economy today

There is no denying that T&T finds itself in a difficult economic space. Even the prime minister has stated that the country is currently experiencing “cash flow” problems with respective to fiscal revenue.

Asked to comment on the state of the T&T economy, Ram said: “T&T is really at a crossroads right now. We are all aware that there are difficulties with the government’s fiscal accounts due to the sharp decline in commodity prices (oil and gas) that make up the bulk of government revenue. So government revenue contracting the way it has points to the fact that T&T is at a point where it really needs to get its fiscal house in order.”

Going further, Ram said, “The reality is that the Government simply does not have the financial resources to spend as much as it did before so it now has to focus on keeping expenditure in check. Additionally, the Government has to be very careful it does not increase its public debt significantly because, while it might delay fiscal consolidation, if you run up a bit of debt now, the pain associated with that debt burden over the longer term could be much worse than the economic situation that obtains today.”

Ram noted that one of the objectives of the Government at this time should be to boost private sector activity to assist with foreign exchange generation.

“The private sector should really be encouraged to take much more of a leading role in the economy. What you really want to happen is that new growth poles for exports are created so these entities could start earning foreign exchange to offset the demand placed on energy sector earnings.”

1980s versus now

History often has a way of repeating itself and the experiences of the 1980s are used illustratively as a backdrop against the economic circumstances facing T&T today. Ram, however, suggests that the operating environments for both time periods, though similar, are certainly not the same.

“T&T is quite fortunate that it is not in the same position today as it was in the 80s. There were many reforms undertaken in the late 80s to early 90s that suggest that we are in a much better position to weather this economic storm.”

Asked to point out the differences between the two periods Ram said: “We have a fair amount of buffers this time. Firstly, we have much larger foreign exchange reserves today than in the 1980’s that once managed properly, offer us some real prospects at curtailing the effects of declining fiscal revenue.

“Additionally, the Heritage and Stabilisation Fund represent savings to the country. We also have a fair amount of private sector savings as represented by the levels of liquidity in the banking system. So, all these elements taken together, represent significant departures from the 1980s.”

Ram cautioned though that having these buffers in place does not guarantee we are completely divorced from returning to an “80s-like situation”.

“The Government should really try to get closer to a balanced budget. If we maintain fiscal deficits for too long for example, this could put a serious strain on foreign exchange reserves and could lead to a drag on economic growth. So decisions made now will determine if the 1980s repeats itself.”

The T&T-CDB nexus

At its inception in 1969, T&T was one of the founding member countries of the CDB. Through the passage of time, T&T has maintained a solid—if not unobtrusive—relationship with the bank. Ram had this to say about the relationship:

“T&T has had a very good relationship with the CDB. In the early years, it would have borrowed from the CDB for infrastructure projects. The bank also made loans to some state-owned companies and, most recently, T&T would have accessed an energy sector policy-based loan where the bank supported the implementation and introduction of compressed natural gas (CNG) into the market.”

Going further the Barbados-based economist added:

“T&T is a very important member of the bank. It contributes to our special development resources (SDRs) which then allows us to lend some of these resources at concessional rates to our lesser developed borrowing member countries in the Caribbean. So all in all, T&T because of its large shareholding has a tremendous leadership role in the bank.”

Strategy paper

As part of its mandate, the CDB, on a rolling four-year basis, develops “country strategy papers” for its borrowing member countries (BMCs). These papers, done in collaboration with local technocrats, outline the form of assistance and mode of transmission for this assistance between the CDB and the respective BMC that would cover the four-year period.

The last country strategy paper for T&T covered the period 2011-2014. Currently, a new paper is being developed for the period 2016-2020. On this, Ram said: “Our last trip to Trinidad in April centred around discussions with the new government to help us understand what are the priorities for the Government and to see where the CDB could offer support.

“So we’re in the midst of developing the paper right now and through a couple iterations, we’re hoping to have the paper approved by our board of directors later this year.”

Asked to comment on specific discussions held during the April visit, Ram said, “We had discussions with quite a few ministries and other stakeholders, and we also had very fruitful discussions in Tobago with the Tobago House of Assembly on some possible projects that we could be supporting there.”

Technical assistance

With a multitude of multilateral agencies—IMF, IDB, World Bank and CDB—providing “technical assistance” it’s easy to conceive that along the way, some duplication of effort could take place.

Asked to distinguish the CDB from among the pack of lending agencies, Ram said: “As part of the donor community, we (the CDB) tend to try to work in tandem with rather than duplicate what the others are doing. The IMF and others would have strengths in certain areas like say public financial management, whereas the CDB would be uniquely competent in areas such as: social sector development, education and infrastructure development. These are areas where the bank has substantial experience.”

Focusing on infrastructural development the London-trained technocrat said: “With regard to infrastructure projects, in particular, we’ve been very successful at getting large projects delivered on time, within budget and with the necessary types of evaluations that are important in these modern times.”

Asked to specify these evaluations, he said, “Our infrastructure projects are assessed to treat with the impact of climate change in the region and, as such, to be resilient to these treats.”

Ram also stated that matters such as gender equality, regional integration and public-private partnerships are areas the bank has a great deal of specialised knowledge.

THE CBD

T&T was one of the founding member countries of the Caribbean Development Bank. It is one of the bank’s largest shareholders with ownership totalling 48,354 shares representing a 17.9 per cent interest in the Bank.

This notwithstanding, the country’s borrowing relationship with the CDB has been extremely limited over the past two decades.

In fact, over the period 1970-2015 total loans approved by CDB for T&T totaled US$200.6 million, while total disbursements totaled US$190.7 million placing the country tenth in terms of total lending to all borrowing member countries over that time period. In many respects, the country’s borrowing patterns from CDB correlate strongly with the evolution of its macro economy, in general, and the health of its public finances, in particular.

Trinidad’s borrowings from CDB became relatively significant after the second oil shock in the early 1980s, as oil prices plummeted, throwing the economy into a tail spin. The bulk of government’s credits during these early years were targeted towards ramping up agricultural production.

The period of structural adjustment and negative growth that followed (alongside negative fiscal balances), provided the impetus for a sustained demand for bank assistance.

However, as the economy emerged from the period of stagnation and growth became entrenched (supported by significant oil and gas finds), T&T looked inward in financing its development.

 

Source:
ANDRE WORRELL
andre.worrell@guardian.co.tt
Business Guardian, BG6 and BG7
Thursday May 12, 2016