May 2016 Financial News

Governor Hilaire on economy...Treat shock as permanent...calls on private sector to play larger role

May 28, 2016

Central Bank governor, Dr Alvin Hilaire, said yesterday that it would be prudent for T&T to treat its terms of trade shock as “long-lasting,” in a presentation in which he revealed that the International Monetary Fund (IMF) had this month revised downwards its estimate of the country’s decline to 2.7 per cent for the 2016 calendar year from -1.0 per cent in March.

Delivering the May 2016 Monetary Policy Report (MPR) at the Central Bank building in downtown Port-of-Spain, Hilaire said that as a result of uncertainty about how long the situation of declining export prices and output would persist, “it would be prudent to treat the shock as permanent.”

He said treating the shock as permanent meant that the government needed to balance cuts in expenditure with the longer-term growth objective.

The central banker, in his first substantive statement since his appointment in December, said the implication of treating the energy price/production drop as long-lasting implied the need for “durable” expenditure cuts to prevent a buildup of debt.

“Difficult choices will likely have to be made, especially with respect to components of recurrent expenditure, in search for a sustainable solution,” said Hilaire.

The central banker said that T&T was in the “relatively fortunate position” to have buffers to deal with its economic situation. Hilaire said the country’s US$9.3 billion in net official foreign reserves as at the end of April 2016, a sovereign wealth fund with US$5.6 billion and “relatively low debt by international standards” offered “some measure of control in the pace of adjustment.”

According to the MPR, T&T’s total public sector debt (excluding sterilised debt) stood at 41.7 per cent of GDP at the end of 2015 (calendar year), with domestic debt at 34.3 per cent of GDP and external debt at 7.4 per cent of GDP.

But Hilaire warned: “Of course, one must be careful that the availability of these buffers do not result in the depth of the problem being unrecognised, ignored or not well communicated, or that the needed adjustments are not taken at all or are unduly delayed.”

The governor said that fiscal and structural adjustments need to be taken, adding: “I would suggest that the best approach is to consider the shock as long-lasting and utilize the country’s available buffers at a measured pace while making other more fundamental adjustments.”

He said the government should use the period of downturn to “advance institutional reforms that may have been delayed when oil prices were bouyant.”

The country’s macro-economic policies “must be aimed at supporting a larger role for the private sector and businesses should gear up to fill this role,” Hilaire said.

The central bank governor said that opportunities for non-public sector entities would open up as the government rationalises its functions in the context of lower tax revenue.

But the governor’s call for the private sector to play a larger role in the economy was politely rebuffed by two private sector leaders, Gregory Aboud, the head of the Downtown Owners and Merchants Association and Catherine Kumar, the chief executive of the T&T Chamber of Commerce during the question and answer period.

Aboud said the private sector looked on as the government implemented fiscal and structural policies that were either “not acceptable” or “promised no improvement.”

Kumar pointed to institutional bottlenecks, limited foreign exchange and shortages of appropriate labour were always constraints on new local investment in the productive sector.

Hilaire ruled out letting the market determine the exchange rate as, he said, the Central Bank was aiming to limit exchange rate volatility.

Hilaire was appointed as the governor on December 23, 2015, following the government’s dismissal of the previous incumbent, Jwala Rambarran, for breaching the provisions of the Central Bank Act on confidentiality by disclosing the names of the companies that were the country’s largest users of foreign exchange.

 

Source:
Anthony Wilson
Trinidad Guardian
Saturday May 28, 2016

http://www.guardian.co.tt/business/2016-05-28/treat-shock-permanent