Jun 2016 Financial News

Economist debate the H&S Fund

Jun 09, 2016

Even as the Government has made its decision about withdrawing from the Heritage and Stabilisation Fund, there are mixed opinions on whether that decision is justified. With expenditure exceeding revenue for a long period, is it time for austerity measures to be put in place as has been suggested by former Minister in the Ministry of Finance, Mariano Browne?

This comes as Prime Minister Dr Keith Rowley—upon his return from the ACS Summit last Sunday—said the fund would be divided in two and that the withdrawal would be made from the stabilisation part of the fund.

Business Guardian spoke to various economists on whether there would be any impact on the country’s revenue.

Terrence Farrell

Farrell said it is not surprising that the Government has made the decision to withdraw from the fund because Rowley, in his address to the nation on December 2015, had already signaled that move.

Farrell added that the stabilisation component of the fund was established for “precisely the circumstances in which the country now finds itself,” and, therefore, the decision to make the withdrawal was “sensible and entirely justified.”

The time has come for the rules governing deposit and withdrawal from the fund to be changed and now is the opportune time, he said in emailed responses.

“It was a mistake to combine the Heritage Fund and Stabilisation Fund into one fund. This has now  to be corrected and now is a perfect time to do so.  The Heritage Fund must have different rules for deposit and withdrawal.”

A report in the media on Sunday had indicated that a withdrawal of $2.5 billion (US$385 million) had been made, but Farrell said that amount is not a lot, because the amount which the PM indicated that should be made available this year was US$1 billion or $6.7 billion.

“The initial drawdown of $2.5 billion is therefore not too much. The Finance Minister had indicated that the overall deficit would be about $18 billion to $20 billion.  Even when the stabilisation component of the HSF is fully used for financing the deficit, the Minister of Finance will still have a rather large hole to fill.”

He added that the stabilisation component of the fund belongs to T&T and does not have to be repaid since it is not debt, Farrell said.

“The use of the stabilisation component helps to avoid having to undertake external borrowing and thus increasing the country’s debt.  Obviously, when the economy stabilises and oil and gas prices settle, the Stabilisation Fund, which will then be separated from the Heritage Fund, can again be funded over a period of years.”

Stating that T&T is in a period of structural adjustment to oil and gas prices as well as falling production of natural gas and crude oil, Farrell said T&T’s income had fallen “drastically,” and, as a result, the Government’s revenues are significantly lower. But, he stressed, the fiscal deficit has to be financed too.

“The drawdown on the stabilisation component helps to finance the very large fiscal  deficit and also shores up the foreign exchange reserves at the same time.”

Indera Sagewan-Alli

Sagewan-Alli suggested that the only reason the Government would withdraw from the fund is because the actual price of oil has fallen 10 per cent below what it budgeted.

“My best guess is that the Government’s projected revenue inflow, even with the additional taxes imposed are even worse than presented in the mid-year review.

“This drawdown represents a contraction in the country’s national savings without any requirement moral or otherwise to replace.”

In emailed responses, she suggested that “drawdowns on the HSF should be used for wealth creation; economic diversification. Moreover, without explanation from the Government the atmosphere of uncertainty—which currently characterised the economic landscape—will worsen. The Government needs to be more transparent with the population.”

The economist added that spending taxpayers’ dollars must be done in a strategic manner and not in a haphazard way.

Ronald Ramkissoon

Ramkissoon said the withdrawal is in line with the HSF legislation and that “the condition is in line with the drop in the oil price.” He added that the withdrawal is justified because that is the purpose of the stabilisation part of the fund.

He said the fund is T&T’s and that the issue of repaying does not factor in.

According to Ramkissoon, the fund comprises US$5.8 billion is “still small and by any standard and we should have been saving for decades as other more enlightened mineral-based countries have been doing.

Calling for the fund to be separated, Ramkissoon said: “The necessity to separate the fund into its heritage and stabilisation component with separate regulations is even more urgent now.”

The lesson, he said, is that “if your savings are small, as it has been and as pointed out by the IMF recently, then you must be careful about making large commitments regardless of the justification made at the time.”

Asked whether T&T should have taken up the option of borrowing, Ramkissoon said that alternative is open to T&T but, “it leads to a higher (worse) country debt profile which we can ill-afford and debt must be serviced. We are truly in a very difficult place.”

Mariano Browne

Browne—former minister in the Ministry of Finance—said the fund, although not well structured, has “trigger mechanisms which allow withdrawals when the Government’s revenue situation is inadequate.”

According to Browne, in 2009 the fiscal situation allowed the Government to access the fund but it did not.

In emailed responses, he said: “Energy sector prices are expected to remain depressed for some time. Given the historical expenditure patterns, it means that the Government will be in deficit for some time if it does not adjust its expenditure.”

“But, although the fund allows for withdrawals, it is quite modest in size. Therefore, while accessing the fund on an emergency basis is acceptable,  the fund is too small and will be easily depleted if it accessed repeatedly or in large chunks.”

He added that: “In such circumstances, accessing the HSF is no substitute for addressing the fiscal imbalance from the expenditure side.

“The Ministry of Finance has, so far, ducked the issue of expenditure control. This is irresponsible.”

Browne also stated that the entire HSF is roughly 50 per cent of the Government’s annual expenditure and, therefore, it must be accessed “sparingly” and “only in an emergency.”

The decision to withdraw from the fund had been one which was done in the early stages of the 2016 financial year, Browne said, because, “it is noteworthy that the Minister of Finance in his first 90 days in office, had already signaled his intentions (to withdraw) by saying the HSF was no trophy. That had great relevance and meaning as we now understand and perhaps signaled some measure of desperation.”

He called for more information on how the money is going to be spent, saying that the country had two budgets statements within a short space of time.

“We have an advisory board and visits from IMF experts and two budgets statements. Is the public any clearer on the areas of priority? How will expenditure be rationalised? Whether we like it or not, the current dispensation requires austerity measures.”

Explaining the rationale for calling for austerity measures, he said, “Fiscal expenditure has outpaced revenue for the last several years including this year. This is not sustainable; we need to address the fundamentals. The State is not a tireless mother with an unlimited bank account. It is time we come to terms with that reality. And, in this regard, the country needs both leadership and management.”

 

Source:
NADALEEN SINGH
nadaleen.singh@guardian.co.tt
Business Guardian, BG7
Thursday June 9, 2016