T&T could face IMF if Gov’t fails to reform

Dr Roger Hosein and Dr Daren Conrad, of The University of the West Indies, St Augustine campus, delivered presentations on T&T’s economic state last Wednesday. They offered their suggestions, one of which was structural reform of the economy.

The budget presentation is expected to be read by Finance Minister Colm Imbert on October 5.

Hosein said, “I see this economy in for a rough 60 months. I think we are in troubling times and regardless of what anybody says, I think the economy’s fundamentals look very troubling and worrying.”

He was, however, optimistic that oil prices, according to trends, would move up to around US$50 to US$60 a barrel in 2016 from its current US$45 a barrel. 

But, Hosein said, if T&T continued to focus on oil and gas and failed to diversify its economy, it could find itself heading to the IMF.

He said, “Unless we diversify the Trinidad and Tobago economy, within three years time to five years, we could be going to Washington to meet some of those guys in the lovely suits who sometimes come to visit T&T. They visited us for a period in 1986 to 1989. They’re called the IMF.”

However, Conrad disagreed with his colleague that oil prices would increase. He said he did not see oil prices going beyond $50 per barrel.

As a result of the declining oil prices, T&T’s revenue shortfall was around $7.1 billion.

Conrad said the debt to GDP ratio was 59 per cent according to the Central Bank bulletin of February. He said it was growing so fast that it could soon reach 80 per cent or even 90 per cent.

“That is problematic.”

Like Hosein, Conrad called on the Government to leave the labour market alone and “stop hiring people to do nothing.”

They were speaking at a lecture hosted by the Department of Economics and Trade Development Unit, UWI, St Augustine.

The lecture was part of The UWI Research Expo and was titled Key Macroeconomic Considerations for the Next Five Years.

Conrad spoke on the topic, The Reality of the Current State of the T&T Economy, whereas Hosein spoke on Pre-Budget Macroeconomic Considerations.

Hosein said the new administration came into office with the popular vote, which meant that the population wanted change. He said the five years ahead were “a golden opportunity” for the new Government to recalibrate the economy. 

“Prime Minister Rowley has a golden chance, coming in the aftermath of one government that created a crisis between 2002 and 2008, in terms of bad macroeconomic policies from a transfer and subsidies perspective, and a follow-up government that continued and exacerbated that trend.” He said the budget had a moral and economic responsibility to focus on structurally reforming the economy.

Don’t cut VAT

Touching on VAT, Hosein said the focus right now should not be on VAT reduction but on finding model ways to enhance government revenue intake, rather than focusing on measures that could possibly compromise the inflow of revenue. 

Hosein offered this advice to Imbert, “Let the tax machinery and the plans for improving the tax machinery go ahead, but do not approach a reduction of VAT this year until we are satisfied that sufficient changes have been made, so that when the VAT is in fact cut, we know that the impact will not be a fall in revenues.”

He said, “I think this Government has created the environment for change and came into power because an environment of change existed. It may be an appropriate time to consider reinstating the property tax and finding parallel means of enhancing non-oil revenues.”

Hosein said the State should at some point move to a substainability budget index where expenditures were more closely aligned to non-petroleum revenues.

In this way, he said, it would reduce the dependence and effect on the State and the economy of fluctuating, volatile energy sector revenues.

He said the country needed to find mechanisms to increase foreign exchange earnings since international reserves had the capacity or the tendency to be eroded within the next three to five years because of the inertia in import behaviour.

Hosein said the State also had a responsibility to correct any imbalances in the foreign exchange market and the dilemma faced by the business community. If not addressed, he said, “these can have implications for business confidence in the country and the cost of credit to producers in T&T.”

Meanwhile, Conrad described the issue of VAT reduction as “real trouble.”

“When I hear talk about cutting VAT, I am getting scared because that means our revenue base is going to shrink even more and we might have to go to the IMF within the next two years, not three. And when the IMF comes, we don’t get off easy.”

He said, “VAT is one of those things that I was always happy about because everybody used to talk about it when it was implemented, but every subsequent government…nobody touched it because they know if they touched that then we have significant shortfalls in revenue. So we are going to have to look at leaving that in place.”

He said lowering VAT could create added inflationary pressures.

Conrad said there was the need to review property tax. But before doing so, the State needs to ensure there are proper mechanisms for collection. Conrad said that was the reason why reform of the system was so critical. 

He said, “We really need to look at property tax. We need to reform it, but that should not be undertaken until we find the proper mechanism for collection.”

He called for diversification of the economy. 

“We need to develop the non-energy sector. It is a long process but you can start it. If we don’t diversify then all these fancy things…we will have to give them up.”

Economist predicts cuts in social programmes

Conrad predicted there would be cuts in social programmes. He also said when these cuts were made, there would likely be some social unrest.“We don’t have social development programmes, we have social welfare programmes. You get money and you’re just not accountable. We have handouts in this country.” 

Hosein’s suggestions

  • rationalize government expenditure; 
  • maintain the level of expenditure but focus more on capital expenses; 
  • raise fiscal revenue inflows, perhaps by re-introducing property tax.

Conrad’s concerns

  • lack of diversification; 
  • size of public debt and persistent fiscal deficits.

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