May 14, 2017 Jwala Rambarran 3Comment

Many of us, as patients, appreciate the need for our doctor to be open about the state of our health. We often seek out the best doctors and even second or third opinions when it comes to our medical treatment.

We expect the best care from the medical professionals to whom we have entrusted our lives. When dealing with life and death, we don’t take chances.

So why then do we continue taking such dangerous chances with the health of our economy?

After 20 months in office and despite his best efforts to sound like he really knows what he is talking about, the OJT Minister of Finance, who lacks qualifications, expertise and training in economics and finance, continues to administer the wrong treatment to our wounded economy.

Here are five reasons why the Minister’s contribution to the mid-year review of the 2017 Budget shows why he’s the wrong person to be playing doctor with our frail economy.

 

  1. Wrong Diagnosis, Wrong Treatment

 

Policy done right can be a powerful treatment for our economy; policy done wrong can further sicken our economy.

The Finance Minister blames the general decline in energy production and sharp fall in energy prices that started in 2014 for the severe reduction in government revenue and foreign exchange earnings. Based on his diagnosis, the Minister has prescribed shock therapy – increasing taxes, reducing the fuel subsidy, lowering VAT, and depreciating the TT dollar – to return the country to a path of stability and growth.

But his diagnosis is incorrect. He’s looking at the symptoms not the cause for our current economic malaise, so his policy prescriptions are working against each other, cancelling out any intended positive benefits. Economic output is sharply contracting, job losses are mounting and food inflation is picking up.

It’s now an economic cliché that even primary school children can prattle off in a social studies class: our economy depends on oil and gas to produce jobs, increase government revenue, and create foreign exchange.

The energy sector has pumped riches through the veins of our small country but, like the human heart, it can weaken and fail. Our oil and gas sectors are weak and failing us on a daily basis. We are in a vulnerable position.

A package of coherent and credible medium-term policies to reduce our reliance on the energy sector is therefore the appropriate policy prescription to nursing our economy back to a fit state of health. We either diversify or suffer for a very long time.

Unfortunately, the Minister of Finance was silent on economic diversification. Perhaps he’s waiting on his Prime Minister’s Economic Advisory Board to deliver its diversification study which, based on their speed, should be ready around the next general elections.

Agriculture remains the natural starting point for diversification. We have adequate land for cultivation lying idle that if put to use can create new sources of foreign exchange, exporting agricultural products the world wants, or it could save foreign exchange, cutting down on the high food import bill.

Caroni Green Limited demonstrated success as a commercially viable agri-business state entity. It was earning valuable US dollars through the export of hot peppers. But after unceremoniously shutting down Caroni Green, the Rowley PNM administration shows it’s neither serious about agriculture nor diversification.

 

2.   No Stable Fiscal Vitals

Lacking the necessary economic and financial skills, the OJT Finance Minister is attempting to operate on the economy without first stabilizing its vitals, that is, bringing the budget into balance. He plans instead to achieve a balanced budget in 2020 through tax reforms, containing government expenditure, and redirecting spending away from transfers and subsidies.

This fiscal consolidation will not happen. The Minister demonstrates an obsession with introducing punitive new taxes to support the budget, from the imposition of VAT on food to the ‘millionaire’ tax, to the online tax, and to the controversial property tax which may face a legal challenge in the Courts.

But he’s unlikely to realize the anticipated revenues from these new taxes because the economy is not only in a deep recession but tax administration is also weak, especially at the Board of Inland Revenue. That’s why despite extending the VAT net to food, there was a substantial shortfall on projected VAT collections in the first half of fiscal 2017.

The Finance Minister sheepishly admits the tax reforms he introduced in the 2017 Budget will take some years to yield their maximum effect, but since we “ent riot yet” he’s foolishly charging ahead with introducing the property tax without fixing the administrative capacity of the Board of Inland Revenue to properly collect taxes.

 

3.   Public Debt Pressure Rising

Like high blood pressure, high and rising debt is a silent killer. The Rowley PNM Government has financed its large fiscal deficits mainly through heavy public borrowing.

When the Minister came into office in September 2015 he met a public sector debt which stood at $76.5 billion, or 51% of GDP. One and a half years later, public debt stands at $89.1 billion, or 61% of GDP.

In general, public debt/GDP ratios over 50-60% are considered high and close to the debt tipping point. Beyond this threshold, high debt for an extended period of time forces a government to cut vital social spending and public sector investment, exposes the financial system to the threat of debt default, and acts as a drag on economic growth.

During its 2016 Article IV Consultation for Trinidad and Tobago, which is like an annual medical checkup for the country, the IMF warned… “Under current policies and projected energy prices, Trinidad and Tobago’s central government debt is set to rise unsustainably. While sizable buffers do exist, and can be used to finance a coherent package of medium-term adjustment, they cannot substitute for them.”

Since the IMF gave that warning, which the Minister selectively ignored, public debt sustainability has worsened. Additional debt and debt servicing burdens have come onto the books with new and large borrowings, especially the US$1 billion borrowed with much fanfare last August through an international bond issue.

We have already experienced a casualty of high debt. Both Standard and Poor’s and Moody’s, the two largest and most reputable rating agencies in the world, recently downgraded our sovereign credit ratings, warning further downgrades are possible unless the Government stabilizes its public debt burden. Moody’s downgraded us to junk status; Standard and Poor’s took us two notches closer to junk status.

Yet, the OJT Minister of Finance now wants to request a third credit rating, this time from Fitch Ratings, another international but smaller rating agency.

While getting a third medical opinion might be helpful to determine treatment, it will not change the condition of the patient from serious to stable, a miracle which the Minister desperately hopes will happen.

 

4.  CLICO Resolution Plan in Coma

 

The CLICO Resolution Plan is the blueprint I, as Central Bank Governor, had put in place since March 2015 to finally resolve the intractable problem caused by the collapse of CLICO, the country’s largest insurance company. The Plan was developed to repay all of CLICO’s creditors and policyholders and to ultimately facilitate the transfer of CLICO’s traditional insurance portfolio to a suitable buyer.

Six years after it collapsed, CLICO was therefore able to make a payment of $4 billion in cash to its largest creditor, the Government, and a payment of $950 million to a specific group of its policyholders.

Government would also receive around $3 billion in lieu of cash through the transfer of CLICO’s shareholdings in Angostura Holdings Limited, CL World Brands Limited and Home Construction Limited.

Further sales of CLICO’s assets would have completed the payout to both Government and policyholders bringing the CLICO Resolution Plan to near completion by now.

This has not happened. The CLICO Resolution Plan has fallen into a coma.

Last year, in his mid-year Budget review, the Finance Minister portrayed himself as a white knight coming to rescue the CLICO Resolution Plan from “limbo, no apparent purpose or direction, consumed by internal power plays, inertia, dithering, apathy and stagnation.”

One year later, the Minister’s words seem prescient as if he was foretelling what would be the comatose state of the CLICO Resolution Plan under his rudderless stewardship since he has failed to realize any proceeds from the sale of CLICO assets.

The Minister does not seem to have the expertise to navigate the complex transactions associated with the CLICO Resolution Plan. To make matters worse, he continues to interfere in the affairs of CLICO, which is under the legal control of the Central Bank. He is also meddling in the affairs of CIB, which is in compulsory liquidation, managed by the Deposit Insurance Corporation and supervised by the High Court.

Given the Finance Minister’s political interference, any policyholder or creditor of CLICO can mount legal challenges to the Central Bank, preventing the transfer/sale of assets from the company, further delaying and complicating CLICO’s resolution.

Quite frankly, there are many things the Finance Minister is doing which makes me question the capability of his advisor, who was a former Central Bank Governor. Like how could his advisor who presided over CLICO’s collapse once again be in a position where he has indirect control over CLICO’s affairs. He nearly killed CLICO but is now advising and devising a path for the company.

This is a travesty. But the self-appointed guardians of democracy remain silent.

 

5.   Toxic Exchange Controls

 

The imposition of exchange controls is perhaps the OJT Finance Minister’s biggest blunder yet and is the most damning evidence he is out of his depth.

During his mid-year budget review, the Minister stated he had “requested” the Central Bank give priority to manufacturing and trade whenever it intervenes in the disbursement of foreign exchange to the commercial banks. This measure he said took effect just one week ago.

Whenever the Central Bank sells US dollars to the banks, there’s already a well-established practice for it to suggest priority must be given for trade-related transactions. The Central Bank suggests, not directs, the banks when it comes to the sale of foreign exchange to the general public and business community. This is in keeping with a liberalized foreign exchange market, with no restrictions whatsoever.

If the Finance Minister is now directing the Central Bank to tell the commercial banks they must now prioritize who gets US dollars, when they get it and how much they get, then he’s regressing our foreign exchange regime to the infamous days of exchange controls which ended some 25 years ago.

Many of us remember filling out the EC-0 and EC-1 forms, waiting with trepidation for a ‘nameless and faceless” central bank officer to determine our destiny.

Under the Minister’s plan, who will the banks give priority access to foreign exchange? A large manufacturer processing food products with a high import content, or a small manufacturer producing fresh fruit drinks with a large local content?

What about food importers? Or importers of medical supplies? Where will they be in the pecking order for US dollars?

The backward return to exchange controls is toxic. It will reinforce speculative demand for scarce US dollars, aggravate foreign exchange shortages, and further nourish an already thriving, illegal black market. It will create conditions for corrupt business practices.

If such a system of foreign exchange allocation does not satisfy legitimate demands for foreign exchange, it could be considered an exchange restriction by the IMF and will require IMF Board approval. Why does the Minister want this head-on confrontation with the IMF?

Once again, the OJT Minister of Finance will soon find out his instruction to the Central Bank will not be the panacea he thinks will make him look like the erudite economic mind he so desperately hopes to become.

So it goes when short-sighted politicians enter the intricate realm of central banking and their arrogance and inexperience leads the country down a dangerous and destructive path.

I find equally troubling the role of the Minister’s advisor, who is a former Central Bank Governor and a career IMF economist. If the Minister’s advisor is advising him to implement outdated exchange controls, then we really have to wonder about the decisions and actions this advisor took during his tenure as Governor. I wonder how such a person can justify his salary as an advisor when his student is spewing such garbage.

The answer to our foreign exchange problem lies not in the retreat behind ineffective tools from the 1960s. The answer lies in reducing the pervasive inequality in the distribution of foreign exchange by making US dollars more widely accessible, both across banks and across their customers and even to the local manufacturing sector.

Those were the design changes I, as Central Bank Governor, was implementing to our foreign exchange market before the OJT Minister of Finance commanded a return to the dysfunctional, dinosaur-like distribution system.

 

Conclusion

Nearly two years ago, we entrusted the care of our country to the Rowley PNM Government, after they assured us they were “red and ready”. They have absolutely failed to deliver. Instead, they have replaced competence, creativity and compassion with impotence, illiteracy and insensitivity, the new hallmarks of economic policy making.

Rowley’s recent remarks at a PNM cottage meeting in Diego Martin that if he is no longer wanted to lead the government he would gladly go back to Tobago and “mine sheep” revealed two things.

One, Tobagonians often refer to goats as sheep. Two, Rowley’s true colors as a selfish leader. Shouldn’t the ethos of a prime minister, the most important public servant position, be one of selfless service.

Rowley’s remark also reminds us goats are perhaps the only living creatures that might just tolerate his presence.

My sympathies to the Tobago “sheep”.

3 thoughts on “Dr. Who?…Why Imbert’s Policy Prescriptions Are Dead Wrong

  1. Very informative and fact stating. It is indeed a very very sad hora we are faced with in this deep time of crisis. We have such clueless, incompetent, wasteful, toxic governance!!! As the economy depreciates so too the minds of these people. We as a nation are faced with grievances, but nobody cares…none of those bunch of failures of the PNM care..as long as they “live up life” a life only one can dream off, has actually materialized as they clearly demonstrate abuse of their power and privilege, without any resentment or even compassion for our nation and its people! As we stand together hopefully, lets keep the faith that we all survive the next few years of hardship. Our forefathers have taught us to be strong, we can be as long as we unite as a single body against all the ills we are faced with.
    At this point, let me thank Mr. Rambarran for supplying us and keeping us updated as to the politricks of the PNM…a job well done and deserving Sir!

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