Tag: Budget

Posted on

Stimulus package – to do or not to do?

I had promised to write this week about the role in and implications of the Clico fiasco on the NBS and the NIS. Unfortunately I am still trying to confirm some information which means that I could not present a full picture. Hopefully I can do so shortly. I apologise to readers for this.

Introduction
During the discussion on the 2009 budget which has all been forgotten in the wake of the Clico meltdown, some members of the private sector had even called for a stimulus package. The call came in the wake of the announcement by the Minister of Finance that Guyana’s real GDP grew in 2008 by 3.1% and projected growth in 2009 was 4.7%, compared with average growth in the rest of the world of 0.5%. To realise its goal of a 6% growth in 2009 China is now planning a second stimulus package on top of the first package of US$600B. That Guyana can achieve its target without any such package must therefore mean that a miracle is taking place before our eyes. It makes the call by the private sector unnecessary and perhaps that is why we heard nothing further from the sector. So let us look at some other countries.

The new buzz
Stimulus package has become the new term in current economic lingo since President George Bush presented the initial package which was followed by President Obama’s US$800+ billion package after his assumption of the presidency. Using what has already become his legendary skills of persuasion, Obama has been urging world leaders to adopt aggressive, American-sized spending programmes. And indeed if we look at the number of countries that have introduced stimulus packages you would think there is general consensus about the virtues of such packages. In fact two of the greatest recoveries in modern economic history – FDR’s New Deal and the Marshall Plan − are held up as proof of their great virtue.

Those to have adopted such packages recently include Canada, a country which has run a federal surplus for the past twelve years but has announced a sweeping stimulus package of tax cuts and new spending that will push the federal budget into a US$28B deficit; Australia whose package is worth US $27B, while Malaysia’s package of US$16.2B was described as unprecedented in the nation’s history. But both in absolute dollars and expressed in terms of GDP the US, China and Germany in that order are the countries that are investing the most in stimulus packages, some more than once. Interestingly India where politics trumps economics is the big country with the smallest package expressed relative to GDP.

Cynics
With this kind of evidence you would think that everyone would jump on board the stimulus bandwagon. If you do you would be ignoring the politicians and the many-handed economists. It may be unfair to the Republicans to say that they voted almost unanimously against Obama’s stimulus purely on the grounds of partisan politics. Part of it may have to do with ideological differences they share with economists who start with the proposition that there is a range of packages – from the various forms of getting money into the hands of the consumer to direct spending by the government and to monetary policy.

Those who argue the case for fiscal stimulus say that with more money in consumers’ hands, more goods and services would be bought and there would be less need for companies to lay off workers, leading in turn to less demand.

George Bush’s package was based on such a theory. US Republican vice presidential candidate Sarah Palin who temporarily dazzled voters with her charm offered what appeared to be the simplest form of stimulus package: dropping money from the sky into the hands of voters/consumers. That has generally been dismissed because the evidence – or at least this is the conventional wisdom – is that such sums are saved rather than spent, defeating the whole purpose of such a package.

There is now emerging a consensus however that compared with monetary policy, fiscal policy is an ineffective tool in combating recessions. Monetary policy emphasises the ability of the central bank to make more money available − thereby increasing demand − by lowering interest rates. But this too is no guarantee since even with a more liberal monetary policy the banks may still be unwilling to lend and entrepreneurs may prefer to wait out the crisis before retooling or going into new plant and machinery. It would have been good to hear the Bank of Guyana’s views on the matter of interest rate and its role on the level of such rates.

Clash of the Titans
Then there is government spending with the potential to take the budget into (bigger) deficit. As we are seeing with the US, this can pose enormous problems. Obama may be able to convince Americans that his package is necessary, inevitable and the best. But America is the world’s largest debtor nation and no less than the Prime Minister of its major creditor country, China, has just expressed its most direct fears about its trillion dollars investment in US Government bonds and more indirectly about the US’s stimulus package. For the giants it is a clash of culture with the US believing in spending and borrowing while the Chinese are known for thrift and savings.

But it is not only China that has expressed reservations about the US’s approach to the problem. Europe’s position is more contentious with their finance ministers rejecting, ahead of the G20 meeting in London next month, Obama’s call for a two-pronged G20 effort to fix the global economy: stimulus measures and regulatory reforms. In a statement issued through their Chairman, Luxembourg Prime Minister Jean-Claude Juncker, they said the call for more pump-priming by other G20 economies did not suit them.

Juncker noted, “The European recovery programme represents a spending level of 3.4 to 4.0 percent of GDP,” and their “public finances are beginning to suffer.” He could have added that there is no unanimity in the EU either as the differing attitudes to such packages in Spain, England, Italy and Estonia show.

There is a real dilemma since no matter how much is spent domestically if there is no consensus and no uptake in world demand, domestic spending could hardly make up for the slump in exports as world demand evaporates and foreign direct investment (FDI) declines.

Poorer countries
If the big countries cannot come up with the solution then smaller ones are in for a rough ride. No small country can, even if it had the financial resources, spend itself out of this recession. Take Guyana as an example. It has already placed too many of its cards on sugar and rice and does not have many more to play.

Parliament seems to be heading to take on a multi-billion dollar obligation with Clico and our budget deficit as a percentage of revenue is a huge 23%. If we exclude grants the percentage is a staggering 42%. Our public debt is climbing inexorably while internal and external factors threaten our main exports. We face falling FDI and reduced remittances. We are burdened by high taxation and cannot be taxed any more. We will either have to draw down on our international reserves or borrow more. These are not easy options.

It is true that our 2009 budget is unlawfully inaccurate. It has no income from the politically controlled Privatisation Unit/NICIL or the Jagdeo-controlled Lotto Funds. It also excludes the PetroCaribe funds. But it seems that we have to live with such imperious illegalities.

If we look at all the recent budgets we have had essentially the effect of stimulus packages – each year spending well more than we can afford in the hope that we will achieve our goal and see a surplus in the national budget; each year boasting about the biggest budget ever, a trend that now has its own momentum.

Yet, our idea of spending is huge sums on the capital budget much of which goes directly to a handful of contractors and big ticket projects. Physical infrastructure takes priority over education, and even in health unnecessarily large amounts are spent on unlawful drug-purchase contracting.

The Caribbean is suffering badly from the crisis with retailers in the tourist economies reporting a decline in revenue of 15-20%. The energy-based Trinidad is experiencing year-on-year reductions within the same range, affecting the ubiquitous roadside vendors and even the pampers manufacturer. Trinidad which bases its budget on the price of oil has announced two budget cuts affecting in the first instance its capital programme.

No one knows what, if anything the IMF may be saying to the Government of Guyana about stimulus. But the private sector has to be careful what it calls for. To ask a spendthrift to spend more of your money is to invite trouble.

I am sure that is not what we need or they intended. What we need is a tax cut for the poor who in any case are being cheated on VAT, and better financial management.

Posted on

Putting some sense in the 2009 Budget

Introduction
The National Assembly has the most unenviable task of making sense of the 2009 Budget presented last Monday in the National Assembly. The Minister of Finance apparently saw its greatest virtue as being the “biggest budget ever.” Not only is a boast on size from a Minister of Dr Singh’s stature interesting, but if size is the only thing that commends this budget, then there must be serious concern about its wisdom. Size only tells us how much of our money the government will be spending and where the money is coming from. It does not tell us how well the money is being spent and surely that is at least as important.

I understand that MPs, constituted as the Committee of Supply for purposes of Budget consideration, can at this stage, raise “any question relating to the line item being considered and all others relevant to the provided profile for capital items, description provided for each line item, etc.” They need to use that right to the hilt. In terms of ideas and direction, this Budget is by far the worst ever constructed under the Economic Recovery Programme, and even before. It perhaps reflects the involuntary departure from the Ministry of Finance of Mr Winston Jordan who long held the position of Budget Advisor and who was replaced by Ms Sonia Roopnauth, parachuted into the ministry, along with a Deputy Minister of Finance whose role and utility is hardly well communicated.

More resources for the Audit Office
Expenditure has been climbing inexorably over the years which Dr Singh sees, incredibly, as a virtue. The perpetual late availability of the annual report of the Audit Office on the annual public accounts is often of little more than curiosity interest. That adds to the responsibility on the committee to thoroughly review the entire Budget, even at the risk of being accused of stalling. They owe it to the nation.

By the time the year is over, with accurate accounting, we will likely see the highest deficit ever recorded by this country. If all goes to form we can expect that the audit report on the finances allocated in the 2009 Budget will not be available until some time in 2011, the year of the next general election. We can expect as well that the report will be subject to the usual defects expected from an office short of critical resources and accustomed to failure to meet statutory obligations. One of the urgent and most significant recommendations of the committee therefore is the provision of increased sums to finance a functioning Audit Office.

As usual, most of the big players know that because of weak supervisory oversight on spending, they have tremendous latitude on how they account and spend. There is still lots of money outside there that is not properly accounted for on the income or expenditure side of the accounts. That is the case with the Lotto funds and now NICIL headed by Mr Winston Brassington, involving over the years billions of dollars. Those are unconstitutional and unlawful acts. The committee must come down on this. Since a Budget deals with available resources and their application, the estimates (budget) as presented are not correct in that they leave out substantial resources. They should be referred to the Minister for amendment.

There is no known case in recent memory where any Budget figure was changed after debate. Additionally, a significant part of the Budget is based largely on the system of incremental budgeting − take last year and add x %. That is not budgeting but arithmetic. In other words if we spent $100 dollars last year we look at inflation and then do a top-up to arrive at the current year. If we assume even a modest 10% in fat, wastage and inefficiencies, a clinical surgery of that fat without going yet into “lean and clean” could cut the budget by $12 billion – allowing a reduction of several forms of taxation including the VAT.

Zero-based budgeting
No change will come about without a new approach and nothing ever will. But blame me for being an optimist. I think it can be done, even beginning in 2009. Dr Singh was keen to tell us again about his government’s plans for the constitutionally independent Office of the Auditor General. What he should be telling us is how he intends to improve and modernise the system of budgeting of government finances. As an academic and accountant the Minister would be very familiar with the system of zero-based budgeting (ZBB).

He would know that properly applied, zero-based budgeting is particularly useful in the public sector and that the UK government in its 2007 Comprehensive Spending Review carried out a set of zero-based reviews of baseline expenditure in government departments to assess the effectiveness of government spending and its long-term objectives. ZBB starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods. Rather, everything that is to be included in the budget must be considered and justified. In effect, start by saying the budget is zero and then add the cost of those things considered necessary.

The key benefit of ZBB is that it focuses attention on the actual resources that are required in order to produce an output or outcome, rather than the percentage increase or decrease compared to the previous year. Under ZBB, budgeting is no longer a number-crunching process of spreadsheets, but an exercise involving the budget agency and the spenders in an analytical and decision-making process. The stupidity of the government’s rhetorical question, where is the money going to come from if this or that tax is cut, is based on a lack of appreciation of ZBB and the whole budget matrix, a criticism I never thought I would make under this Minister’s stewardship.

Bloated government
ZBB is not rocket science. Admittedly our budget is distorted by political considerations like having to find ministries and placements for all those party loyalists and those willing to go on the elections slate, hardly a relevant factor for ZBB. Do we really need a Ministry of Sport with a Minister and a Parliamentary Secretary, when we have a Director of Sport and a National Sports Commission? Do we need two former ministers to advise the current Minister of Local Government which cannot deliver local government elections? And does the President need and use all those advisers in the Office of the President?

The committee looking at the line items in the Budget should ask for full particulars of the terms of employment of all advisers to the President and his ministers. Under ZBB there would have had to be good reasons to for their continuation.

Think what happens when you cut a ministry: savings on ministerial salaries and perks including chauffeur, guards, duty concessions, allowances, secretaries, public relations persons and property expenses. Even with the smallest ministry this can easily add up to hundreds of millions.

ZBB particularly lends itself to discretionary spending such as this and that activity, and showing overseas travel, etc. The committee should ask for details of the 2008 expenditure and 2009 projected expenditure on local and overseas travel by the President, ministers and other public officials. Almost on every occasion I travel I see some politician or other travelling first class. The committee should not be prepared to accept glib answers but only hard evidence on the amount and details of money spent for the President and his ministers’ overseas travel in 2008 and their specific spending plans for 2009.

Too many dollars, too little sense
The committee should ask about the $2.5 billion being spent on GECOM in 2009 – more than the amount spent on agriculture – and consider whether we are getting value for money. The Ministry of Foreign Affairs is getting $3.2 billion and cannot put a representative in the UK where even a government supporter has lamented we do not have a representative and miss many, many meetings. What contribution does former Home Affairs Minister Mr Gajraj’s presence in India bring us that cannot be achieved by contacts between our Ministry of Foreign Affairs and the Indian High Commission?

We need to know why with all this overseas representation the President has to go out of the country sometimes three times per month. Are our representatives not functioning and do the things the President goes to really require the presence of our head of state?

The committee should find out about the money allocated in 2008 for airstrips in Leguan and Wakenaam, for which no work was done. It should ask for information on the Hope Canal on which $3 billion is being spent this year – all from borrowings and on the basis of technical advice of which the public knows nothing. Should the committee not want to ensure that it acts before the money is spent and the problem remains? The committee should scrutinize the capital budget with the greatest of care – some $46 billion dollars are involved.

It should request the audited financial statements of the National Drainage and Irrigation Authority since it came into being in 2006. To give money to people who are derelict in their statutory duty to account is irresponsible. That of course applies to all the Budget agencies and those to whom public monies are given.

Conclusion
I do not expect that everything can be done immediately. But it is time that we move to serious budgeting and not indulge in politics and arithmetic as the 2009 Budget does. The Committee of Supply should request the presence of the Budget Director as it wades through the 2009 Budget. The accounting officer from the relevant ministry or department should be present to answer questions and if Minister Singh is too busy then his apparently under-worked deputy should be present at all the sessions.

Business Page would also like, respectfully of course, to recommend that we move to a system of zero-based budgeting and that we begin by identifying three or four ministries for the exercise in phase one, to begin in 2009. And to recommend as well that all positions paid from the public purse be listed in the Estimates, and not only those which have come through the Public Service Commission. Too much is being hidden.

Posted on

Staggering increase in external debt

Bad news
The country’s stock of external public and publicly guaranteed debt rose by 20.3 per cent to US$804 million from the end of September 2007 to the end of September 2008. This dramatic increase has been reported in a quarterly report by the Bank of Guyana for the nine months ended September 30, 2008. As a consequence, external debt service costs increased by 10.5 per cent to US$11.5 million, reflecting new debt payment schedules primarily for multilateral creditors. These were among a number of interesting issues raised in a most commendable effort by the central bank, and the Governor, Mr Lawrence Williams and his team deserve kudos for what appears to be a first for the bank.

Otherwise the report makes for a most depressing report on the management of the economy by President Bharrat Jagdeo and his Finance Minister Dr Ashni Singh, of whom so much was expected when he first was appointed a minister after the 2006 elections. By almost every measure the economy in the three months July to September 2008 performed worse than it did in the same quarter in 2007.

There was lower output in all the country’s major commodities during the third quarter of 2008 compared with the same period in 2007. Sugar fell by 3.6%, rice by 1.6% and poultry by 12%, while in forestry products, diamond and fishing the story was the same. Someone counted the eggs and came up with a 64% increase in the country’s production of eggs while there was modest growth in the mining sector, including the foreign owned bauxite companies blessed with generous concessions which the government has refused to disclose.

More bad news
If the overall performance of the manufacturing sector is depressing, the non-performance of segments of the sector must be a cause for serious concern. The production of paints and alcoholic beverages increased by 1.7 per cent and 6.3 per cent, respectively, whereas there were declines in the production of pharmaceuticals by 2.5 per cent and non-alcoholic beverages by 33 per cent. Our pharmaceutical company is another beneficiary of concessions and valuable contracts to supply Indian manufactured drugs to the government.

And if non-alcoholic beverages include Coke, Pepsi and I-cee, is it an error or did we in the third quarter produce only two bottles when three months earlier we were producing three? Where are we going and what does it say that a senior official of one of those beverage companies is a top member of the increasingly useless National Competitiveness Council?

Inflation
The Bank of Guyana, sourcing its information from the Bureau of Statistics reported that the inflation rate “during the third quarter of 2008 grew by 7.8 percent compared with 13.9 percent for the corresponding period in 2007.” There must be some error here, however, since the inflation during the quarter could not be 7.8% and was probably the rate for the nine months. The food basket maintained by Ram & McRae for the quarter reflected an increase of 8.2% over the three months but for the year the firm’s basket of food showed an increase of 33%, similar to the increase in Trinidad and Tobago. Conveniently, the Bank of Guyana concludes, without offering the kind of analysis and evidence expected from such a body, that the level of inflation in Guyana was driven by higher international fuel and commodity prices.

What is troubling is that the report indicates that price data for the third quarter were not available. Yet we will be expected to accept without question inflation figures pronounced by Dr Singh when he presents another of his big budgets that would not only include all of the third quarter but the entire year! It is hardly surprising therefore that leading economists and the public have ceased to give any credence to the numbers provided by the government, particularly on inflation and GDP, two politically sensitive variables.

Wages and employment
The Bank of Guyana clearly forgot that these are key issues in the economy since they give them a complete pass, meaning no mention. Expectedly, it did devote much attention to the financial sector reporting that the foreign exchange market continued to grow during the review period. The bank seems to forget as well the role and scale of the underground and parallel economy, and as our newspapers show, the role of drug money in the economy. It has decided, again without solid information, that sales of foreign currency “were related to higher import costs.”

Almost half of the transactions by value in the foreign exchange market were accounted for by the cambios with the bank itself purchasing some US$376 million, comprising mainly purchases of US$212 million from GuySuCo and the Guyana Gold Board. Despite the perceived strong links between the non-bank cambios and the underground economy the report does not reflect any cause for concern on the part of the bank in its supervisory role over these entities, most of which are unincorporated businesses not requiring independent audit of their books.

The drugs trade
At least as readers of the daily newspapers, the bank must be aware of the drug trade with its own oligarchy. And so too must be the one-man Financial Intelligence Unit, located within the Ministry of Finance, that is supposed to prevent money-laundering. The report indicates that sales by the non-bank cambios represented 8% of total currency sales. Even Lewis Carroll would have hesitated before writing this figure. This column has criticised the law regulating the non-bank cambios, noting that they have outlived their initial purpose and called for their abolition. In a remarkable sign of impotence and or lack of will, the response has been that it will drive the business back onto the streets. This seems to suggest that instead of running the country on the basis of laws, we are at best closing our eyes and ears to reality, operating on fear of stepping on the toes of the powerful.

Despite the bank’s poor record of supervision of the cambio sub-sector the report devotes several pages on the remittance business, advising of the steps being taken to bring it under its control. The report notes the significant increase in the inflow of remittances during the past six years, increasing from US$3.4 million in 2002 to US$224.4 million in 2007. In the first half of 2008, net flows of remittances increased by 6.3 per cent, or US$6.6 million to US$111.8 million compared to half year 2007. Interestingly, Caricom countries now rank only behind the United States of America as the dominant countries from which Guyanese receive remittances.

Tax, borrow and spend
The report emphasises that the overall surplus of the public sector contracted during the review period, resulting from relatively higher expenditure by the central government since receipts from corporations and tax revenues increased slightly. The tax and spend approach that has characterised President Jagdeo’s style of financial management seems to have been taken to new levels by Dr Singh. With him at the helm of the Finance Ministry, it is now tax, borrow and spend. Since moneys borrowed have to be repaid later, no government, elected or otherwise, should be allowed to borrow away the future of a country. There should be a cap on how much a government is permitted to borrow, even if it is to stabilise excess liquidity in the financial system as the report indicates.

The report which was created in PDF format on December 29, 2008 for publication on the bank’s website “predicted” that in the fourth quarter, the economy would continue its growth path, particularly in the mining, construction and services sectors, and that the agriculture sector which had faced “minor setbacks in the third quarter” would register modest growth. Clearly it could not be referring to sugar where the drama became even more surreal. In a cleverly worded disclaimer for the (mis)management of the economy, the report notes that the efficacy of the bank’s policies will depend on the stance of central government fiscal policy. And we all are aware of the history of that policy.

Posted on

Half year economic performance

The Guyana economy has performed reasonably well during the first half of the year according to Dr. Ashni Singh, Minister of Finance, and there is cautious optimism about the domestic economy for the rest of the year. This is according to the mid-year report presented to the National Assembly by the Minister on October 27, 2008. However, anyone with a serious interest in the economy and concerned about the several important omissions contained in the mid-year report should read the report in conjunction with the half-year report done by the Bank of Guyana and published on the bank’s website.

Driven by improved performances in agriculture, mining, engineering and construction, and services, the economy recorded a 3.8 per cent GDP growth during the first half of 2008, but still a sharp decline from the 5.8 per cent growth in the corresponding period of 2007. The Bank of Guyana – using that well-known oxymoron – reports that the manufacturing sector recorded negative growth, due partly to the high cost of inputs − fuel and imported raw materials, challenges to which the sector is no stranger.

2008.11.16_Chart1
Source: Bank of Guyana Half-year report 2008

Revenue and expenditure
On central government revenue and expenditure, the mid-year report presents some interesting information. Value-added and excise taxes were budgeted to increase by 12.8% from the $36.7 billion collected in 2007 to $41.4 billion in 2008. For the half-year actual collections amounted to $17.8 billion (43% of full year) compared with the $17.1 billion collected last year. On a period by period comparison these collections represented a marginal increase in value-added tax to $11 billion from $10.2 billion, although excise tax collections declined to $6.7 billion from $7 billion.

Internal revenue collections amounted to $19 billion in the first half of 2008 compared with $17.4 billion collected last year. The bulk of such revenue comes from a handful of companies, including the commercial banks, telecommunications companies and Banks DIH, DDL and DEMTOCO. Despite the many unincorporated businesses, the self-employed category pays less than one billion dollars in taxes, or just about 15% of the taxes paid by the employed persons.

While both reports indicate significant growth in key sectors, tax revenues have not risen correspondingly and one is left to wonder whether this is a case of generous tax concessions or continued tax evasion within key sectors.

But it is in relation to expenditure that the picture is particularly interesting. And while the Minister in his report did not discuss the table which contains several errors, it must now be a matter of speculation why only 38% of the full year budget has been expended in what the table itself describes as key sectors. Particular attention is drawn to the Health,

Infrastructure and Agriculture sectors where only 41%, 27% and 33% respectively, have been spent in the first half of the year. Are we going to see a mad and irresponsible rush to spend during the second half of the year, simply because the money has been allocated?

2008.11.16_Table1

Debt
The mid-year report deals very inadequately with external debt and omits completely any information on domestic debt which has been rising alarmingly over the past several years. The Bank of Guyana Report shows the stock of government’s domestic bonded debt increasing by 7.6 per cent, while its external public and publicly guaranteed debt rose by a whopping 16.8 per cent from end-June 2007.

The outstanding stock of government domestic bonded debt, which consisted of treasury bills, debentures, bonds and the CARICOM loan, amounted to G$74,223 million, an increase of 7.6 per cent from end-June 2007 and 7 per cent from end-December 2007 balance. The increase from one year earlier reflected the expansion in the stock of outstanding government treasury bills at end-June 2007.

Over the year July 1 2007 to June 30, 2008, the stock of outstanding public and publicly guaranteed external debt rose by 18.2 per cent to US$774 million. This increase reflected disbursements of US$45 million by the Inter-American Development Bank and the delivery of US$44 million credit by the Venezuela Petrocaribe agreement.

Employment
This very critical economic and social indicator once again fails to attract the attention of the Minister and again recourse has to be had to the Bank of Guyana Report which by its own admission is not based entirely on hard data. One has to wonder why the government continues to refer to labour surveys but yet the Ministry of Finance seems unable or unwilling to deal with the issue. While indicating that preliminary data indicated that public sector employment remained relatively stable, the Bank of Guyana reports some decline due primarily to factors such as resignation and retirement of employees.

The Bank of Guyana reported that while “data on private sector employment are sparse, there are indications that the growth sectors recorded higher levels of employment.” It went on to state that the mining, distribution as well as the engineering and construction sectors seem (emphasis mine) to be associated with increased employment.

It is interesting how the Bank of Guyana and the Ministry of Finance are so sure of the performance of the various sectors of the economy but cannot establish similarly reliable numbers on employment.

Inflation
Inflation has been one of the most disputed and massaged variables in the Guyana economy. Both reports indicate a 5.8% rate of inflation but again the Bank of Guyana is more informative even if no less controversial. The Minister of Finance attributes the increase mainly to food items, identifying cereals and cereal products as the principal contributors which are unlikely to be the main concerns of the average consumer. In fact in a typical food basket done monthly by Ram & McRae, Chartered Accountants, the price increase in food items over the six month period was 10.2%, compared with the Bank of Guyana figure for the food group of approximately 9%.

Conclusion
While the date on the Minister’s report is shown as September 12, in fact it was presented to the National Assembly on October 27, repeating a pattern of wrong dating by this Minister. Despite the additional time he took in presenting his report, the Minister chose not to address the serious global economic issues that surfaced in the third quarter, nor did he treat in any serious way his duty under the law to include in the report a list of major fiscal risks for the remainder of the fiscal year, together with likely policy responses that the government proposes to take to meet the expected circumstances.

Posted on

A look at the Trinidad and Tobago Budget 2008-09

Introduction
It was like a baptism of heat for new Minister of Finance Karen Nunez-Tesheira of the twin island state of Trinidad and Tobago as she presented the first budget of the re-elected Patrick Manning government and more personally, her first since her surprise appointment as the country’s first female Minister of Finance.

Surprising because despite being the holder of an Executive Masters of Business Administration from the Arthur Lok Jack School of Business of the University of the West Indies, Nunez-Tesheira is better known as an attorney at law who has spent more than twenty years at the Hugh Wooding Law School as Senior Tutor and writer of two recommended books on the syllabus of the school.

Indeed as she announced measures inherited from or incomplete from earlier years she was teased with perhaps the most damaging accusation against an academic – plagiarism. Uncomfortably for the Minister, one opposition front bencher closely followed her speech, shouting out the page and paragraph number if she repeated something which was in the previous speech.

For Budget 2008-09 it was all about billions of TT dollars which at today’s rate of exchange is approximately US$1 = TT $6.24. The budget was presented against rapid developments in the financial sector in the US − the bail-out of Bear Stearns a few months ago, more recently of mortgage giants Fannie Mae and Freddie Mac and insurance titan American International Group and public disquiet at a call by the Bush administration for US$700 billion to buy what is now being referred to as toxic mortgage loans. The Minister had earlier said in a statement issued by her ministry that it was difficult to anticipate exactly how the ongoing turbulence in financial markets would impact T&T but that the country’s central bank was examining the developments on the economy of T&T.

In that statement the Minister indicated that the Governor of the central bank had informed her that the bank has no holdings of paper issued by any of these institutions and that the very small proportion of the bank’s foreign assets managed by US institutions are “ring-fenced” and were not on the balance sheets of these institutions.

The PNM government has however announced a number of measures to amend various acts, including the Financial Institutions Act and the Securities Act to strengthen the regulatory framework.

Budget highlights
Total revenue is estimated at $49.465B of which $20B (40%) is expected to come from the energy sector with the remaining coming from other taxes on income and Value-Added Tax.

Total expenditure net of capital repayments and Sinking Funds is projected at $49.445B giving a surplus of $19.5M. As a percentage of total expenditure, education receives some 14.4%, infrastructure 13.3%, health 8.78%, security 9.6%, agriculture 4.5% and housing 3.3%.

External reserves have increased to US$8.5B or the equivalent of eleven months of import cover while the Heritage and Stabilisation Fund has some US$2.4B representing 10.2 % of GDP and higher than the level of the country’s external debt which stands at 6% of GDP.

The growth in the economy was 3.5 % which − despite the substantial increases in energy prices – saw the non-energy sector growing faster than the energy sector.

Inflation has taken a hit with commodity food prices and headline inflation rate having risen to 11.9% over the twelve months to August 2008 which makes the sustainable inflation rate of 6 % a formidable challenge.

Increases for senior citizens, those on public assistance and disability and retired public servants.

Other positive features by the Minister include free access to textbooks and other school material, free meals and transportation for students, 2% mortgage interest rate for low income earners, no VAT on all basic food items, one of the lowest rates of personal income tax “anywhere in the world” (25% after an allowance of US$10,000 per annum).

Developed country status
As would be expected, the Minister was upbeat about the medium-term prospects for the country that aims to achieve developed nation status by 2020. The Minister was not bashful in announcing that her government was putting in place special arrangements to bring benefits to the country beyond the tax take and added that they propose to increase the government’s ownership of assets in the natural gas market.

One of the measures attracting the most comment is the announcement of an increase in tax on premium unleaded gasoline which the Minister controversially predicts “will affect the high end of the market.” This measure will require those affected to pay $4 a litre for premium unleaded gasoline — an increase of $1 or 33 per cent, a move which some see not as a revenue matter but one to ease the traffic congestion that sees jams in the morning, at noon and nights and choking entry and exit points not only in Port of Spain but in the other major urban areas such as San Fernando and Chaguanas.

The government’s long-term plan is the reintroduction of a rail system involving two express train lines covering 105 kilometres while more immediately the government-owned Public Transport Service Corporation is expanding and modernizing its fleet of vehicles to 400 while the Coastal Water Taxi Service project will, beginning in phases from December 2008, connect by boat the principal cities cutting travel time from 2 hours to 45 minutes in the Port of Spain-San Fernando link.

Guyanese and Colombians
Aided by increased revenues from the export of oil, LNG and petrochemicals, unemployment has fallen to a historic low of less than 5 % and the construction industry is now using increasing numbers of nationals from non-Caricom countries including Colombia and as far away as Nigeria. Guyanese would therefore feel justifiably aggrieved that so many of our hugely productive nationals are turned away by immigration officials when they try to enter the country. I understand that part of the reason for the difference is that many of the Guyanese try to do it on their own while others are brought in mainly by international contractors.

Apart from its willingness to remain involved in the economy the government also plays a leading role in the housing sector though some critics see the not too thinly disguised hand of politics involved. Many of the schemes are located in marginal seats (T&T has the constituency system), and the distribution pattern can shift the electoral balance significantly in favour of the ruling party even as the opposition continues to founder for any strategic line of challenge on the Government’s Achilles Heel such the markedly arrogant and autocratic style of the Prime Minister, corruption, crime, weak governance and failure to deal with inflation.

Crime and inflation
In fact with Trinidad and Tobago challenging its sister countries for the title of crime capital of the Caribbean, it remains a mystery why more attention was not spent on measures to address the out of control crime situation in the country. Deputy leader of the main opposition party Kamla Persad-Bissessar’s comment that “the programmes the government has put in place will continue to overheat the economy” was shared by some of the TV commentators in the hours after the presentation of the budget. Not many people would agree with her that the country was heading for a meltdown.

While the Minister announced that the government was trying to deal with increased food prices by treating agriculture as a priority sector and therefore dealing with high food prices from the supply side, Persad-Bissessar lamented that the low allocation to agriculture hardly reflected this priority status.

As a part-time visitor to the country, my observation is that T&T’s economic challenge is how to tame the inflation tiger with the depreciation of the TT dollar in line with the US dollar against non-US dollar currencies adding cost pressures to inflation fueled by sharply escalating food prices. Bank governor Ewart Williams has advised that the only way to reverse food price inflation on a sustainable basis is by increasing domestic agricultural supply and containing demand. There is an obvious contradiction between this objective and the government’s policy of buying political and public support by increasing the amount of money pumped annually into the economy.

Agriculture
Last year, as Finance Minister, Partick Manning announced an agricultural policy following a two-day national food consultation that fourteen agriculture initiatives, involving the conversion of sugar lands to food crops, were earmarked to be implemented at a total cost of $1.2 billion.

Minister in the Finance Ministry Chartered Accountant Mariano Brown has told the public that only four of these have come to fruition, attributing the blame to the private sector for not taking up the challenge. That those have not succeeded in making a dent in prices obviously raises the question as to the prospects for success of the initiative in the light of more money being put into the economy by the government. Another initiative which may be instructive for us is the bulk purchase by the National Flour Mills of staple products in non-traditional international markets and selling those items at cheaper prices locally. This was abandoned after NFM racked up huge losses.

Rating and comparison
Despite the challenges the country received a good review by the International Monetary Fund which last year described its economic performance as “remarkable in a regional context and in comparison to other energy producing economies.” More recently, the country’s credit rating has been raised making it more attractive to investors who seem unmindful of the crime situation that plagues T&T.

I have consciously avoided any comparisons or contrasts between Guyana and Trinidad where there are both similarities and differences, but for me some do stand out. The first is the willingness of the government in Trinidad to engage in the economy while in Guyana we are prepared to leave it to the private sector that has but one motive only. The second is the take of revenue that comes from natural resources.

In Trinidad it is 40% while in Guyana, as a result of a range of tax incentives our share is negligible, if not negative in economic terms. We tax the salaried and the poor in the form of income tax and VAT at punitive rates, while those are considerably less in Trinidad. The Audit Office in Trinidad has already published its report on the 2007 Accounts of the Government while in Guyana the 2006 has only just been released with warts galore.

Like Guyana, the government in Trinidad is not hesitant to use the economy for political causes and we share places of dishonour with Trinidad on the Transparency International scale of corruption. We are 126 while Trinidad is 72. Trinidad and Guyana both believe in big governments and political favours are not unknown. We also share similarities of demographics and the penchant of our nationals to migrate. Do I need to go on?