Trinidad and Tobago: Pressure on Central Bank to help recovery

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PORT OF SPAIN, Trinidad According to the Inter-American Development Bank’s (IDB’s) latest Quarterly Bulletin (December 2020), the Trinidad & Tobago economy will have contracted by 5.6 percent in 2020. This is considerably less than that experienced by extremely tourism-dependent economies in the Caribbean, with The Bahamas, for instance, suffering a 14.8 percent contraction.

On the IDB’s Tourism Dependency Index (TDI), The Bahamas has a score of 59.4 (out of a notional 100 for a totally tourism-dependent economy); Trinidad has a score of 8.1, ranking it at 100 out of 166 countries. Nevertheless, there is no doubt that Trinidad faces a tough 2021, not least because, as the IDB notes in its Quarterly Bulletin, Trinidad’s macroeconomic performance “has not fully recovered from the 2015 global commodity shock”.

It was the collapse in global oil and gas prices in 2015, “along with disruptions to domestic energy production in the following year”, that led to a 6.3 percent GDP decline in 2016 (on International Monetary Fund figures). This was followed by declines of 2.3 percent (2017), 0.25 percent (2018), and 0.002 percent (2019) – and then came the coronavirus (Covid-19) pandemic to tank the economy by an estimated -5.6 percent in 2020. Not surprisingly, all of this has had an adverse effect on public debt.

While the government’s action to consolidate public finances was successful in reducing the fiscal deficit from 9 percent of GDP in FY2017 to 2.5 percent in FY2019, public debt rose from 62 percent of GDP in FY2017 to 65.5 percent in FY2019 and is now 80 percent of GDP. With the current account balance also suffering, foreign reserves dropped by 15 percent between 2015 and 2019, declining to US$7.2 billion as of October 2020, providing 8.6 months of import cover. And for FY2020, the fiscal deficit was back up in double digits at 11 percent of GDP.

For the IDB, one of the keys to recovery, not just in Trinidad & Tobago but throughout the Caribbean, is institutional capacity building. It emphasised this in its December bulletin, and a forthcoming IDB publication, Economic Institutions for a Resilient Caribbean, will explore this concern in detail.

Among other things, the IDB notes:

  • Inefficiencies in the revenue collection system and ineffective audit and verification procedures are among the main deficiencies in the revenue administration systems.
  • Potential deficiencies in debt management may be at odds with debt reduction targets…[T]he cost of servicing public debt and unanticipated factors that affect debt (e.g. the crystallisation of contingent liabilities or other debt-creating flows) are important drivers of debt accumulation in Trinidad & Tobago…
  • There is room to improve bank regulation and supervision…[A]s the country’s banks expand their regional footprint, they face challenges in terms of consolidated supervision, the interconnectedness of monitoring, and the management of contagion risks. The increased adoption of digital services in the aftermath of Covid-19 also elevates risks and heightens the need for increased supervision.
  • There is a need for greater central bank independence and flexibility in monetary policy. The independence of monetary authorities is necessary to ensure that primary monetary objectives, such as price stability, can be achieved without interference. The Central Bank of Trinidad & Tobago has a fair amount of legal independence but scores 0.4 on the Central Bank Independence Index (Bodea and Hicks 2015; Garriga 2016), which ranges between zero (lowest level of central bank independence) and one (highest level).

Interestingly, the question of central bank independence has become a rather hotter political topic since the IDB issued its December bulletin.

In its December Monetary Policy Report, the Central Bank of Trinidad & Tobago (CBTT) highlighted the difficult policy dilemmas that follow from the pandemic.

It said: “As in most other countries, fiscal action will remain at the core of the combined macroeconomic policy response. A delicate balance will continue to be required in providing indispensable support to the poor and disadvantaged communities – who have been disproportionately impacted by the pandemic – while keeping an eye on the debt situation. The current high liquidity environment means that monetary policy may need to be in a holding pattern, but ready to adjust quickly as financial conditions evolve”.

However, keeping monetary policy “in a holding pattern”, even if with one eye on adjustments “as financial conditions evolve” does not seem to be good enough for the government’s taste.

On December 18, 2020, finance minister Colm Imbert gave a briefing on his plans to revive the economy, saying: “As we go forward under this uncertain COVID environment, the role of monetary policy is going to become far more important. We will have to have a stronger connection with the Central Bank and work in tandem with them, to deal with things like the money supply, interest rates and other methods of influencing GDP such as possibly inflation targeting and so on. This will require much deeper collaboration now between the government and the Central Bank. It’s going to be all hands on deck”.

Imbert added: “We are in a very, very difficult situation financially and we will now have to use a combination of fiscal policy and monetary policy going forward, to see how we could get our economy going. So, we have to be very careful how we select these [Central Bank] governors. They can’t be just selecting someone on the basis of friendship or paper qualifications. We have to pick people who could assist the country with monetary policy in growing the economy”.

These comments prompted immediate criticism from the political opposition about central bank independence.

Opposition Senator Mark Wade complained: “They will reduce the Central Bank governor to a…contractor begging to renew his contract and compromise the Central Bank’s independence. What is the government seeking to do in imposing executive control over an autonomous institution?”

The IDB will undoubtedly share these concerns, and more will be said on the matter when Economic Institutions for a Resilient Caribbean is published. In the meantime, a new and unwelcome element of political uncertainty has been introduced with the admission of prime minister Keith Rowley to hospital on January 8 as a result of a heart condition. Rowley was released after two nights with no apparent ill effects, but questions about his physical resilience at a time of extreme difficulty for the country must remain.

Until this happened, the country had looked set for a lengthy period of political stability following Rowley’s successful decision to opt for a general election in August 2020 rather than waiting until December. As a result, the ruling People’s National Movement (PNM) secured a new five-year mandate with a 22-19 seat win over the United National Congress (UNC) led by former prime minister, Kamla Persad-Bissessar (2010-2015).

The PNM’s mandate remains but doubts about the longevity of Rowley (who had already indicated that this would be his final term) is bound to be unsettling for both the party and the country.

– Source: LatinNews Daily

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