October 20, 2020

Coping with an unhappy new year

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6d951e573cb7630693aefdcc471bf8be-69189009-1300438257-4d831cf1-620x348From Trinidad and Tobago NewsDay

With the high debt levels and a number of countries running deficits, it is expect-ed that fiscal consolidation will continue. While in theory that may sound appropriate, the Minister of Finance and the new Governor of the Central Bank in Trinidad and Tobago may not have such clear cut choices. If the cuts in expenditure are too large and the wrong items with significant linkages are curtailed the knock-on effects could be significant.

The Economic Commission for Latin America and the (ECLAC) has presented a preliminary forecast of economic growth. Globally, it is estimated that there will be a slight uptick in economic growth of 2.9 percent in 2016 from 2.4 percent in 2015. The Caribbean is expected to experience a small economic recovery in 2016 with growth projected to 2.6 percent from 1.6 percent in 2015.

Interestingly growth in Trinidad and Tobago, which in 2015 has been estimated at 0.2 percent, is expected to in¬crease to 0.6 percent in 2016. Public debt, which is a major problem in the Caribbean, is expected to either remain around the present levels or fall slightly, with the excep¬tion of Dominica, Suriname and Trinidad and Tobago. In fact, Trinidad and Tobago has seen an increase in debt over the last year.

What are some of the factors that are responsible for this prognosis? Looking at the external factors, at the top of the list is the expecta¬tion that the trend that has been experienced with raw material prices will continue and have a varied impact across the Caribbean.

There are those who hold the view that the commodity price has run its course and is no more. If this turns out to be true then countries such as Trinidad and Tobago that are commodity producers will experience prices around the present levels for most of 2016. This is going to affect government revenues, export earnings, foreign exchange earnings and the viability of some enterprises.

On the other hand, the service producers will ex¬perience a fall in the cost of energy in particular, but also other knock-on effects which will lower their operating cost, making them more com¬petitive.

The growth in the world economy in the last few years has been driven in large measure by the growth in the Chinese economy.

In 2016 it is expected that the Chinese economy will slow as it continues its transition to a consumer demand driven economy. It is forecasted that the global economy will see improved economic performance in the , developing countries, Japan, developed countries, India, Africa, and the Europe¬an Union. Labour markets in the US and the UK are expect¬ed to tend toward full employ-ment. World trade in 2016 is expected to grow at a slower pace than for the second consecutive year. This is expected to have a dampening effect on GDP growth. There is the view that 2016 will also see volatile financial markets and higher borrowing costs led by higher interest rates in the United States and dollar appreciation.

Although the global econo¬my is anticipated to have an improved performance in 2016 over that of 2015, this growth rate is still considered low.

To stimulate economic growth, it is vital to engage in, as well as attract, invest¬ment that will boost pro¬ductivity. This is especially true for the Caribbean where targeted investment such as the upgrade of the transport infrastructure, principally maritime and air, renewable energy systems and improve¬ment in national and regional e-governance and goods tran¬sit system for trade facilita¬tion will be a fillip to growth.

In the current economic conditions, the Caribbean needs to carefully identify the relevant fiscal policies that are to be adopted and ensure that the focus on the level and configuration of public spending does not result in an over-adjustment that harms the economy.

The Caribbean has to strengthen instruments to promote investments and finance social spending. One area that the region has to re-view is the existing structure of subsidies, since this can create fiscal space for alterna¬tive expenditure.

Those countries that con¬tinue to offer fuel subsidies need to look at this period in time as an opportunity to phase in a full pass through of international fuel prices. In the case of Trinidad and Tobago, the promised discus¬sions on the adjustment to fuel have to involve outlining plans and incentives for a new energy matrix.

In an environment of low levels of economic growth as is happening in the Ca¬ribbean, monetary policy can be expected to continue to boost domestic demand. Set against the backdrop of forecasted rise in headline in¬flation across developed coun¬tries and rising US interest rates, developing countries in the Caribbean and especially Trinidad and Tobago will face a trickier balancing act to an¬gle monetary policy to tackle inflation, yet address the need to stimulate economic growth while protecting the foreign exchange pool of the country.

With the high debt levels and a number of countries running deficits, it is ex¬pected that fiscal consoli¬dation will continue. While in theory that may sound appropriate, the Minister of Finance and the new Gover¬nor of the Central Bank in Trinidad and Tobago may not have such clear cut choices. If the cuts in expenditure are too large and the wrong items with significant linkages are curtailed the knock-on effects could be significant.

The monetary policy stance also has to be care¬fully nuanced to ensure the three conflicting targets of inflation, growth and foreign exchange are addressed.

In all this there is the down¬side risk to oil price were the storage capacity worldwide to be reached. 2016 is an import¬ant year for us to navigate, now that the issue with the is behind us We need to face the challenge collectively.

Happy New Year Trinidad and Tobago.

For more on this story go to: http://www.newsday.co.tt/businessday/0,221967.html

IMAGE: www.timesofmalta.com

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