ON FRIDAY last, two important documents were published that present good guidance for the trajectory of the performance of the T&T economy in the next three years or so.
Those documents were, of course, the concluding statement by the mission from the International Monetary Fund (IMF) that conducted the Article IV consultation with the T&T authorities (mostly the Ministry of Finance and the Central Bank) and the Moody’s downgrade of T&T’s sovereign debt.
Also of importance, at least for those who follow the domestic economy, were the responses of the Ministry of Finance to the statements from the IMF and Moody’s.
In terms of media coverage, one of the important issues that did not receive much play in the initial reporting of the IMF and Moody’s reports is the matter of T&T’s public debt and the Government’s ability to service both the country’s local and, crucially, its foreign debt.
The IMF puts T&T’s public debt—which includes central government debt, and guaranteed debt of state-owned enterprises and statutory authorities—at 87.2 per cent of gross domestic product (GDP) in 2021 and 88.7 per cent of GDP in 2022 with T&T’s current public debt “significantly surpassing the government’s soft public debt target of 65 per cent of GDP.”
The Moody’s report places what it calls general government debt, which is the same as public debt, at almost 85 per cent at the end of fiscal 2021 and it projects the debt ratio will remain in the 85 to 90 per cent range over the next three years.
The IMF’s important statement on debt is as follows: “Once the recovery firms up, a growth-friendly and inclusive medium-term fiscal adjustment plan is essential to reduce public debt and rebuild buffers….”
That short sentence has six elements it is necessary to clarify:
1) Once the recovery firms up:
That clause may seem vague and time insensitive, but given the inevitable decline in Covid-19 cases and deaths, it is likely to happen by the end of the current fiscal year, on September 30, 2022, as the IMF predicts T&T will experience growth of 5.7 per cent of GDP in 2022;
2) Growth-friendly and inclusive
Growth-friendly means policies that promote growth and investment in the non-energy, foreign-exchange earning sector. Among those policies, the IMF mission was pellucidly clear, are “the removal of restrictions on current international transactions” as well as “greater exchange rate flexibility that would reduce the need for fiscal policy adjustments to restore external balance.”
In other words, if T&T has an exchange rate that is flexible, there would be less need for the Government to make fiscal adjustments (see below) AND drawdown on the country’s foreign savings (the reserves and the Heritage and Stabilisation Fund) as some of the adjustment could be made by the exchange rate. Implicit in what the IMF is arguing is that it makes little sense to have an exchange rate that is “fixed,” if a country’s foreign exchange earnings are volatile. Inclusive here means people living in poverty would receive targeted assistance from the Government, but middle-income households would not.
3) Medium-term fiscal adjustment
In its concluding statement, the IMF mission telegraphed exactly what it means by medium-term fiscal adjustment when it stated: “Over the medium term, the fiscal deficit is projected to gradually narrow and reach balance by FY2027.”
And the IMF mission also identifies the nature of the fiscal adjustment it is looking for: “On the expenditure side, streamlining transfers to SOEs, improving public spending efficiency, phasing out subsidies, and reforming public procurement and publishing information on the beneficial ownership of public contracts, would support fiscal consolidation, enhance transparency and accountability.”
The fiscal adjustment over the medium term is crucial to ensuring that T&T’s debt to GDP ratio does not grow from its predicted 88.7 per cent by the end of the 2022 fiscal year.
When the IMF refers to a plan, it does NOT mean a document that dozens of people will work on, but which will be assigned to some dark storeroom as soon as the ink is dry on it. In other words, the IMF is NOT referring to a Vision 2020-type plan or a Roadmap to Recovery-type plan. When the IMF refers to a medium-term fiscal adjustment plan, it means an implementation document that has timelines for achievements, budgets, work programmes etc and for which the Government is accountable. Consultation and parliamentary debate on the implementation document would also be important
Also, the fact that the IMF mission expects the Government to transform the country’s fiscal deficit position into a balanced budget in five years, also means that there must be incremental improvements in the fiscal position for each of the five years....starting from year 1.
Two elements of that medium-term fiscal adjustment plan are noteworthy: By pointing to the need to reform public procurement, the IMF is obviously not satisfied with the new Public Procurement and Disposal of Public Property Act.
And by including the clauses, “publishing information on the beneficial ownership of public contracts, by cutting expenditure,” the IMF mission is a higher level of accountability and transparency that it believes should be part of the prescribed amendments to public procurement law;
6) Reduce public debt and rebuild buffers
The goal of the fiscal adjustment plan must be to reduce the public debt from the dangerously high level of 88.7 per cent at the end of the 2022 fiscal year EVERY YEAR for five years. Clearly, that does NOT mean that in the second year of the plan, the adjustment programme can be cast aside as the administration throws money at the public in the hope of winning the 2025 general election.
In the statement the Ministry of Finance issued on Saturday afternoon, Mr Imbert is quoted as saying: “We are certainly prepared to heed this advice, and we have started to put in place remedial policies to bring our debt back on a lower trajectory. The IMF has made some suggestions in terms of a fiscal anchor: we are welcoming more detailed technical engagement. The same applies to suggestions to improve the infrastructure of our foreign exchange and money markets. We are welcoming any constructive solutions that will, in the end, improve our citizens’ life.”
It is noteworthy that the minister is prepared to heed the advice of the IMF in November 2021, when the same institution was described as a destructive force in June 2021.
What is also interesting was the response by the Minister of Finance to the Moody’s downgrade. He explained that when Moody’s gave the country a negative outlook last year, the Ministry of Finance had argued that the increased expenditure to counter the impact of Covid-19 on the economy and the population “was a responsible policy response.”
That policy response “helped avoid destruction of the economic and social fabric and was both sensible and sensitive in our view. What subsequently matters is the determination to bring public debt back under control in a credible manner.”
That determination to bring public debt back under control is extremely laudable and prudent, but given T&T’s tribal politics, is it possible?