Valmikki Arjoon

Economist attached to The UWI St Augustine campus,

Dr Valmikki Arjoon

THE University of the West Indies (UWI) St Augustine economist Dr Valmikki Arjoon has suggested Government should consider establishing a liquidity swap line with the US Federal Reserve to help the country access more US-dollar financing.

He said given the deficit for budget 2020 could be in the vicinity of $18 to $20 billion, the State has to find their optimal mix of financing, which could involve considering new financing mechanisms.

The liquidity swap line is a debt free option, said Arjoon.

“As extraordinary times call for extraordinary measures, the State ought to consider new financing mechanisms,” he told Express Business.

Arjoon said: “This outlet will not expose us to currency risk, as it involves exchanging TT dollars for US with the Fed based on the market exchange rate at the time of the transaction. The monies are re-exchanged at a later date, using the same exchange rate as in the first transaction.

“So, assuming we wanted to access US$500 million and the exchange rate is US$1 USD to TT$6.76, we would exchange TT$3.38 billion for this US$500 million. At a later date, we would then re-exchange US$500 million and get back our TT$3.38 billion from the Fed—the exchange rate for this re-exchange would be the same as the initial exchange of $6.76. This therefore protects us from any fluctuations in the currency value as the same rate of exchange is maintained, and we will not incur interest costs, as it is not a loan—it is simply a currency swap to be re-swapped at a later date,” he explained.

He said such a facility can only be established after high-level diplomatic discussions with the Central Bank and the Federal Reserve.

Arjoon said given T&T’s paucity of revenue earnings before the Covod-19 pandemic, the State has no choice but to borrow some of the finances to engage in their fiscal programmes. Another option to raise funding would be for the divestment of State assets to offset some of the country’s debt.

“We are not the only ones—many other economies will also have to incur more debt and a higher deficit to cope with the Covid fallout. With the adjustment of the Development Loans Act, we can borrow an additional TT$10 billion from the local market. They ought to consider issuing a long-term bond with a maturity of at least 20 years. The upside to this is that this bond provides another investment opportunity for citizens to earn a much higher rate of return than what is currently provided by others especially banks. Since it is local debt, the State will repay in local currency, which will protect us from any future currency risk,” he said.

Arjoon cautioned that when borrowing locally, the State has to be careful that it does not exhaust the liquidity in the system, as some of this is needed for credit to the private sector.

“The Central Bank must ensure that they continue to maintain adequate levels of liquidity in the system well into 2023, by buying back bonds through their open market operations, so that there are additional funds available for borrowing by both the Government and the private sector,” he said.

T&T has already sourced funds from multilateral institutions including CAF, the IADB and the World Bank.

He noted that the IMF has a Rapid Financing Instrument which T&T could also access.

“This is very different from typical IMF bailouts – the monies are for Covid-19 relief and does not involve strict conditions which we have to adhere to. We can also look to the international market to borrow as we could possibly secure a lower interest rate, given that the US fed fund rate has fallen drastically (0 to 0.25 per cent). Additional debt is inevitable but what matters more is how these funds are spent – more should be allocated to build productive and export capacity.

“Keep in mind many strong economies already have high debt – Singapore has a debt to GDP ratio of 126 per cent, while Japan’s is over 200 per cent. Much of their debt was used for building productive capacity. For instance, we could borrow to develop the productive and export capacity of key sectors such as agriculture. We should borrow against the future revenues of this sector that we wish to build. Don’t put the funds in the consolidated fund – put it straight in the hands of the agriculture sector and some of the revenues they earn will be used to partially repay that debt,” he said.

Arjoon observed that no real savings have taken place in the last few years.

“We spent $31 billion more than what we earned in revenues in the last four fiscal years, leading to the public sector debt to GDP figure to grow to 65.5 per cent at the end of 2019. The private sector is in the same boat – with many firms earning a paucity of revenues in the past few years especially SMEs, the private sector’s debt to GDP ratio has climbed to 45 per cent.”

The SMEs, he contended are the largest employer in the private sector.

“Many SMEs are still closed and are going to need more support from the State – much more than the $300 million that they’ve been allotted. With approximately 20,000 SMEs locally, this works out to only $15,000 per company. While it is touted that SMEs will have access to lower interest loans, if a business is unprofitable and does not have attractive collateral, they most likely will be denied access to loans as they would be regarded as risky. This may happen even if the State partially guarantees loans, as not all SMEs will be in receipt of these guarantees.

“Further, since many are in an unprofitable state, how will they afford to pay instalments on existing loans? We could therefore find in the short-term, the level of loan defaults will increase. This would cause banks to become extra cautious with who they lend to in the future. Therefore, if you can’t even access the loan facility, then it really does not matter if interest rates on loans are lower.

“More is needed to provide a lifeline for SMEs, including cash injections, wage subsidies, tax write-offs for wages paid, lower taxes and customs charges on key imports, enabling them to pay residential utility rates instead of commercial rates. This is certainly not an exhaustive list, but whatever support they receive now will have far reaching consequences for our future economic performance, as many may not survive,” Arjoon said.


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