What’s up with the economy? To be blindingly obvious, it’s 80 per cent geology, ten per cent past sins, and ten per cent getting the macro-economic policy numbers right.
The Guyanese have geology on their side right now, and we don’t. Piggybacking their boom will help, but won’t be a cure-all. Any big new Trinidad and Tobago finds are likely to be in deep, deep water a long way offshore. Which means many years before they’re doing us any good. It’s a tough battle to keep LNG and petrochemicals plants running. There’s no Venezuelan cross-border gas riding to the rescue.
In North America, shale gas and shale oil are spurting out of the ground. T&T’s biggest former market is our biggest competitor. The US, not T&T, is selling LNG to Jamaica.
Next, past sins. In the big, bold boom years, diversification just did not happen. We had talk, not least about the glitz and glamour end—film, fashion, high-end tourism, steel pan, offshore finance. But on the ground, not a lot.
With GDP growth crossing 13.5 per cent in 2006, what was the problem? Why spoil the party?
And the policy numbers? Since the trouble hit, successive budgets have kept life fairly normal. Governments have run up deficits and drawn down on assets. NGC made an after-tax profit of $560 million in 2015. But they paid a $7.2 billion dividend into the government’s coffers. That game can’t go on for ever.
We can’t do too much about the geology. Past sins are past sins. But are there any magic answers with the policy numbers?
The one which gets most attention is the US$ exchange rate. Demand for US$ exceeds supply. There’s queuing and rationing. The Central Bank keeps its sales tight. |Despite all that, foreign exchange reserves slid from US$11.5 billion in 2014 to US$6.9 billion in September this year.
Demand exceeds supply. So switch the price and we’re in balance? Devalue? Tell the Central Bank to spot the magic number? Free up the controls, and let the market forces reign?
If only it were so easy.
First, we’re pretty much stuck with policy intervention, not market forces. It’s not like a tourism-based economy, with a flood of mini-inflows as visitors exchange their US$. The big money comes with energy company tax payments to the government and Central Bank, which sells on to the commercial banks when it needs to.
In theory, that cash could instead be auctioned on the free market – but as it comes in big lumps, that would lead to massive volatility. The game would be watching for when bpTT and Shell pay their taxes.
There’s going to be an exchange rate policy, announced or unannounced.
Kamla said clearly in her budget reply that monetary and exchange rate policy is exclusively for the Central Bank.
But she then said she would work with the Central Bank for a competitive exchange rate, “eliminating the current dirty managed float and allowing market forces to operate within a crawling band.”
A crawling band sounds a bit like what sometimes happens on Carnival Tuesday. But in this context, it would mean the T&T$ sliding slowly gracefully down against the US$. How fast and how far? We’re in the world of policy decisions, not market forces.
In 2015 and 2016, the managed float allowed the exchange rate to slip. On that basis, there may not be a whole lot of difference with a crawling band. No dramatic solutions there.
Next problem. Currency markets always overshoot.
Right now, we have a parallel market. It’s illegal, but it’s set by market forces. The well-informed Marla Dukharan reports a rate of seven or eight T&T$ to the US$.
If the currency depreciated gracefully to that level and stopped, all would be painless. Indeed, if the big importers are using the parallel market right now, the impact on retail prices would be minimal.
Trouble is, that’s not how it works.
In 2015, Suriname had an official rate of Sr$3.35 to the US dollar, and a parallel market rate around Sr$3.90. In November, they devalued the official rate to Sr$4.00. That started a stampede. Within a few months, the parallel rate was at Sr$6.50. Inflation peaked at 55 per cent.
Anything like that here, and we’re in trouble.
One more problem. Yes, devaluation would cut demand for imports. That’s the pain part.
But devaluation works best if it also boosts demand for exports. That’s the gain part.
I doubt T&T would sell a single extra tonne of methanol or ammonia with a devalued dollar. And I can’t see any shiny new diversified non-energy export industries springing up in short order, either.
Getting the macro-economic numbers right is a great story, but it does not work miracles.
Jamaica this week completed a painful IMF adjustment programme. All the target indicators are in the right place. They’re the star performers.
But in the real world, Jamaica is still in trouble. The Jamaica dollar has slid since March from J$125 to J$141 to the US dollar. And last month they revised their economic growth forecast down to just 0.7 per cent. The Alpart bauxite plant has shut down, with the loss of 800 jobs.
That’s geology again.