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T&T needs economic prophylaxis 

Saturday, November 5, 2011

Among the dangers of bad economic policy—and we refer here specifically to fiscal deficits over a number of years leading to mounting internal and external debts—is that it can eventually result in significantly higher borrowing costs and political instability. In Europe yesterday, ten-year sovereign bonds issued by the Governments of Greece and Italy—countries with long-running fiscal deficits and debt to GDP ratios of over 100 per cent—were trading at 26.4 per cent and 6.27 per cent respectively, significantly higher than the 1.84 per cent for similar ten-year German bonds. For countries that are facing fiscal deficits and are required to borrow to finance those deficits, higher interest rates simply mean that they are forced to pay more for new loans. This, of course, contributes to deepening of their fiscal deficits, all things being equal.

In both Greece and Italy, as well, members of the governing coalitions signalled significant disagreements with the deficit reduction policies proposed by both Greek Prime Minister George Papandreou and Italy’s Silvio Berlusconi. It is quite likely that the governing coalitions in both Greece and Italy could collapse within days and both countries could be forced to hold general elections—potentially adding political instability to the tremendous economic turmoil these countries face. It is safe to conclude, therefore, that in countries in which there is no political consensus about the path best taken in dealing with economic instability, coalition parties comprising members with differing political orientations are in danger of splintering.

There is no need to overstate the obvious potential danger to the ruling People’s Partnership (PP) here, comprising as it does five distinct political parties and against the historical background of the collapse of the National Alliance for Reconstruction (NAR). The NAR, which governed T&T between 1986 and 1991, collapsed in office in 1988 when one of its senior members, Basdeo Panday, deserted the coalition, as a result of political differences with then Prime Minister ANR Robinson but, crucially, in the context of the party’s imposition of the tough but necessary economic policies dictated by the International Monetary Fund (IMF). Ironically, one of the leading lights in the NAR 25 years ago was Winston Dookeran, who now serves as Minister of Finance in the PP Government.

This is not to say that the Government faces any immediate economic challenges anywhere close to those being endured by the people in Greece and Italy. Far from it. The opposition People’s National Movement’s (PNM) charge that the Government’s policies are leading T&T back into the arms of the IMF is as implausible as the pre-election allegation of the PP that the country’s Treasury was empty as a result of the PNM’s squandermania.

As Minister Dookeran has pointed out, T&T has several buffers that serve to provide a great deal of protection for the economy. These buffers include gross external public sector debt of only 8.1 per cent of GDP, foreign reserves that were estimated to total US$11.6 billion as of June and, on top of the reserves, a Heritage and Stabilisation Fund with US$4.1 billion. The moral of the story of Greece and Italy is that countries that live beyond their means—which, in effect, is what a fiscal deficit equates to—for a long time and without a clear and coherent means of eliminating that deficit, inevitably run the risk of getting into financial difficulties.

It is in this context that some concern should be expressed about the fact that the Government recorded a fiscal deficit estimated to be $7.9 billion, or 5.5 per cent of GDP, in 2011 and that the deficit for the current 2012 fiscal year is targeted to be $7.6 billion or 4.9 per cent of GDP. While there is no immediate cause for alarm at these deficits, and even though there is some doubt about the accuracy of the 2011 figure, we, like the Central Bank in its June 2011 Economic Bulletin, are of “the firm view that, following three years of fiscal deficits, faster medium-term growth would require fiscal consolidation so as to contain public debt and provide fiscal space for sustained infrastructural investment.”

Mr Dookeran may have lost an opportunity in his 2012 budget presentation to provide the T&T economy with a further prophylactic against the global financial and economic turmoil that we are witnessing before our eyes.


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