Trinidad and Tobago’s main political parties may disagree about many things, but they do agree that a few basic principles, such as icking to sound fiscal policies and preserving economic stability, should remain above politics. Policy continuity – and plenty of oil and gas – has made Trinidad a prosperous country, but not a rich one. The new government of Patrick Manning wants to start transformingTrinidad into a fully developed country in 17 years.
It is not hard to understand why Trinidad has achieved consensus on economic policy. It suffered eight consecutive years of economic contraction in the 1980s after spending its way through windfall oil export earnings. The economy is growing again and the country’s sound finances have won it a coveted investment grade credit rating, but the price of progress is eternal vigilance. Last year, Ewart Williams, governor of the Central Bank of Trinidad and Tobago, said, “Our economic fundamentals are strong, our economic prospects are favorable and while we face challenges we have proven that when needed we can summon up the necessary political consensus to make the difficult policy decisions. Using the sporting analogy, thegame is ours to lose.”
Trinidad has posted eight consecutive years of growth and is an island of prosperity in a turbulent region. Inflation in Trinidad is running at 3% to 4% a year, and official reserves are a comfortable $2.5 billion, equivalent to six months’ imports. The country now faces a fork in the road. The government can continue accumulating fabulous wealth, much of which is frittered away on inefficient state enterprises such as the loss making sugar company Caroni. One-tenth of the country’s labor force is unemployed and unequal wealth distribution is fuelling crime. The other choice for Trinidad is to invest its growing wealth in new industries that can both create jobs and reduce its dependence on energy. A modern, sophisticated capital market and well-structured financial institutions clearly have a crucial role to play in efficiently mobilizing resources for industry to employ those excluded from the oil and gas bonanza.
It may seem an obvious choice, but Trinidad is split between communities of African and Indian descent, and bridging this vision requires considerable political skill and determination. It took nearly all of 2002 to break the deadlock created by elections that returned a parliament evenly divided between the two groups. Elections last October ended the stalemate and Manning, leader of the People’s National Movement (PNM), took office as prime minister. He drew up an ambitious growth plan, called Vision 2020, to make Trinidad a developed nation by 2020.
Achieving this is entirely possible. If incomes continue rising by about 5% a year, average incomes would reach $16,000 similar to current levels in Western Europe. Trinidad’s booming oil and gas industry, the cornerstone of its economy,provides 25% of government revenues. The country expects $8 billion-$10 billion in foreign direct investment over the next five years, and nearly all of it is likely to go to the oil and gas sector. But as Williams tated, “There is much in the evolution of the economy about which we can feel very pleased, the cloud in the silver lining has been our persistent inability to ensure that the benefits are shared by all our citizens. It is simply unacceptable that, with per capita income in excess of $7,000 per annum, we continue to live with pockets of poverty and conditions of social dislocation that would discredit countrieseven less well-endowed.”
Both Manning and Williams have said the country urgently needs to reform its tax system and public sector if it is ever to reach developed country status. Williams wants a specific tax regime for the natural gas industry, which now exports more than the oil sector. “We need to urgently review the energy sector tax regime to ensure that the country is getting an adequate return on its most precious and non-renewable asset,” he said. In addition, the government needs to control waste and inefficiency in the public sector. Williams estimates that half of government revenues are spent on public sector salaries, pensions and interest payments. Taan Maraj, research manager at Caribbean Money Market Brokers(CMMB) says, °The size of the public sector has been anongoing challenge for the government, as seen in the levels ofcurrent expenditure which has remained high over the last few budgets and further evidenced by the high level of transfers and subsidies to state enterprises,” According to figures from the Central bank, last June the government spent TT$ 9.65 billion ($1.54 billion) and took in TT$9.64 billion ($1.55 billion) in revenues. Wages and salaries ate up 32% of spending and one quarter of the expenditure supports inefficient state enterprises. Previous governments slipped into the bad habit of guaranteeing these companies debt issues in the income market. Since 2001, sugar company has issued TT$ 395 million ($63 million) and the Water and Sewerage Authority has issued TT$1.81 billion ($290 million) indebt securities with government guarantees. CMMB puts the government’s total debt-to-GDP ratio at over 60%, of which nearly one-third consists of guarantees for state-owned enterprises.
Private Sector Expertise
The government has recruited experts from the privatesector, academics and civil servants to evaluate the country’sneeds over the next 17 years and advise on targets. Manning hasappointed Arthur Lok Jack, chairman of Associated BrandsLtd., to chair this group of representatives from all sectors ofthe economy. Lok Jack strongly supports reducing the size ofthe public sector and improving efficiency. °Current expenditureis not going to develop the country. We need capital expenditureto develop the country,” he says. The good news is Manning’sparty, the PNM, has a good record of divesting publicsector companies. Between 1991 and 1995, its previous term inoffice, it cut the number of state enterprises from 87 to 47.
The government also needs to stimulate development ofnon-energy related industries. Oil and gas are non-renewableresources, and although they provide vast revenues, they createrelatively few jobs. But manufacturing, tourism and servicecompanies could create thousands of jobs for semi-skilledworkers. The government could help by recycling its growingoil and gas royalties into loans, subsidies and infrastructure projectsto support private industry. The government announcedthat it would allocate TT$15.6 million from its public sector investment program this year to develop the tourism industry. Thegovernment has made progress in other areas, such as construction.CMMB’s Maraj expects the new housing allowancefor new homeowners of TT$10,00 ($1,600) per year for fiveyears, and an expanded mortgage tax deduction worth up toTT$18,000 ($2,800) per year to stimulate the constructionsector. The government intends to build 2,925 new housingunits this year.
The government also acknowledges that it needs to takea decisive role in developing the capital markets and supervisingthe country’s financial institutions to channel resourcesinto productive investments. The financial system isawash with liquidity because the country runs a large tradesurplus while there is a dearth of attractive investment opportunities.The result is a growing pool of idle money. Williams intends to cut down on public sector borrowing, develop a primary dealer network and improve the availability and quality of public information on primary and secondary government debt issuance.
Structure Needed
Lyndon Guiseppe, head of corporate banking at RBTTBank, says, °Last year we saw a lot of liquidity in the system,but it tends to evaporate as soon as the government issues. Astructured calendar of government issuance would help reducethis liquidity and volatility in the debt markets.” TheCentral Bank also wants to take responsibility for supervisinginsurance companies and pension funds away from theMinistry of Finance, establish a financial services ombudsmanand a credit rating agency. Stephen Bayne, managing directorof RBTT Trust Limited, says the government’s interest indeveloping the capital markets and regulating the country’svibrant financial sector is encouraging. °Interaction withthe government’s advisers suggests a deep consultationprocess and a sense that while they regulate, they will facilitatethe markets’ development,” he says.
The government also wants to ensure that the private sectorcontinues thriving. Manufacturing companies such asSM Jaleel, a beverage exporter and bottling company, AssociatedBrands and Angostura Holdings export to Europe,North and South America, Australia and the Middle East.Homegrown financial institutions such as Republic Bankand RBTT Financial Holdings are growing in influence acrossthe Caribbean. Free trade agreements with Costa Rica, the Dominican Republic and Venezuela should help companies expandinto Central and South America. Corporate tax cutsshould boost investment and ensure a competitive business climate. °With the [Free Trade Area of the Americas] and withglobalization, we are competing with everyone else and currentlyour corporate tax regime is less favorable than in LatinAmerica and several countries in the Caribbean,” saidWilliams. The government also plans to make successive taxcuts over the next few years.
As positive as these reforms are, some private sector executivessay they would welcome a greater partnership withthe government. Ronald F. de C Harford, managing directorof Republic Bank, says, °The [government] needs to embracebusiness as a friend for the country’s development andwe haven’t seen that embrace as yet.