assessed and put in place on the expenditure side( and also on the non-energy revenue side) to forestall an eventual buildup of debt. Difficult choices will likely have to be made, especially with respect to the components of recurrent expenditure, in the search for a sustainable solution. At the same time, it is likely that there could be considerable scope for strengthening public sector management to reduce waste, bolster efficiency, and beef up tax collection-one practical and early avenue for improvement is the sharpening of debt management to reduce interest costs to the state, which for the Central Government stood at about 8 per cent of non-oil revenue in FY2015 / 16.
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As an energy producer,
Trinidad and Tobago has been here before, with the vicissitudes of oil and gas prices often calling the economic beat.
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Opportunity for Reform: The opportunity should be taken to advance institutional reforms that may have been delayed when oil prices were buoyant. The institutional framework for public and private sector activity-legislation, setup and modus operandi of bureaucracies, operating standards and procedures, accountabilities for service delivery, harmonisation across agencies, level and enforcement of penalties etc.-requires constant review as an economy evolves. Factors such as the emergence of new products, new businesses, heightened international competition, advances in technology and revved up speeds of communication mean that the framework must evolve quickly. However, when an economy is doing well inefficiencies are often masked, standards may slip and the requisite changes not put in place.
The economic challenge currently confronting Trinidad and Tobago offers an opportunity for a wholesale assessment aimed at streamlining and modernising this institutional apparatus. The‘ trade facilitation’ initiative that is underway( involving the Ministry of Trade, Customs and Excise Department, the Manufacturers’ Association, Chamber of Commerce and other agencies) to assess and coordinate the requirements / procedures for trade and investment is a great example of what can be put in train. While such reform programs need careful planning and execution in a sequenced fashion for them to be sustainable, a lot can be achieved in the short run with concerted communication and effort from the public and private sector bodies involved.
Monetary policy: Monetary policy should be responsive to the dynamics of adjustments across the economy. Broadly speaking, the primary aim of monetary policy in Trinidad and Tobago is to foster conditions in the financial system conducive to low and stable inflation, which impacts the purchasing power of the local currency. As a corollary of this, the Central Bank has an important role in the foreign exchange market particularly as, as banker to the Government, it converts much of the energy taxes that the latter receives in foreign currency into domestic currency. In fact, during the current adjustment period the foreign exchange market has been one of the first markets‘ out of the blocks’, as it were, for two main reasons: First, as noted earlier, the drop in international energy prices affected Government revenue and the balance of payments directly-depressing both the growth of official international reserves held at the Central Bank( as less Government energy taxes were converted) and the foreign exchange conversions by energy companies in local financial institutions. Second, financial transactions, including those involving foreign exchange, take place very quickly in the context of modem communications technology and Trinidad and Tobago’ s open external current and capital accounts. Comparatively however, the responses in other markets are not as instantaneous: for example, the Government revisited its original 2015 / 16 budget after six months and as the unemployment numbers suggest, the adjustments in the labor market may still be at an early stage.
In this setting, the Central Bank’ s perspective is to look at the longer-term horizon and react as if the shock were permanent. This approach has the benefit of preparing for the worst, while we can easily accommodate the upside if energy prices recover. Our analysis of the lags in the pace of adjustments in the rest of the economy leads us to the conclusion that monetary and foreign exchange policies would likely not be able to address all short run disequilibria. Specifically, the impacts of planned cuts in Government expenditure will take at least several months, businesses and individuals will take some time to adjust their spending and investment patterns, and the recent currency depreciation will affect import demand with a lag-particularly after imported stocks are depleted.
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Structural policies or reforms, often overlooked when an economic shock is short-lived, must take centre stage over a longer time horizon, especially to facilitate a greater role for the private sector once the government’ s role is constrained over time.
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Moreover, expectations by analysts, investors and the general public will likely be in a state of flux as they come to terms with the economic situation and assess the macroeconomic response. Within this environment, the Central Bank’ s monetary stance will continue to be flexible, managing domestic liquidity and influencing interest rates, in
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