One wish for T&T fiscal budget 2022/2023 — Please make it make sense
by Marla Dukharan (originally published September 25, 2022)
The recent “Spotlight on the Economy” highlighted many important economic developments and data, and I thank and congratulate the Gov’t of T&T for this effort. But this exercise also revealed inconsistencies and unnecessary untruths. “Our credit rating is improving. Our revenue is increasing. Our economy is in growth mode. Inflation is being kept at bay. The fiscal accounts are almost in balance,” for example, according to the Minister of Finance. Here are the facts:
1. The Gov’ts credit rating according to S&P was maintained at BBB- in July 2022 (the lowest level of investment grade) and the outlook was changed from negative to stable, based on “significantly higher energy and petrochemical prices, which will more than offset lower-than-expected energy production…spur improved incomes and stronger Government revenue collection…helping to stem the rise in Government debt.” This improvement in the credit rating outlook was based on pure luck, therefore — not on Gov’t policy or efforts.
2. Gov’t’s fiscal position is improving based on higher energy prices, but it is unclear to what extent. The Minister’s presentation shows on page 17 that revenue is now expected at TTD51.5 bn, expenditure at TTD53.5 bn, and a deficit of TTD2 bn. The presentation by the Permanent Secretary shows on page 4 however, revenue at TTD51.47 bn but expenditure at TTD55.19 bn, and a deficit of TTD3.72 bn. The difference of TTD1.72 bn is not insignificant. This discrepancy is not surprising — the Minister consistently counts financing items as revenue for example, to overstate revenue and understate the deficit. The Gov’t’s Draft Estimates of Revenue documents consistently show actual deficits (TTD5.6 bn in 2015, TTD12.6 bn in 2016, TTD19.6 bn in 2017, TTD12 bn in 2018, TTD9.5 bn in 2019, TTD23.9 bn in 2020, and TTD21.2 bn in 2021) well in excess of the Minister’s numbers in his Budget statement and otherwise. And what about the payment of VAT and other arrears? Will these be settled with all this unexpected revenue? This was not mentioned. With interest payments at TTD5.48 bn and an overall deficit of either TTD2 bn or TTD3.72 bn expected this fiscal year, the primary balance is therefore expected to yield a surplus of either TTD3.48 bn or TTD1.76 bn. But the Minister is targeting a primary surplus in 2023 and an overall surplus in 2024, meaning that he apparently unknowingly already surpassed his own primary fiscal targets!
3. The economy contracted for six consecutive years 2016–2021 inclusive, and further in Q1 2022 by -0.1% y/y, as the energy sector contracted -5.1%, and the non-energy sector grew 2.2% as the economy reopened. With natural gas production falling by 4.7% Jan-May 2022 y/y, the production of methanol, ammonia, and urea fell 8.7%, 8.6%, and 34.4% y/y, respectively. Natural gas and LNG production is averaging near 2003 levels, while crude oil production is about half the 2000 production level. Our economy has yet to record positive growth since 2015.
4. The Minister neglected to mention exactly how inflation is being “kept at bay.” The CBTT has kept its Repo rate unchanged and the fiscal stance is expansionary. CBTT’s June 2022 Economic Bulletin says “Headline inflation gained momentum during the first half of 2022…the CSO’s Index of Retail Prices showed that headline inflation moved from 3.8% in January 2022 to 4.9% in June 2022…while food inflation averaged 8.0%.” The CSO shows inflation climbed further to 5.9% in July, with food prices increasing by 10.3%. “Kept at bay” does not apply here.
5. Reserves reached USD6.7 bn in June, and if we back out Gov’t USD borrowing and withdrawals from our HSF, we would have around USD1.7 bn, which is what we had 20 years ago, and is only about 2 months of import cover. The money supply to reserve ratio reached TTD14.55:USD1.00 in May 2022, demonstrating the pressure building on the exchange rate. And finally, and most disturbingly, our country continues to haemorrhage USD that the authorities are unable to account for. CBTT reported USD956 million in Net Errors and Omissions for 2021. This amounts to USD2.2 bn lost in the past 3 years alone. S&P reported Errors and Omissions outflows averaged 7% of GDP annually over the past 10 years. But nobody talks about this. I do hope the Minister addresses this issue.