Central Bank of Trinidad and Tobago - Essay Example

As at today Trinidad and Tobago has one of the highest Per Capita income in the Carribean.This could be attributed partially to the large deposits ofoil and gas resources. More than half the governments’ revenue, about 90% of exports and over 40% of GDP are traceable to the energy sector. Within the Caribbean region, life expectancy and literacy rates in Trinidad and Tobago are among the highest .The country is also a reputed financial center with beneficiaries of its capital flows spread within the region. Favorable international environments have played very vital roles in economic development of the country. Windfalls from surging prices of energy, exploitation activities of new gas fields and moves towards industrial capacity expansion have contributed in no small measure to vibrant economic activity, strengthening of foreign reserves and excess liquidity witnessed in the financial system. Certain indicators like capacity strains in the construction and other sectors, tightening of the labor market and an accelerated inflation point towards the operation at full or near potential of the economy. To ensure that Trinidad and Tobago’s economy is improved upon and achieves a high performing economy status, the need for certain economic development initiatives cannot be overemphasized. According to a 1999 estimate, the GDP of the country stood at about $9.41 billion dollars at growth rate of about 5%.the purchasing power parity or GDP per capita also stood at about $8500 in 1999.A further breakdown of composition by sector of the GDP reveals that services has the highest input of 54% followed by industries with 44% and by agriculture with 2%-according to a 1998 estimate. Exports from the country in 1998 had a value of $2.4bn (f.o.b).In order to raise the standard of living for current and future generations, there is an important need to strike a delicate balance of efficient investment of energy windfalls in promoting social objectives and economic diversification while avoiding an overheating of the economy and inflationary trends by the strategic pacing of energy revenues. It is important to note that, the gulf between the non-energy sector and its energy counterpart has widened with the non-energy sector witnessing a fiscal deficit alongside an accelerated public spending increase. Urgent steps need to be taken so as to reverse overdependence on revenues from the oil sector. Human development and infrastructure should be allocated high-quality spending. Given the upward trend in inflation and the real exchange rate, it is important for the government of Trinidad and Tobago to exercise overall budgetary restraints so as not to aggravate the pressures already being felt in these areas. This would in turn translate to the development of the non-energy sector. Policy makers should also be mindful of the sustainability or otherwise of policy decisions because while certain fiscal policies may be good in the short run for the purpose of checkmating demand pressures, in the long run, policy reversals may occur as a result of depleted energy resources which are disruptive in nature. In the light of this, it is recommended that a target of 9-11 per cent of the current GDP be set in the medium term as non-energy deficits. Savings and prudent investments of surplus energy revenues should be imbibed underpinned by disciplined fiscal policies, adequate oversight and transparency. Other recommendations that should be considered by the government of Trinidad and Tobago are the resolution of institutional constraints that has prompted the creation of special purpose vehicles (SPVs) and the replacement of generalized subsidies with well-targeted income supporting programs for the poor. As regards the stability of prices, steps need be taken in checkmating the rising inflationary trends. The central Bank of Trinidad and Tobago (CBTT) should continue to tighten monetary policy in ensuring that it regains control over the stock of excess liquidity in the system .The CBTT should also push for an increase in foreign exchange sales given the fixed exchange rate regime currently being implemented, while allowing the upward the upward rise in the rate of treasury bills to further help in tightening the monetary policy. Market characteristics that have lent a hand to the unsatisfied customer demands for foreign exchange should be addressed .The authorities should as well as consider a greater exchange rate flexibility in the medium term given the increasing inflationary pressures from a potentially overheating economy, the monetization of the non-energy deficits and excess liquidity. Furthermore there is the need for an improved macroeconomic management. Frameowrks that will strengthen the financial sector regulatory and supervisory roles should be prioritized while working to improve on the productivity of the non-energy sector. Impediments to growth in this sector should be identified and removed so that the economy can be more diversified. The business environment should be improved upon to allow for the maximum participation of the private sector by drawing up economic initiatives that would promote industries that are viable over the long term without necessarily relying on government subsidy. These industries will in turn create massive job opportunities to tackle unemployment and its attendant problems. Attractive fiscal incentives from government may include tax holidays and import tax exemptions for investors to take advantage of. High rates of investments exceeding 20% of GDP on average should be targeted by the authorities in the medium term within which high and rising endowment of human capital features prominently. Efforts should be made in well-targeted allocation of capital to high yielding investments and catching up technologically to the industrial economies. Macroeconomic stability should be maintained in order to accomplish the three functions of growth namely accumulation, efficient allocation and rapid technological catch-up. This can be achieved by combining policies ranging from market oriented to state led campaigns. Two kinds of economic development initiatives may be applied in achieving these goals, namely: Fundamental and selective Intervention. Top among the most important fundamental policies are those that encourage macroeconomic stability, high yield investments in human capital, stable and secure financial systems, limited price distortions and openness to foreign technology. Selective intervention on the other hand entail mild financial repression so that interest rates are kept positive but low, directed credit, selective industrial promotion and trade policies that push non-traditional exports particularly in the non-energy sector. Also crucial to efficient investments is competitive discipline. Whereas most economies may employ only market-based competition, it may be necessary for the authorities in Trinidad and Tobago to go a step further by creating contests that combine competition with the benefits of co-operation among firms and between the government and the private sector. These contests may range from very simple non-market allocation rules, such as access to rationed credit or foreign exchange –on the basis of performance, which the government and competing firms monitor. To succeed, selective intervention must be disciplined by competition via either markets or contests. Economic contests like all others require competent and impartial referees (strong institutions). Thus a high quality civil service that has the capacity to monitor performance and is insulated from political interference is essential to contest-based competition. Multiple shifting policy instruments in pursuit of more straightforward economic objectives such as macroeconomic stability, rapid export growth-particularly in the non-energy sector-and high savings, should be employed by the authorities in Trinidad and Tobago. Fiscal deficits should be made to be limited to levels that can be financed without increasing inflationary pressures with quick interventionary responses when fiscal pressures are perceived to be building up. Macro-economic stability encourages long-term planning and private investment thus with an impact on the real value of financial assets and real interest rates, financial savings is encouraged. Non-energy sector growth can also be facilitated by macro-economic stability. Fiscal discipline and high public savings can make adjustment to exchange rates competitive, underpinned by policies that reduces expenditure .a variety of approaches can be employed to promote exports from the non-energy sector. Trade policies can be shifted to encourage these exports thereby promote regime that entails a pro-export incentive structure. Instruments such as export credit duty-free imports for exporters and their suppliers, export targets and tax incentives should also be implemented along with supporting institutions. Export development should however be made to rely less on highly selective interventions but rather on a more broadly based market incentives and direct foreign investments. The authorities may want to consider policy interventions in various forms like: -Targeting and subsidizing credit to selected industries -Keeping deposit rates low and maintaining ceilings on borrowing rates to increase profits -Subsidizing declining industries -Establishing and financially supporting government banks -Making public investments in applied research -Establishing firm and industry specific export targets -Developing export marketing institutions -Sharing information widely between public and private sector. However in order to achieve maximum success with this campaign the authorities should be mindful of certain pre-requisites. Firstly there should be the development of institutional mechanisms, which will allow for the establishment of clear performance criteria for selective intervention and performance monitoring. Government interventions should be dispatched with a high level of discipline underscored by performance. It is also important to note that it will be counter-productive for government interventions to become excessive. The authorities should be sensitive enough to pull back when the macro-economic stability is threatened by fiscal costs. Balanced budget laws and legislative procedures should act as checks and balances for the scope of subsidies to be embarked upon. Price distortions as a result of government intervention should be kept at a minimum. In building the institutional basis for growth, certain factors need to be considered. There has to be proper framework that would legitimize these initiatives and win the support of the society at large. Establishing a principle of shared growth whose main focus will be to make all and sundry stakeholders by promising that as the economy expands all groups would benefit. The mechanism employed in the conveyance of this principle need be explicit. Mechanism like comprehensive land reform programs, downward review of agricultural pricing policies aimed at raising rural income, explicit wealth sharing programs, massive public housing programs, assistance of workers co-operative and establishment of programs by government to encourage small and medium-size enterprises. Also necessary is a business-friendly environment. Competing groups need to be re-assured they all would benefit by establishing institutions and mechanisms that would tackle co-ordination problems. This can be achieved by the recruitment of a competent and relatively honest technocratic cadre that is insulated from the political interferences of the day-to-day activities. This cadre would help the authorities to map out viable economic strategy. In place of a technocratic cadre a deliberation council may be set up to review at intervals the performance of the economy. Human and physical capital should as a matter of paramount importance be accumulated. Primary and secondary education should be made universal and basic while also inculcating technical skills. Savings and investments should be increased. Strategies for effective allocation of resources should be adopted. There must be a high level of openness to foreign technology and industries performing below par should be promoted while employing a mix of fundamental and interventions to promote an export push in the non-energy sector. In order to make the most of the markets there is an approach generally accepted by economists as the best. It is generally believed that a healthy private sector which results from investments in people is better for the economy with a much reduced government role, openness to the rest of the world and macro-economic stability, it is otherwise known as the market-friendly approach. Within this approach it is believed that investing people has a high return on investments (ROI) and the government of Trinidad and Tobago should take a cue from this and be involved in highly targeted spendings.wasteful underutilization should be avoided by the authorities. Restrictions on competition like industrial licensing, inappropriate legal codes of employment, and bankruptcy etc should be avoided. Infrastructures and institutions should be provided for entrepreneurs. As a final note it is important to note that a stable macroeconomic foundation is the best public goods that the authorities of Trinidad and Tobago can provide for its people. Should the authorities overspend; the result will be overborrowing, monetaryexpansion and financial sector difficulties, which will naturally be followed by inflation, chronic overvaluation of the currency and loss of export competitiveness. References 1.Mendes, John. 1986. Cote ce Cote la: Trinidad & Tobago Dictionary. Arima, Trinidad. 2. Saith, Radhica and Lyndersay, Mark. 1993. Why Not a Woman? Port of Spain: Paria Publishing Co. Ltd. ISBN 976-8054-42-5. 3. Besson, Gérard & Brereton, Bridget. 1992. The Book of Trinidad. 2nd ed. Port of Spain: Paria Publishing Co. Ltd. ISBN 976-8054-36-0. 4. Archipelagic Waters and Exclusive Economic Zone Act No 24 of 1986 5. The chamber of industry and commerce (www.caic.org.tt) 6. www.southchambers.org 7www.armchatnitt.com 8The central Bank of Trinidad and Tobago (www.central-bank.org.tt) Read More