King warns against Govt’s plans: Recipe for eating up more foreign exchange
Charles Kong Soo
Published: Guardian
Sunday, December 13, 2015
Economist Mary King says the Government intends to spend an unprecedented TT$63.1 billion and none of it looks like it is designed to boost the country’s exports or reduce its import bill. Instead, King said, it would increase the already burgeoning demand for foreign exchange.
She was responding to questions via email on Thursday sent to her by the Sunday Guardian on the recession the country was experiencing.
King said: “We are in an economic downturn, recession or whatever name you prefer, simply because our small, open economy needs foreign exchange as the fuel on which it runs.
“When this foreign exchange income is reduced, in this case because of sustained low prices of petroleum and commodities, the local business sector cannot import as much as before or ramp up exports to compensate for loss of foreign exchange income, nor can it replace many of the things we import.
“Hence, economic activity has to decrease with, eventually, a concurrent negative impact on incomes.â€
She said this meant that the country’s onshore sector needed imports to enable and continue its economic activity and growth.
King said that it was useless talking about the Central Bank not releasing foreign exchange since to release more than the Government earned in energy sector rents was to run down the country’s reserves, to operate on its reserve fuel tank, at best a short-term measure.
King said the Central Bank and Government had to use the tools at their disposal to reduce aggregate demand onshore since the country imported some 70 per cent of what was consumed locally.
She said one way to do this could be to increase the cost of all imports by devaluing the T&T dollar.
King said this was a broad-brush approach since it increased the price of essentials such as medical drugs and non-essentials like Mercedes Benz cars with the same stroke.
She said, however, the country could use instead the vectored approach, which targeted certain imports for price increases via higher taxation and not essentials such as medicine.
King said commercial bank credit also facilitated local business, and the importation of goods and services. She said via reduction of the money supply and increases in the repo, interest rates could be nudged upwards, so increasing the cost of the T&T dollar to conduct certain business activities and, hence, the costs to import certain goods.
King said government spending helped to drive onshore demands and, in particular, spending on infrastructure, some of which should be postponed since it would require related imports, again increasing aggregate demand for foreign exchange.
She said that it was a fallacy to think that the Government could spend its way out of such a recession since such an activity did not address the cause of or combat the recession unless it was in areas that directly built export capacity or relieved the need to import while encouraging economic diversification.
King was asked what would consumers be likely to buy in a recession as the price of goods would have increased and there would be less disposable income in a recession/stagflation. She said the ordinary household would have to prioritise its spending since income would most probably be reduced by the recession.
King said a vectored approach by the Government and the Central Bank leading to increases in the prices of non-essential goods and services would assist households in prioritising.
She said locally produced goods that needed no associated imports would feel less of an adverse impact in a recession. King said taxes should not be increased on basic food imports.
She said T&T’s food import bill was now $5 billion and the country could not quickly replace imports with local products.
However, a devaluation as opposed to the preferred vectored approach would affect the population’s most vulnerable since the demand for food was somewhat inelastic, King said.
