File photo: UWI economist Vaalmiki Arjoon.
UNIVERSITY of the West Indies (UWI) economist Dr Vaalmiki Arjoon wonders whether a spotlight has been shone on what he described as a cost of living crisis in TT. He asked this question in relation to statements made by the Prime Minister, Finance Minister Colm Imbert and other speakers at a “Spotlight on the economy” event hosted by the ministry at the Hyatt Regency Hotel, Port of Spain on September 2.
“As expected, much of our economic fundamentals at the macroeconomic level have largely improved given the surge in energy prices.”
On Sunday, Arjoon said, “With a total deficit of over $64 billion in the last six years averaging $10.7 billion annually, it is highly favourable that the deficit is narrowed to a projected $3.7 billion – the lowest fiscal deficit since 2012.”
He attributed much of this to the increase in taxes on income and profits which usually account for over 60 per cent of the state’s earnings, increasing by approximately $12 billion since 2016.
“This was not only accounted for by the petrochemical sector companies, but also the manufacturing sector, who in the last 18 months took advantage of the surge in global spending and ramped up their production to increase their export revenues.”
Arjoon said there needed to be a more efficient tax collection system.
“Naturally, with fewer tax collection and avoidance practices, these taxes would have been higher, which underscores the need for a more efficient tax collection system.
He anticipated higher energy revenues in the coming months, partially due to the deepening energy crisis in Europe, due to the indefinite shutdown of the Nord Stream gas pipeline causing further cuts to European gas supplies.
“This will place upward pressure on the price for gas and LNG, since Europe is placing more emphasis on the use of LNG as an alternative to Russian gas.”
Arjoon said, “This price hike will be more apparent since winter is around the corner.”
He added that TT would have benefitted us even more from this if Atlantic LNG’s Train One was operational.
But while TT’s revenue streams and other macroeconomic indicators are undoubtedly better, Arjoon had a concern.
“It does not change the fact that there is a deepening cost of living crisis, more so for those in the middle to lower income brackets.”
He said while TT’s inflation rate of 4.9 per cent remains lower than many other economies like the United States (8.5 per cent) and United Kingdom(10.1 per cent), inflation is the percentage change in prices from one period to another.”
“Prices are currently the highest they have ever been for generations. Our price index at June 2022 was 116.2 – an 11 per cent increase since 2016.”
Arjoon created a hypothetical scenario to explain this point.
“Even if inflation remains low, if a household is already paying a high cost for a basic basket of items per month, say hypothetically $2000, and inflation is, say, one per cent, then the price of that basket increases to $2020, but the price still remains high – it is the change that is small.”
The purchasing power of households is what really matters.
Arjoon said if prices are already high, then purchasing power is low even if there is a fall in the inflation rate.
” Inflation fell marginally from 5.1 per cent in April 2022 to 4.9 per cent in June. But does not mean that prices fell – it means that prices increased but the pace of this increase was slower.”
While world food costs fell by almost nine per cent in July, given the modest increases in grains supplied from the re-opening of Ukraine’s ports and increased seasonal availabilities from countries like Argentina and Brazil, Arjoon said, “We are yet to see any meaningful relief to households’ food expenses from a fall in food prices locally.”
He hoped that in his budget presentation on September 26. Imbert will “announce measures to soften the impact of the high cost of living, such as increased allocations to the food card and school feeding programs, cash transfers, temporary adjustment to import tax rates etc.”
Arjoon suggested there must be a strategy to ensure that our earnings continue to be healthy should energy and petrochemical prices fall in the short term, or else debt levels will increase again.”
He said this is not favourable for TT’s credit ratings.
“For our next rating’s exercise, it is highly likely that Moody’s will at the very least keep our rating at Ba2 but adjust the outlook from stable to positive, suggesting a possible upgrade by next year once revenue earnings continue to be healthy.”
Arjoon acknowledged that TT has healthy foreign exchange reserves of US$6.8 billion and some of this was from foreign loans taken and drawdowns taken from the HSF (Heritage and Stabilisation Fund)
“We do not spend US dollars locally, so when the state borrows in US dollars and withdraws from the HSF, these USD must be converted to TT dollars by the Central Bank for use by the state.
Arjoon said, “The US dollars that are converted now forms part of the forex reserves held by the Central Bank.
While Imbert did not speak about any injections into the HSF on September 2, Arjoon expected him to do so in his budget presentation.