Govt’s balancing act Infrastructure vs inflation

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Finance Minister Karen Nunez-Tesheira makes a point during her record $49.5 billion budget presentation on Monday. At right is Energy Minister Conrad Enill.


Infrastructure versus inflation.

The pursuit of infrastructure development and the containment of inflation are the Government’s goals in its 2008/2009 Budget offering.

At a glance, it’s fairly obvious that infrastructure needs completion: unfinished, unpainted glass-windowed buildings dominate the Port-of-Spain skyline, the streets flood when it rains and the almost-completed interchange overpass is being advanced as the answer to traffic which clogs the roadways.

The price of progress has been inflation.

At $49.4 billion, it’s T&T’s most costly budget. In it’s favour is a sustained economic growth and the high oil and gas prices which have buoyed the economy.

But it comes at a time when there’s uncertainty in world financial markets, energy prices are see-sawing and inflation is a challenge for most economies.

T&T is not insulated from these global ripples.

The Waterfront Centre.

In presenting her 2008/2009 Budget, Finance Minister Karen Nunez-Tesheira said that there’s no way to measure how the on-going turbulence in global financial markets will impact on T&T.

How will the Government’s pursuit of infrastructure affect its aim to curb inflation?

Budget analysts agree that infrastructure spending should be reduced but that doesn’t necessarily mean that inflation will follow.

Inflation now stands at 11.9 per cent, fueled by sharply rising food prices which have plagued the population over the past year. The Government is committed to bringing it down to six per cent.

Nunez-Tesheira said the rise in inflation has both external and domestic causes.

“The expansion of public and private sector construction activity has pushed up the costs of labour and raw materials in the construction sector. This has led the Government to review its infrastructure development programme to arrive at adequate solutions including new methods of financing, for example, using turnkey arrangements which would reduce capacity constraints thus minimising the liquidity impact and mitigating the inflationary effect on the domestic economy.”

She noted that the Central Bank has used monetary policy instruments including:

* the primary and secondary reserve requirement,

* the Special Commercial Bank Fixed Deposit, accounts at the Central Bank,

* the repo rate,

* open market operations,

* issued liquidity absorption bonds on behalf of the Government

* sold foreign exchange

* applied moral suasion

* and launched the Financial Literacy Programme as part of its response mechanism.

“The Government recognises that reducing inflation to more acceptable levels is critical to providing the right incentives for the business sector, for protecting the purchasing power and living standards of income earners and is even more critical for the protection of the lower income groups and for pensioners on fixed incomes.”

To mitigate the impact of food prices, the Government has allocated $1.7 billion to the agricultural sector.

Nunez-Tesheira said that agriculture offered the most incentives but that there was a lengthy process to access funding and land. She said that this was streamlined to better foster and co-ordinate financing, production and marketing arrangements.

To this end, the executive chairman of the National Agricultural Marketing and Development Corporation (Namdevco), Noel Garcia, has also been appointed to chair the Estate Management and Business Development Company (EMBD) and the Agricultural Development Bank.

Minister in the Ministry of Finance, Mariano Browne, said food prices were a challenge for the PNM-led Government.

“Food prices is not an issue that you can deal with in any new measure apart from, for example, putting subsidies, in which case, you will increase the non-energy deficit. The Government has a medium-term strategy with regard to bringing the non-energy sector deficit down. The intention is to carry it down to between ten and 12 per cent,” he said.

Nunez-Tesheira admitted that inflation, the Government’s Achilles heel, will continue to rise in the short term but the goal is to bring it down to “a more acceptable level.”

Central Bank Governor, Ewart Williams, said: “The budget acknowledged that inflation is a serious problem.

The budget recognised that certainly the increase in food prices may continue for a while and the budget also said that the Government’s objective was to reduce inflation to five to six per cent over the medium term. My problem is I am not too sure we can wait for the medium term.

“Inflation at close to 12 per cent now is far too high and my experience suggests that unless it is reversed quickly it tends to become embedded,” said Williams on Tuesday.

The pegged oil price of US$70 was seen as high by some analysts.

“If anything, this was the year to be conservative,” said economist Gregory McGuire, who believed that the Government should have stayed with last year’s US$50 price.

“We fully expect oil prices to moderate as global growth subsides but this decline in oil prices will be limited to the extent that current high prices reflect increasing production costs, market fundamentals, and demand from emerging and developing economies, albeit at a more moderate pace,” said Nunez-Tesheira.

Nunez -Tesheira said, as have energy majors and Energy Minister Conrad Enill that a pegged oil price did not overly affected T&T as it is now gas-based.

So, is $4/million metric British thermal unit (mmbtu) conservative?

Well, consider that the price is now US$7.35 ( at the time of writing) and Enill and bpTT chief executive Robert Riley have both expressed optimism that the natural gas price will go higher.

Energy sector revenues support the Government’s spend.

T&T has been operating on fiscal surpluses over the past five years, Nunez-Tesheira said.

But Williams says the Government now has “a dilemma” of reconciling the rate of expenditure with monetary policy with a view of reducing the nation’s spiralling inflation rate.

He said that the faster the increase in expenditure, the more is the reliance on monetary policy to reduce inflation and tightening monetary policy has implications for interest rates and that has other implications for the rest of the economy.

Nunez-Tesheira laid the Government’s case for its sustained expenditure on infrastructure, stating that investment in modern physical infrastructure, water, electricity and telecommunications will generate substantial economic returns.

But $49 billion more for the same projects?

In 2007/2008, the Government’s capital expenditure amounted to $10 billion of which $4.5 billion was disbursed under the Public Sector Investment Programme and $5.5 billion under the Infrastructure Development Fund.

“When you’re running a government, you’re running a business,” she quipped.

She said that the budget was a report of what took place in the fiscal year, what was achieved and what was the Government agenda moving forward.

“If something was not achieved, due to various reasons, that doesn’t mean that it still isn’t a priority for us. But it will be included,” she said in response to a question posed at the T&T Chamber’s post-budget meeting on Tuesday.

With many projects in need of fresh financial injection, and some facing inflated costs, the Government remains committed to completion, she said.

Economist Jwala Rambarran was ambivalent.

His budget expectation was that the Government would spend more but that the expenditure picture would basically be similar to last year’s.

He described the budget as “irrelevant.” He said that while it recognised inflation as a problem, it read like a manifesto.

“It’s a budget largely ignorant of global realities. It sends the wrong message that we can afford to be complacent,” he said.

In his view, the US financial system is facing a meltdown and most industrial countries are on the verge of a recession, yet the Government’s picture is that the economy is “robust and resilient.”

Hayden Blades, senior economist at RBTT said it read like a “marketing document” which did not address “bad news” such as crime.

Nunez-Tesheira said that some of T&T’s rapid pace of development and efforts to improve the quality of life had created capacity bottlenecks.

“There is no doubt, for instance, that the expansion of employment, higher incomes and easier credit availability have led to an increase in demand for automobiles, contributing to traffic congestion,” she said.

The most significant “de-bottlenecking” took the form of an increase in the price of premium unleaded gasoline from $3 to $4 per litre.

“The ones who can afford to pay are the ones who have been asked to pay,” said Browne.

“It was decided as a deliberate measure in terms of the tax structure to go after the one market segment that can afford to pay and then leave all the other subsidies intact at that level and that would mitigate the impact on inflation,” he said.

“We can’t build roads fast enough to accommodate the cars. You have to do something else so you send a price message,” he said.






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