Diversification more urgent than ever – Part 3

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The TTWhistleblower today continues this series looking at the urgency of economic diversification amidst the onset of political lethargy that seems likely from buoyant energy prices.

The Keith Rowley Administration has since the 2010 to 2015 PNM Opposition made heavy weather on the need for diversification, the urgency of new support platforms for revenue and industry and a plan that many expected would be implemented after the 2015 general election.

To date, the only change in the economy has been historic decline, a range of burdensome taxes, food and fuel price increases, and increasing job losses.

Declining economy, increasing revenue

When set against a backdrop of historic economic declines and GDP shrinkage, news from the Central Bank of increasing stabilisation in Government accounts should in one’s mind translate to increasing economic health.

However, today, unemployment continues to grow, food prices are stretching already strained family pockets and there is yet to be a signal of restored confidence by consumers and business.

According to the Central Bank, higher energy and non-energy receipts sparked improvement in the Central Government accounts.

Initial estimates from the Ministry of Finance showed Central Government incurred a deficit of $228.3 million in the first quarter of fiscal year 2017/2018 compared with $2.47 billion in the corresponding period one year ago.

The Bank said the smaller deficit was consistent with improving international petroleum prices and higher natural gas output coupled with spending cuts. As a result, the non-energy fiscal deficit moved to $2.44 billion from $3.62 billion one year earlier.

It should be noted here that no mention was made of strong fiscal policy to generate economic activity being attributed to improvements in the Central Government’s accounts.

Total revenue increased by $1.057 billion to $9.046 billion during the first three months of FY 2017/2018.

It was found that energy revenue almost doubled, and reached $2.21 billion reflecting both higher petroleum prices and natural gas output.

Non-energy revenues grew by 9.1 percent to $6.82 billion mostly because greater collections from income and profits and excise duties.

Non-energy receipts, however, were found to have weakened weakened by declines in equity profits from the Central Bank, lower profits from public enterprises together with lower collections from duties on imports.

Initial data showed a slowdown in capital revenue, which tumbled to $7.4 million from $582.3 million in the first quarter of FY 2016/17. The decline in capital revenue was due in part to lower year-on-year receipts from the sale of CL Financial assets.

Spending

Central Bank data also showed a decline in aggregate expenditure of 11.3 percent to $9.27 billion in the first quarter the 2017/18 financial year, when compared to the year earlier as the Government continued to cut spending.

Data revealed lower spending across major categories of current expenditure, particularly goods and services and transfers and subsidies.

Lower expenditure on goods and services reflected reduced payments on rent, leases and contracted services, as well as the prioritization of payments for goods and services, the Central Bank found.

Data also showed reduced spending on transfers and subsidies in lower transfers to households, particularly the petroleum subsidy, and subventions to Statutory Boards and Similar Bodies.

Capital spending and debt

Core to stimulating economic activity and driving the creation of jobs is Government’s capital expenditure programme and its Public Sector Investment Programme (PSIP).

The Bank found that expenditure on the capital programme declined to $117 million in the first quarter of FY 2017/2018 from $325.8million in the corresponding period of FY 2016/17.

Reduced spending was said to be primarily due to delays in the implementation of projects and variation in the scope of work for some projects.

What the Bank found in interest payments, however, was quite different.

Interest payments rose to $642.5 million from $541.0 million in the first quarter of FY2017/2018 due to a larger stock of foreign and domestic debt.

The Bank in its Economic Bulletin for March 2018 stated: “Total public sector debt amounted to $120.9 billion (77.5 percent of GDP) in December 2017, compared with $121.4 billion in September 2017. Net of open market operations (OMOs), public sector debt increased to $96.2 billion (61.6 % of GDP) from $93.8 billion in September 2017.”

Even as capital spending decreased and the public debt increased, it was found that “private sector credit increased over July to December 2017, but lending to businesses remained weak. Lending by the consolidated financial system picked up between July and December 2017, mainly because of increased commercial bank lending. Credit to businesses and consumers rose incrementally, while real estate mortgage lending accelerated.”

In the six-month period to December 2017, the growth of lending to businesses picked up ‘moderately’.

Credit to businesses rose by 1.3 percent in December 2017, compared with a rise of 0.3 percent in July 2017.

In disaggregating business lending in the last quarter of 2017, it was found that activity in the construction sector remained tepid- lending to construction companies declined, after taking into account the reclassification of a construction loan to a real estate loan at a particular institution.

Lending to the manufacturing sector fell by 7.4 percent.

The growth of consumer credit by the consolidated system accelerated slightly in December 2017.

Lending to consumers increased by 5.1 percent in December 2017 compared with 4.1 percent in July 2017.

Quarterly data within the consumer credit sector showed loans for consolidation of debt (16.0 percent) rose, showing that some borrowers were moving to rationalize their loan obligations to possibly take advantage of a lower overall interest rate.

On consumer credit, the Bank found: “Despite slowing markedly from July, the growth of credit card balances (6.1 percent) remained robust in the latter half of 2017. Lending to consumers for the purchase of motor vehicles slowed (3.0 percent) in the last quarter of 2017, the eighth consecutive quarterly decline. Lending for home improvement and renovation was also subdued (1.8 percent).”

Perhaps the biggest indicator of the absence of economic diversification, aside from a lack of job creation, business expansion and foreign investment was found in this country’s gross official reserves.

Foreign Reserves continue to decline.

The Bank found: “At the end of 2017, gross official reserves amounted to $8,369.8 million, compared with $9,465.8 million as at December 31, 2016. This represents 9.7 months of prospective imports of goods and non-factor services. Moreover, it suggests that the external accounts registered an overall deficit of $1,096.0 million during the twelve months of 2017.”

It must be said that while in this series we have examined and analyzed the failures at the level of Government to develop, implement and direct an economic diversification programme, commentary does not remove the urgency of the need.

In this and the previous two parts of this analysis, the urgency has been laid out very clearly – diversification is now more urgent than ever before.

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