Trinidad and Tobago’s government is determined to avoid the oil-led boom and bust scenarios that have wreaked havoc on the economy twice – in 1973/74 and in 1979/1980. Then the economy expanded too fast, sucking in imports and making other sectors uncompetitive, only to go into recession when oil prices declined. It suffered from what economists call Dutch disease.
Now, as Trinidad enters its 12th year of growth and is looking at a 10% expansion in 2006, the government is doing all it can to avoid a repetition of past mistakes.
Inflation at 7% is bumping up against maximum permissible levels and the government is using a combination of monetary policy and supply side measures to try to cool things down. It is also accumulating funds to ensure the country’s future and is calculating the budget using a very conservative oil price of $35 per barrel.
It has negotiated exploration deals with energy producers that should ensure new discoveries and is busy building other sectors of the economy such as the planned international financial centre.
Growing economy
“Inflation is high by international standards but one expects that, given the environment we are in,” says Mr Conrad Enill, minister in the ministry of finance. “We cannot be expanding [the economy] and doing a lot of the things that we want to [programmes include free tertiary education, affordable housing and crime prevention] without creating some inflation. But what you have to do is manage it.”
Mr Enill says that monetary policy will be one lever of control but in addition, the country will be inviting in foreign construction contractors as local industry is hitting capacity constraints.
On the savings front the big new initiative is the Heritage and Stabilisation Fund (HSF). “For budgeting purposes we are working on a $35 a barrel price and at least 60% of the revenues we receive over and above that goes into the HSF,” says Mr Enill. “In fact, we are putting more like 80% to 90% into the fund.
“Eventually the HSF will accumulate sufficient resources and pay sufficient returns to compensate for loss of energy revenues [as deposits deplete],” he explains. Right now the final touches of HSF legislation are still to be put in place but Standard & Poor’s expects that 5.3% of GDP will have been saved by the end of the current fiscal year.
The HSF will be split into two parts: a fund to compensate for energy price shocks and an investment fund that will prioritise strategic investments related to Trinidad’s economy such as equity investments in major international oil companies or infrastructure projects or technology development. The proposal is to set up a special unit in the central bank to manage the fund and to achieve a stipulated rate of return.
But what happens if a future government decides to spend the money on current consumption rather than saving it for future generations?
Mr Enill says: “The rules of the fund will require that annually the minister of finance will have to report to parliament what investments have been made and how any monies have been spent.
“We are putting that into the legislation so that the population can kept track on how these resources are being utilised. But the population will have to decide [through the ballot box] whether it wants a finance minister who is sensible or one who is not. They will have to live with the consequences.”
Natural gas
Mr Enill refers to Trinidad as a gas-based rather than an oil-based economy. By converting gas output to an oil equivalent Trinidad now produces 500,000 barrels per day (bpd) of gas compared with only 120,000 bpd of oil.
Mindful of the need to generate new discoveries of both commodities – current supplies will deplete in about 15 years – the government has negotiated contracts with producers that compel them to drill a certain number of wells over a three-year period. Mr Enill hopes this may extend supplies a further 15 years.
Trinidad is currently pursuing a Vision2020 to enable it to gain developed country status in 14 years’ time. Long before that, however, Trinidad hopes to establish a world-class financial centre and buildings to house the IT infrastructure have already been identified.
“We are looking at a full service operation. The US has become a lot more difficult [for banks to operate in] because of all the new laws, and we believe there is an opportunity for Trinidad and Tobago – in much the same way as Bahrain and Dubai are doing – to get involved in international financial markets. We are located close to central and South America and we believe we can attract a lot of financial business here,” says Mr Enill.
