Just over a year ago headline inflation was 15 per cent year on year and food inflation was in the high twenties. Today headline inflation is 2.7 per cent (the lowest since January 2003) and food inflation is 3.5 per cent.
Though it appears that this disinflation (reduction in inflation rate) is being driven by the economic and financial recession/collapse in the world, the dynamics of the present situation are heavily influenced by the structure of our export sectors, economy, the Government’s income and spending pattern.
It is tempting to translate the falling inflation as improved performance by the economy and to some, the Government’s good economic management. But even as the Central Bank reduces its Repo rate it is trying to suck out residual liquidity from the market-a direct reversal of the relationship between the two during the local boom time. Listen to the Governor of the Central Bank:
’The decline in credit to the private sector, combined with higher net fiscal injections contributed to elevated levels of liquidity in the financial system. With excess reserves balances hovering around TT$2.5 billion, commercial banks in early November were requested to deposit TT$2 billion in interest-bearing accounts at the Central Bank for a period of one year to 18 months. Sales of foreign exchange by the Bank also helped to drain excess reserves balanced from the financial system.’
Something different is happening in the local economy. Before the 2008 recession with energy prices high the Government spent everything it earned in taxes except what it put in the Heritage and Stabilisation Fund and the Infrastructural Development Fund. Because of the non-energy deficit, the liquidity in the local market was being driven upwards at an alarming rate. The high liquidity and the velocity of money as local non-government spending increased, coupled with imported food inflation caused the inflation rate to soar to 15 per cent.
The Central Bank tried its best to take money out of circulation, freeze it, but the liquidity was maintained by continued government pro-cyclical spending. With this high liquidity and rising inflation the Central Bank also raised its Repo as a signal for the commercial banks, chock full of cash, to raise their rates also. The recession has caught us with a residual high liquidity.
In this recession or whatever, the Government has not reduced its spending to fall in line with its income. Its income from the energy sector was TT$25.7 billion in 2007-2008, TT$11.7 billion in 2008-2009 and is expected to be TT$7.7 billion in 2009-2010.
In order to maintain its spending the Government intends to make up its income short fall by local borrowing some TT$13 billion in this fiscal year- very importantly, a reduction in the non-energy deficit and hence liquidity growth. The residual liquidity problem continues even in our recession and the Central Bank continues to take money out to restore monetary control. Our PM, at his political best and economic worst, sees this liquidity as good since other countries are crying out for cash in their markets.
Our exporting manufacturing sector has all but lost its Caricom market and jobs are being lost. There is a decline in credit demand by the private sector indicating a lack in business investment and economic activity reducing the velocity of money.
The official employment rate appears to be good but one has to consider the make-work programmes by the Government, who is also the largest employer in the country and that the driver of our economy, the energy sector, only employs some four per cent of our labour force.
What is revealing is that the demand for foreign exchange has increased substantially though imports have fallen and the private sector business activity has also slowed. Though the economy is not yet into deflation (i.e. negative inflation-price decreases) the population is behaving as though we are. We are not spending, moreso putting this cash into (safer?) US dollars with no local increase in economic activity-possibly a continued decrease as measured by GDP growth per quarter.
The question is whether the people expect prices to drop further and are holding on to their cash that is growing in value, so further encouraging economic activity decline -the deflation spiral.
In T&T there is money in the banks, inflation rates are coming down but consumers are not spending, business is not borrowing and demand for our goods in Caricom has dropped. Our Central Bank is struggling to regain monetary control of the economy. People are holding on to their cash, afraid of losing their jobs and waiting for something to happen. The Government is also waiting for something to happen, for oil/gas prices to get back to where they were, energy exports to pick back up and foreign investment to return to T&T.
maryking@tstt.net.tt
