Pre-Budget Commentary- Dr Vaalmikki Arjoon, Senior Economist and CCIC Vice-President
It’s Budget Monday in Trinidad and Tobago! Today, Dr. Vaalmikki Arjoon, our Vice President and Senior Economist, shares his insights on what our nation should keep an eye out for in today’s budget.
Our economy has declined by 20% since 2015. Though we saw 3% growth in the first quarter of this year, we are still far from pre-pandemic levels due to obstacles to private sector competitiveness and SME growth, subpar energy sector production, forex access difficulties, high food prices, and rising crime rates, which are exacerbating poverty and inequality. While achieving a balanced budget is vital, the minister must also focus on strategies to address these economic challenges and enhance our quality of life.
Since June 2018 our natural gas production fell by over 34%, currently standing at 2.57 bcf/d. As a result, LNG production declined by 45%. The profit-sharing agreement to monetize gas from the Dragon field is an excellent opportunity to add to our gas production in the next two to three years.
This should be seen as a means of supplementing our gas production. The budget should discuss the fiscal strategies to speed up the bid rounds in the energy sector and increase upstream activities, so that we can meaningfully increase gas production. This isn’t an overnight event, but we have a window of opportunity. We may be in an energy transition period to greener sources, but LNG is likely to be in healthy demand over the next decade.
Demand in Asia is high, given weather patterns and industrial activities in China. Despite aggressively investing in renewables and nuclear energy and households changing their electricity and gas usage patterns, Europe continues to purchase LNG to add to their reserves. While global supplies are tight, it’s likely to substantially increase in 2026 from supplies coming out of Qatar, Australia and the US, which could push down prices. We therefore have to act now to take advantage of market opportunities within the next few years.
Advanced economies are also aggressively pushing a green agenda and one day, countries will replace their demand for LNG with Green energy instead. We also have to present a strategy that focuses on us becoming a supplier of green energy. Again, this will take time but we have to start NOW! It will require much capital investment at the start and the authorities have to partner with the private sector to make this a reality. The budget can offer incentives like tax credits or subsidies to private entities willing to invest in the green energy transition.
It’s essential not to make SMEs heavily relying on online credit card purchases the scapegoats for our forex challenges, as there are traditionally other significant sources of forex leakages. For instance, over decades we lost billions of forex due to transfer pricing in the energy sector. A common example is where multinational energy companies operating locally sell commodities like LNG to sister marketing companies in other jurisdictions at lower prices, only to see the LNG resold at higher prices in the international market. This tactic artificially reduces the multinational’s revenues and subsequent USD tax payments to the state. In 2018, the former Minister of Energy noted a report by Poten and Partners that indicated a staggering $24 billion loss in LNG value due to transfer pricing from 2011 to 2014. This is approximately TT$162 billion, and could have paid off our entire national debt, leaving and extra TT$33 billion to spend on further development such as investments in green energy. To what extent has this practice been resolved?
Additionally, forex leakages stem from trade mis-invoicing, where for instance exporters deliberately under-report values to evade taxes and stash forex in foreign accounts. The Global Financial Integrity report reveals an average annual loss of $2.7 billion from mis-invoicing activities from 2009 to 2018.
Capital flight is another concern, with local investors and businessmen flocking to US financial assets due to their perceived safety and higher returns. This trend may intensify given rising US treasury bond rates. Many private sector entities with US accounts abroad opt to keep their funds there due to dwindling confidence in the local economy and investment climate. Addressing these systemic issues is crucial to tackling forex challenges comprehensively.
There is also an opportunity to bring added forex in the financial system through the property tax. Instead of burdening households and small businesses with this tax at the initial stages, the state could have first levied the tax on multinationals with a property value of at least $300 million, both on and offshore. They could pay the tax in US dollars, or if they have to pay in TT, they would likely have to get the TT by selling forex to the banks. Either way brings an injection of forex into the system.
Note that 2020 to 2023, authorized dealers held a forex surplus of US$725.8 million, indicating they purchased $725.8 million more than they sold during this period. For this year, they sold $346 million more than what they purchased. From these figures, the dealers should have an excess of US$379.8 million, and therefore, other banks should for now, avoid lowering their allocations.
To address forex challenges, short-term measures include increasing EXIM bank allocations, establishing an SME development bank to support forex allocation and small business financing, and temporarily boosting the CBTT’s forex injection to authorized dealers.
However, tackling the root cause of forex issues requires enhancing export competitiveness in both energy and non-energy sectors by fostering a business-friendly environment that promotes private sector growth.
Despite various challenges, the manufacturing sector, particularly food processors, showed remarkable growth, with a 54% increase from Q1 2021 to Q1 2023. However, this sector only constitutes 5% of the overall economy. To enhance the contribution of smaller sectors to exports, employment, and tax revenue, it is essential to improve the business environment. Issues like the absence of consistently reliable port scanners, operational inconsistencies at ports, and delays in customs clearance result in increased expenses for businesses such as customs overtime charges. Standardizing scanners across all ports and private bonds can curb illegal activities and expedite clearance of raw materials, equipment and goods for re-sale. Additionally, streamlining regulatory procedures and enabling all transactions with state agencies through the online single electronic window, expediting building permit approvals, enhancing port infrastructure, and improving access to financing are measures that can further enhance the business environment.
Food inflation continues to remain high and this underscores the need for us to start producing more of what we eat and stop relying on the rest of the world to feed us! Despite consecutive budgets offering increased allocations to agriculture, the sector continues to underperform, it declined by 17.8% in the first quarter of this year. It continues to riddled with issues like poor irrigation, land tenure issues to access the benefits from the ministry, praedial larceny etc. But from a food production standpoint, we can optimise increased production per acreage by adopting smart technologies and applying them to our farming practices. This is where the ministry needs to place focus on – setting up a smart agriculture program to boost our food production and avoid exposure to high international food prices.
Food is the main commodity we consume everyday and prices have increased by 31% in the last five years, so it’s no wonder that the public service is asking for increased wages. A wage increase is warranted given the increase in the cost of living for several years now but we have to be careful that the increase isn’t too high as it might create more problems like higher inflation especially if the increase is higher than our overall productivity, or employers downsizing their workforce as they might not be able to afford the increase. It’s important the state strikes a balance with this.
The MoF can also consider replacing VAT altogether with a six percent sales tax. This is much easier to implement, allows for easier transparency and less opportunity for tax avoidance. Plus, after all refunds are paid, there would be no need for a VAT refund in future. One reason that VAT refunds take so long is the audit process, at which the tax authority has not been effective. A sales tax doesn’t need a lengthy audit. The TTRA also needs to ensure they have enough staff to address the transfer pricing, as we lose billions via the multinationals.
What’s also integral are the minister’s announcements on new crime initiatives. Border patrols, community policing, more equipment and resources for the police service and integrated use of CCTVs are important, but they need to step up on investments in Education and Skills Development – allocate resources to improve the quality of education and vocational training programs. A well-educated and skilled workforce is less likely to engage in criminal activity. Invest in data driven analytics to identify crime hotspots and trends, enabling law enforcement agencies to allocate and use resources more efficiently.