A Case for Countercyclical Monetary Policy in the Caribbean

Transcription

1 CONFERENCE ON THE ECONOMY 2018 UWI STA A Case for Countercyclical Monetary Policy in the Caribbean Dr. Justin Ram Director of Economics, Caribbean Development Bank

2 The Big Picture: Last 10 Years in the Caribbean GDP Growth Slowdown and GDP Contraction Increased Fiscal Pressures Weakening External Position Worsening Credit Ratings Declining Relative Competitiveness Rising Protectionism Increased Financial Regulatory Requirements Geo-political Uncertainty

3 Average BMC growth is consistently lower than other small and developing states Real GDP Growth (%), Source: IMF WEO, CDB

4 Mn TT$ Repo Rate (%) Use of Repo Rate has been inconsistent in recent years Money Supply and Nominal GDP versus Repo Rate ( ) 100,000 90,000 80,000 70,000 Money Supply Nominal GDP Repo Rate , , , , ,000 10,000 Commodity Boom Price Impact of Global Financial Crisis Developed Economies Recovery Source: Central Bank of Trinidad and Tobago

5 Merchandise Trade is dominated by Mineral Fuel Exports Visible Trade Balance ( ) 70,000 60,000 50,000 40,000 30,000 20,000 10, ,000 Total Visible Trade Balance Total Visible Trade Balance Excl. Mineral Fuels -20, Source: Central Bank of Trinidad and Tobago

6 Food and Machinery shares of imports have expanded Composition of Imports (exc. Crude, Fuel & Lubricants) ( ) Source: Central Bank of Trinidad and Tobago

7 REER Exports (Number of Products) Trade Competitiveness has been in decline since Doing Business Distance to Frontier 3000 REER (2010=100) 2500 Exports (Number of Products) Source: UWI STA

8 Doing Business rankings deteriorated across the Region; Little evidence of reforms in TT World Bank Doing Business Rankings Region Trinidad and Tobago Source: World Bank

9 TT$Bn Government Operations are heavily dependent on Oil Revenue Central Government Finances ( ) Source: Central Bank of Trinidad and Tobago

10 TT Oil and Gas Wages are significantly higher than Other Energy Services and Industry Rates Base Monthly Salary (Before Overtime & Allowances- TT$) Minimum Monthly Salary (Before Overtime & Allowances TT$) s Petrotrin Energy Service Companies Minimum Petrotrin Industry Average Source: The Energy Chamber of Trinidad and Tobago

11 Operating in an open petroleum economy Characteristics of an Open Petroleum Economy 1 Exports dominated by petroleum Impact on the Wider Economy Off-shore sector has high wages 2 Exports are highly profitable 3 Government expenditure mostly financed by petroleum revenues 4 Petroleum companies are mainly foreign-owned High domestic demand drives prices upwards Inflation encourages unions in other sectors to demand higher wages Higher costs reduces the global competitiveness of other export sectors Source: Seers (2005)

12 National savings and foreign direct investment levels are below pre-crisis levels Gross National Savings, % of GDP BMC FDI Inflows, US$ million World Caribbean Small States Trinidad and Tobago Source: World Bank

13 In recent years, TT fiscal balance deteriorated and debt level generally increased Government Debt/GDP (%) Change in % Change in % BAR SUR JAM BZE TT ANT ANG SVG GUY DOM HAI BAH BVI SLU CAY GRE TCI SKN MON Source: Central Banks 13

14 Monetary policy should be counter-cyclical and complementary to fiscal policy ECONOMIC BOOM VS ECONOMIC BUST Fiscal Policy Save excess (e.g. in a Sovereign Wealth Fund) Fiscal Policy Tap into excess savings to finance social security interventions Monetary Policy Decrease money supply and increase interest to curb inflation Monetary Policy Allow for higher inflation

15 Strategic policies can protect Caribbean economies with a floating exchange from frequent and debilitating external shocks Nominal GDP Targeting Proposal: Central Banks should target a nominal GDP growth rate (instead of a specific inflation rate) Benefit: When adverse shocks affect either output (e.g., natural disaster) or inflation (e.g., global oil prices), the national response can be more flexible. There is less pressure to vary output to meet inflation targets

16 CBTT increased interest rates in June a contractionary policy response to economic growth and low inflation Macroeconomic Indicators Repo Rate Inflation Nominal GDP Real GDP Source: CDB, CBTT

17 Main Takeaways 1 2 Monetary policy needs to be counter-cyclical and supportive of fiscal interventions. For monetary policy to be most effective, Caribbean economies with a floating exchange rate should adopt/ensure: Nominal GDP Targeting Autonomous Monetary Authorities

18 Stepping back in order to jump better Macroeconomic Economic growth and diversification Strong/ resilient financial sector Prudent fiscal and monetary management Productivity & Competitiveness Private sector-led growth Opening new trade markets Regional payments facility (Fintech) First class and costeffective infrastructure Human Development Sustainable Society Environmental Preparedness Good quality education for all Workforce skills training based on employers needs Conditional cash transfers to the most vulnerable Strict building code compliance CCRIF, indemnity insurance, resiliency funds Environmental tools Climate change adaptation tools Microcredit for recovery lending Regional Integration Gender Equality Statistics Digitalisation Implementation

19 : ) : The future is ours, to decide!