Economic Downturn and Implications for Poverty Alleviation

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Letitia Hawkins
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Vol. 13 No. 2 / June 2009 In 2000, Trinidad and Tobago (T&T) joined all nations of the world in committing to build a more equitable world, free of extreme hunger and poverty, by 2015.

However, there is widespread concern that the global economic recession may reverse many of the gains made in eradicating poverty across the globe.

7 billion to meet social expenditure goals; 32% more than the previous year. Several questions arise. Can it be sustained? What are the major sources of risks?

.. The Local Economy A Brief Glance at the Economy at Mid Year: Is there Hope over the Horizon? How can these risks be mitigated?

1 Vol. 13 No. 2 / June 2009 In 2000, Trinidad and Tobago (T&T) joined all nations of the world in committing to build a more equitable world, free of extreme hunger and poverty, by This was to be accomplished through the pursuit and attainment of eight objectives now known as the United Nations Millennium Development Goals (MDG). However, there is widespread concern that the global economic recession may reverse many of the gains made in eradicating poverty across the globe. This unease has spread to Trinidad and Tobago as our economy weakens in the face of a sharp fall in export earnings and government revenue. For 2009, Government allocated some TT$6.7 billion to meet social expenditure goals; 32% more than the previous year. Several questions arise. Can it be sustained? What are the major sources of risks? Economic Downturn and Implications for Poverty Alleviation What s Inside The Global Economy Many major economies are expected to contract, including, notably, the US economy (by 2.8%)... The Local Economy A Brief Glance at the Economy at Mid Year: Is there Hope over the Horizon? How can these risks be mitigated? Trinidad and Tobago adopted the MDG within its Vision 2020 Poverty Alleviation Strategy. This strategy centers on two pillars: Nurturing a Caring Society which deals with improving the lives of citizens and Developing Innovative People which refers to fostering innovation, competitiveness, skills development and life long learning. Specific goals have been set for each strategic imperative. With respect to Nurturing a Caring Society, the principal goals include poverty reduction, access to adequate housing for all citizens, and containment of the HIV-AIDS epidemic. The goals related to Developing Innovative People include a seamless, world class, self- PG1

2 For 2009, Government allocated some TT$6.7 billion to meet social expenditure goals; 32% more than the previous year. While there have been vast improvements in living standards in Trinidad and Tobago over the last decade, pockets of significant poverty remain as at renewing education system; a skilled and competitive workforce; and a culture of science technology and innovation. While there have been vast improvements in living standards in Trinidad and Tobago over the last decade, pockets of significant poverty remain as at In an analysis Developmental Pillar Priority Area Key Initiatives Nurturing a Caring Society Developing an Innovative Society Meat, Chicken Social Security Housing Health HIV-AIDS Tertiary Education Primary and Secondary Sustainable Livelihoods In the period 2002 to 2007, social services expenditure amounted to TT$48 billion, or 27% of total expenditure. In its latest Monetary Policy Report, the Central Bank forecasts economic growth for 2009 at 0% - 0.1%. based on the Survey of Living Conditions 2005, Kairi Consultants estimates that 16.7% of the population in Trinidad and Tobago live in poverty, this means that less than TT$665 per individual, per month. The geographic distribution of poverty is highly lopsided.the Sangre Grande/Toco region had the table 1: Trinidad & Tobago Key Millennium goals initiatives Cash Transfer, Senior Citizens Grant, Disability Grant, Public Assistance Grants Urban Renewal, HDC Communities, Rent to Own, Squatter Regularisation, Home Improvement Grants CDAP, Community Medicine, Upgrade of Health Facilities. Counselling and Testing Sites, Anti-retroviral Treatment, WYP Promotion HELP, GATE, MUsT, HYPE, OJT, YTEPP, Milat, MiPart Universal ECCE, Textbook Rental Prpogramme, School Nutrition Programme, School Transportation CEPEP, NEDCO, Micro-enterprise Loans, Micro Enterprise Training and Development. highest indicator at 39.1%, followed by Princes Town with 30%, Siparia at 27.7% and Point Fortin Borough with 24.6%. In recognition of the unsatisfactory standard of living among the population, the Government of Trinidad and Tobago has made a deliberate effort to transfer wealth derived from the energy sector towards poverty alleviation. In the period 2002 to 2007, social services expenditure amounted to TT$48 billion, or 27% of total expenditure. An expansive range of initiatives has been undertaken, particularly after 2005, in order to improve the quality of life among the less fortunate. Table 1 lists major initiatives related to poverty alleviation, housing, health, HIV AIDS, Tertiary Education, and Sustainable Livelihood. These programmes, established in an environment of plenty, touched a broad cross section of the society, directly and indirectly. But in the context of the current economic environment, doubts about their sustainability arise. In its latest Monetary Policy Report, the Central Bank forecasts economic growth for 2009 at 0% - 0.1%. This is likely to translate into further shortfalls in Government revenue and would require prudent expenditure cuts and capital project rescheduling. Government has given its commitment that social programmes will not be affected, despite a revenue shortfall estimated at around TT$9 billion for fiscal Be that as it may, evidence from the downturn of the 1980s can perhaps provide useful insights on the emerging scenario. In the period 1981 to 1989, Government social expenditure peaked at TT$2.2 billion in 1983 but fell gradually to PG2

Latest figures published by the Central Bank indicate an inflation rate still in excess of 10%... local prices are lagging behind those in international consumer markets.

3 Latest figures published by the Central Bank indicate an inflation rate still in excess of 10%... local prices are lagging behind those in international consumer markets. The economy is in better shape today than in Nonetheless, if the economic downturn endures, the most vulnerable in the society face the greatest exposures. TT$1.8 billion in 1989, some 20% less. However, the decline in social expenditure was less pronounced in relative terms. At its peak in 1983, social expenditure accounted for 40% of total recurrent expenditure and was equivalent to 12% of GDP; by 1989, the respective shares had fallen to 38% of total expenditure and 11% of GDP. The data shows that although Government revenues fell by approximately 25% from TT$6.6 billion at peak in 1983 to TT$4.9 billion in 1989, the fall in social expenditure was not as pronounced. However, Government s restraint in slashing social spending was insufficient to prevent deterioration in living standards. A World Bank study on Poverty and Unemployment in Trinidad and Tobago 1 during the 1980s revealed that absolute poverty increased from 3.5% of households in 1981 to 14% of households in 1988, and deteriorated further to 22 % in The real risk to the poverty alleviation agenda comes from the twin scourge of unemployment and high inflation. The World Bank study concludes that the increase in poverty in the decade of the 1980s was closely linked to the increase in unemployment. The unemployment rate in T&T increased from a low of 9.9% 1982 to 22% in While Government may maintain its social expenditure in this period, the impact of such expenditure will be eroded as the ranks of the unemployed swell. The problem is compounded by inflation which erodes the purchasing power of those with fixed incomes. Latest figures published by the Central Bank indicate an inflation rate still in excess of 10%. This suggests that local prices are lagging behind those in international consumer markets. The economy is in better shape today than in Nonetheless, if the economic downturn endures, the most vulnerable in the society face the greatest exposures. Poverty alleviation goals can be derailed even if Government maintained current levels of social expenditure. In order to mitigate the risk arising from the crisis, Government can give consideration to initiating open, tripartite dialogue on the subject. A national consensus is necessary so that appropriate measures can be developed to combat inflation and stimulate the production of local goods and services. 1 International Bank for Reconstruction and Development (IBRD) - Trinidad and Tobago: Poverty and Unemployment in an Oil Based Economy, 1995 PG3

Global growth is projected to be -1.3% in 2009, before gradual recovery begins in 2010.

4 The Global Economy The Global Slowdown Endures The global economy is in the worst recessionary period of the post-war era. Economic turbulence continues to be propelled by dampened consumer confidence, fall-off in international trade and diminished capital access precipitated by the financial crisis. Global growth is projected to be -1.3% in 2009, before gradual recovery begins in However, even this severe outlook will be dependent upon the success of policy implementation to curb volatility. Though mild upswings are projected for most countries in 2010, a global recovery is no longer viable this year, given economic performance in the first half of Many major economies are expected to contract, including, notably, the US economy (by 2.8%) and the Euro Area (by 4.2%). Indeed, even the steam engine economies of China and India are also projected to cool in 2009 (see Table 2). The Caribbean economy will perform similarly. Collapsed commodity prices and diminished demand for commodity exports and tourism from major trading partners, the US and the European Union (EU), have stifled opportunities for meaningful growth. The ECCU 1 economy will shrink by 2.4% in 2009 and 0.1% in 2010; the Jamaican economy by 2.6% in 2009 and 0.3% in 2010; and the Barbadian economy by 3.5% in 2009, though 0.5% growth is expected in Trinidad and Tobago (T&T) has the least pessimistic outlook and is projected to grow by 0.5% in 2009 and 2.0% in Labour markets will also follow this trend. In the Euro Area, employment is expected to contract by 2.5% this year and a further GDP growth (%) Figure 1: Global Economic Growth year 1.5% during 2010, representing 8.5 million lost jobs over when compared to 9.5 million jobs created during The situation in the US is almost as grim given the fact that 7.0 million jobs have been lost since the recession s world united states Euro Area United Kingdom China india Caribbean PG4

5 The Global Economy Region US 1.1.% -2.8% 0.0% Euro Area 0.9% -4.2% 0.4% Caribbean 3.0% 0.2% 1.5% China 9.0% 6.5% 7.5% India 7.3% 4.5% 5.6% Source: World Economic Outlook, April 2009, IMF. onset. This brought unemployment to 9.4% in May, effectively doubling the corresponding rate in Unemployment in China has been projected at 4% for this year and 4.6% in In the Caribbean, tourism revenues, on which the region depends, have been declining as foreign consumers lock down non-essential spending. Several companies have retrenched employees in response. In Jamaica, over 12,000 workers were sacked over the past seven months, while in T&T there have been discernible cuts in energy, manufacturing and services sector employment. The Governor of the Central Bank of Barbados projected a 5% decline in tourist arrivals for 2009 and a no-growth situation in The decline in tourist arrivals would growth in trade (%) Source: IMF table 2: Global Growth Figure 2: Growth in world trade year affect roughly 14,000 jobs. In St. Lucia and the Bahamas, major hoteliers have already trimmed their workforce. The slowdown in tourist arrivals will also reduce a major source of much needed foreign exchange inflows to pay for imports and protect the value of fixed and managed currencies. International trade plummeted in the fourth quarter of 2008 and continued to fall rapidly this year, in accordance with the trends illustrated in Figure 2. Commodity prices have slid with decreased demand. Despite crude oil s tentative and moderate price recovery, food and metal prices have and are projected to continue declining, stifling growth prospects for exporting nations. In the advanced economies, inflation levels are extremely low. slightly less than 1% in the EU this year, and -0.7% in ADVANCED ECONOMIES IMPORTS EMERGING AND DEVELOPING ECONOMIES IMPORT ADVANCED ECONOMIES EXPORTS EMERGING AND DEVELOPING ECONOMIES EXPORTS the US. Inflation levels in developing regions are not as low since their pre-recessionary rates were much higher. In the Caribbean, inflation continues to soar with rates at 8.5% in Barbados as at March and 10.3% in Trinidad and Tobago as at May. Jamaica is expected to experience inflation in the region of 11.0% 14.0% in In combination with rising unemployment and falling goods and services exports, the price level is a heavy burden for regional consumers. Economic recovery depends on prudent macroeconomic and financial policy. Thus far, in the advanced economies and within the region, governments have chosen to support illiquid financial institutions by injecting capital and/or assuming trusteeship roles to restore confidence. Yet much work remains to be done to sterilise toxic assets and inspire increased participation in the financial system. Significant stimulus packages are being conceptualised and implemented; governments wish to boost activity and in some cases are making controversial decisions to assist firms, like General Motors in the US, in order to protect jobs. There will be a ticklish balancing act to maintain as deficit financing is increasingly employed. The economic climate is such that very few firms have access to private capital and consumers are more likely to bank any extra cash, than to spend. The authorities will be hard-pressed to ensure that stimulus and recovery plans are worth the price. 1 Eastern Caribbean Currency Union (ECCU). The members are Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines. 2 Source: European Commission 3 Source: European Commission - these figures represent urban unemployment as a percentage of the labour force. PG5

6 The Local Economy A Brief Glance at the Economy at Mid Year: Is there Hope over the Horizon? Trinidad and Tobago has endured three successive quarters of the global economic slowdown and this overheated economy has cooled down in more ways than one. While there have been a lot of negative indications of a slowdown such as faltering GDP growth, rising unemployment and persistent inflation, energy prices have recovered somewhat from the crashes experienced at the end of 2008 and early In early In early June 2009, oil prices climbed to sixmonth highs of US$68 per barrel while natural gas prices neared US$4 per mmbtu... June 2009, oil prices climbed to six-month highs of US$68 per barrel while natural gas prices neared US$4 per mmbtu 1 at Henry Hub 2 - a significant improvement from levels recorded in January However, the fiscal accounts remain in a very uncertain position with regard to revenues. The Central Bank of Trinidad and Tobago (CBTT) 3 reports an overall deficit of $2.95 billion at the end of the first five months of the fiscal year, compared with $1.3 billion for the same period in the previous fiscal year. Gross Domestic Product (GDP) is likely to contract in 2009 relative to previous years; however, the extent of the decline is not yet known. Early estimates of the GDP growth for 2009 by the IMF in its country report was 2%; however, the CBTT has projected growth in the range of 0% - 1% for 2009 compared with 3.5% for The collapse of commodity prices has resulted in lower production and exports of all commodities, in addition to the turmoil in financial markets and delays or postponements of planned investments in the Trinidad and Tobago energy sector. The CBTT reports that the volume of oil and petrochemical exports had declined by 11.6% in the period October - February 2009, compared with the corresponding period in the previous year. Natural gas utilisation also fell by 2.1% from October - February 2009, compared with the corresponding period in the previous year. Likewise, GDP in the non-energy sector may have also slowed due largely to the contraction in Government expenditure and lower demand in shrinking regional markets. Job loss figures have been rising steadily since the last quarter of Several public announcements of job cuts have been made by major companies particularly in the energy, construction and manufacturing 1 The gas prices listed in this article are denominated in United States dollars per million British Thermal Units. British Thermal Units are a unit of energy measure which is commonly used in natural gas pricing. 2 Henry Hub refers to a terminal in Louisiana, USA at which Liquefied Natural Gas (LNG) is re-converted to a gaseous state. The price of gas at the Henry Hub terminal is usually quoted for international pricing purposes. 3 April 2009, Central Bank of Trinidad and Tobago, Monetary Policy Report. PG6

The Local Economy Table 3: Monthly Inflation Rates October 2008 May 2009 October 2008 November 2008 December 2008 January 2009 February 2009 March 2009 April 2009 May 2009 Headline Inflation 15.

Data compiled by the CBTT, reveal that from the last quarter of 2008 to April 2009, approximately 6000 jobs have been lost with construction workers being the hardest hit.

For the past few years, Trinidad and Tobago has experienced positive overall balances due to large current account surpluses.

This figure is set to decline due to decreased exports from this country, particularly in oil, gas and petrochemicals.

In the June 26th update, the CBTT reported that year-on-year inflation measured 10.3% in May 2009; down by 1.6% from April 2009.

7 The Local Economy Table 3: Monthly Inflation Rates October 2008 May 2009 October 2008 November 2008 December 2008 January 2009 February 2009 March 2009 April 2009 May 2009 Headline Inflation Food Price Inflation Core Inflation sectors. Data compiled by the CBTT, reveal that from the last quarter of 2008 to April 2009, approximately 6000 jobs have been lost with construction workers being the hardest hit. Reduction in both energy and non-energy exports would lead to a deterioration in the balance of payments position of the economy. For the past few years, Trinidad and Tobago has experienced positive overall balances due to large current account surpluses. In 2008, Trinidad and Tobago experienced the greatest positive overall balance in the four- year period with 11.1% GDP. This figure is set to decline due to decreased exports from this country, particularly in oil, gas and petrochemicals. Inflation is the bugbear of the monetary authorities and has been very sluggish downward, despite reduced demand for goods and services and a general reduction in economic activity. In the June 26th update, the CBTT reported that year-on-year inflation measured 10.3% in May 2009; down by 1.6% from April Food price inflation remains the main driver of headline inflation, registering 19.6% May Core inflation, which excludes the effects of changes in food prices, remained the same as the previous month at 5.8%. The government and citizenry of Trinidad and Tobago should understand that although commodity prices are rebounding, any improvements in the economic fortunes of the country should not be premised on rising commodity prices but on efforts at increasing productivity, both in the private and public sectors, ensuring sustainability in fiscal accounts and diversifying the country away from the energy sector. PG7

8 The First Citizens Economic Newsletter is a quarterly publication of First Citizens Group. While every effort has been made to offer current and accurate information, errors can occur. Furthermore, this Newsletter may contain reference to certain laws and regulations. Laws and regulations will change over time and should be interpreted only in light of particular circumstances. This information is provided as is, with no guarantees of completeness, accuracy of timeliness, and without warranties of any kind, expressed or implied. To the fullest extent permissible pursuant to applicable law, the First Citizens Group disclaims all warranties expressed or implied, including but not limited to implied warranties of merchantability and fitness for a particular purpose. The information presented in this newsletter should not be construed as legal, tax or accounting advice. You should consult with the First Citizens Group or other professional advisors familiar with your particular factual situation for advice concerning specific banking or other matters before making any decision. The text may be reproduced without permission, provided that acknowledgement is made to First Citizens Economic Newsletter and a copy submitted to the Finance and Planning Department, Queens Park PG8 East, Port of Spain. Distribution enquiries: Personal and corporate customers are asked to contact their account holding branch or unit. Branches, units and other subsidiaries please contact the Finance and Planning Department, Queens Park East, Port of Spain, Trinidad and Tobago. Tel: 1 (868) Fax: 1 (868) Photos:photolibrary

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