Prospects for sustainable fiscal policy: Transfers and subsidies examined COTE 2014, UWI, St. Augustine Dr. Justin A. Ram, Director, Economics Department
Presentation outline Caribbean economic overview and some challenges Transfers and subsidies in the Caribbean Transfers and subsidies in Trinidad and Tobago The economic impact of subsidies in T&T Policy recommendations
Mainly Upper-middle to High-income Economies Country Rank (177 countries) Per capita Income (PPP) Cayman Islands 13 49,686 British Virgin Islands 39 30,290 Trinidad and Tobago 42 28,743 Anguilla 46 27,274 Bahamas, The 52 22,639 Turks and Caicos Islands 59 20,878 St. Kitts and Nevis 61 20,582 Antigua and Barbuda 62 20,540 Montserrat 75 15,762 Barbados 79 15,354 Suriname 81 14,463 Grenada 92 11,221 Dominica 100 9,983 St. Lucia 103 9,893 St. Vincent and the Grenadines 104 9,883 Jamaica 109 8,329 Belize 111 8,212 Guyana 3,900 Haiti 157 1,557 Qatar 1 146,521 Singapore 6 72,296 Notes: 1/ GDP per capita (2011) calculated as PPP using the World Bank data, SOURCE: World Bank
Growth among CDB s BMCs has averaged 3% over the last decade By comparison, over the same period: o World growth averaged 3.8% o Emerging and developing countries averaged 6.4% o Other Small Island Developing States (SIDS) averaged 4% o Advanced economies averaged 1.6% Growth Experience
Growth in the Caribbean: Global Comparisons
Fiscal Snapshot
Debt and fiscal balances Country Overall Balance (% of GDP) Primary Balance (% of GDP) Gross Debt (% of GDP) '08 '09 '10 '11 '12 '13 '08 '09 '10 '11 '12 '13 2013 Jamaica 138.9 Grenada 115.0 St. Kitts and Nevis 104.9 Antigua and Barbuda 92.2 Barbados 92.0 St. Lucia 79.8 St. Vincent and the Grenadines 76.4 Belize 75.5 Dominica 75.0 Guyana 63.9 The Bahamas 56.3 Trinidad and Tobago 30.6
Fiscal Performance: Highly-indebted BMCs
With Limited Access to Concessional Financing Sources, Region Highly-indebted SOURCE: International Monetary Fund World Economic Outlook, April 2013
Reflected in recent credit rating actions Standard & Poor's Moody's Other BMC Rating (R) Outlook (O) Action Date Rating (R) Outlook (O) Action Date Rating (R) Outlook (O) Action Date BAR BB- Negative R O 20-Nov-13 B3 Negative R 02-Jun-14 CariA- R 17-Dec-13 GRE SD Default R 12-Mar-13 DOM CariBBB- Affirmed 5-Jun-13 SLU CariBBB R 14-Jun-13 SVG B2 Stable Affirmed 27-Nov-13 BZE B- Stable Affirmed 27-Nov-13 Caa2 Stable R 15-Apr-13 JAM B- Stable R 24-Sep-13 Caa3 Positive O 12-Feb-14 Fitch B- Stable R 25-Feb-14 BAH BBB Negative Affirmed 5-Nov-13 Baa1 Negative Affirmed 2-Jan-14 SUR BB- Stable O 28-Apr-14 Ba3 Stable O 14-Feb-14 Fitch BB- Stable Affirmed 12-May-14 TT A Stable Affirmed 24-Dec-13 Baa1 Stable Affirmed 16-Jan-13 CariAAA Affirmed 14-Jun-13 ANG CariBBB+ R 8-Oct-13 CAY Aa3 Stable Affirmed 12-Feb-13 MON BBB- Stable Affirmed 30-Sep-13 SOURCE: Standard and Poor s, Moody s Investor Services, Fitch Ratings and CariCRIS.
Transfers and subsidies T&S trend Caribbean Territories % of GDP 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Anguilla Antigua and Barbuda Dominica Grenada Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines
Transfers and subsidies T&S trends Caribbean Territories % GDP 16% 14% 12% 10% 8% 6% 4% 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Bahamas Barbados Belize Guyana Haiti Jamaica Suriname Trinidad and Tobago
Regional Movement of T&S and CG Overall balance % of GDP
NOW FOR TRINIDAD AND TOBAGO
Now for Trinidad and Tobago: Increasing transfers and subsidies 16% T&S trend Trinidad and Tobago % GDP 14% 12% 10% 8% 6% 4% 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 While depletion of natural asset accelerates (% of GNI) Real Asset Value 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Indicative adjusted net savings (T&T)
FUEL SUBSIDIES EXAMINED
Two problems exist: (1) Opportunity cost pw W pd = mc Supply Demand qw qd
Opportunity Cost as % of gov t current revenue Note: this is in addition to actual cost of subsidy 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013
Problem 2: Distribution of fuel subsidies Identify the price increases to be analysed for each petroleum product. Estimate the direct impact on each household as a result of these price increases. Estimate the indirect impact on each household income group due to the resulting price increases on other goods and services.
Price shifting model utilised Leontief framework Price vector Estimates the pass through effect of a price increase in fuel to border prices Resulting real income impact on Income groups
Utilizes a Leontief framework c p v' c v' I A 1 L c where 1 I A L is the Loentief Inverse Matrix and v' c is the price vector of value added. If the model is transposed and expressed in terms of column vectors it becomes: c p 1 I A' v L' c v c
Real income effect of subsidy as % of total income 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% < 1,000 1000 to 2999 3000 to 4999 5000 to 6999 7000 to 8999 9000 to 10999 11000 to 12999 13000 to 14999 15000 to 16999 17000 to 18999 19000 to 20999 21000 to 22999 23000 to 24999 25000 and over Real income effect of subsidy All groups
Real income effect of subsidy monthly TT$ 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - < 1,000 1000 to 2999 3000 to 4999 5000 to 6999 7000 to 8999 9000 to 10999 11000 to 12999 13000 to 14999 15000 to 16999 17000 to 18999 19000 to 20999 21000 to 22999 23000 to 24999 25000 and over Real income effect of subsidy All groups
Conclusion and Policy Recommendations Large opportunity costs associated with subsidies Regressive distribution of subsidies Allocative inefficient Possibly impacting real competitiveness
Need for reform. Phased reform. Conclusion and Policy Recommendations Reduce opportunity cost and overall subsidy. Possibly TT$6-8 billion in savings and increased economic revenues. Re- introduce CNG new technology makes it more reliable. Efficient and reliable public transport is needed (mass transit)
Conclusion and Policy Recommendations EE and RE also possible alternatives. To offset impact of reform: target transfers to households that need it.
Thank you for your attention. Questions?