Last week's article identified two price change drivers on the supply side of goods and services. These are "economic" changes, e.g. increases in the prices of raw materials in a production process, and fiscal, changes in the money supply in the country. Today we in T&T and even in the region are suffering from increases in prices in the local markets of food (imported and local). We need to disaggregate the proportion of these supply side price changes caused by increases in our money supply.
We are all well aware that the price of food on the global market is driven by increased demand for more sophisticated food by China and India, Peak Oil, i.e. the inability of the world's petroleum production system to meet demand, hence the increasing cost of transportation and production costs of food, salination and erosion of soils, the movement of land away from food production to that of alternative fuels, failure of crop production in certain countries due to poor weather and climate change.
This price increase is affecting all of the countries in the world whether they import food or not, and they, as we, are experiencing increasing food prices. However, the corresponding current annual food price increases in say India is ten per cent, Nigeria - 36 per cent, US - 3.5 per cent, Europe - 2.5 per cent, Singapore - 2.9 per cent, China - 18.2 per cent and T&T - 20 per cent.
Surely, then, the price increases of imported and local food in T&T stands out in stark contrast to the other countries with the exception of China and Nigeria. In China we see that its currency is undervalued, there is a large positive balance of trade and the liquidity in the country is very high. Its Central Bank is again poised to increase interest rates so as to reduce credit, liquidity and even exports.
T&T is in a similar boat with good balance of trade due to its petroleum exports, massive government spending and, based on the Real Economic Exchange Rate, an undervalued local currency. Hence, food prices in T&T are not simply driven by economic supply constraints but, like China, also the increase in money supply in the country.
Core inflation in these other countries is also well below what we have in T&T, again demonstrating the more general push on prices by high liquidity. But should we, like Singapore, allow the nominal exchange rate of the T&T dollar to appreciate, which as stated in last week's article could reduce the liquidity in the country and also put more purchasing power in the hands of the consumer particularly with respect to imported food?
If our economy was sustainable - i.e. did not depend almost solely on the exploitation of the depleting petroleum resource then the obvious monetary solution would include an appreciation of the TT dollar. The other variable in the equation is that we have to save foreign exchange earned given the volatility of petroleum prices, the ensuing depletion of reserves and the fundamental need to reconstruct the on-shore economy, i.e. reverse the effects of the Dutch Disease. It is encouraging that our new Minister of Finance has accepted the use of part of the RSF for economic diversification - development of the on-shore sector, a song I have sung for ages in the Senate.
It is impossible, like Norway, to use only the earnings of the RSF at this time. Instead we have to live as though, say, the price of oil was US$30. In order to prevent inflation in domestic prices our fiscal and monetary policies have to be in step. The Central Bank Governor is calling on the Government to reduce spending, as is the IMF.
Government's budget spending has to be restricted to that based on the revenues that would have accrued if the petroleum price were actually US$30 i.e. the liquidity has to be controlled at the source - Government spending.
The present Budget allocation by law is not based on the desire to save but on the "error" in the Government's expected price of petroleum. The Central Bank with its monetary policy must release just enough US dollars into the local market so as to maintain and manage the exchange rate at a value consistent with the US$30 price - and allow it to float when necessary to compensate for higher import prices by compatible monetary and fiscal policies.
The present model, however, sees the Executive rapidly expanding its spending to increase GDP, based on rising petroleum revenues with the TT dollar pegged to the depreciating US dollar. The Central Bank, to the detriment of our need to save, is struggling to prevent a depreciation of the exchange rate by increasing its sale of US dollars into the local economy - from US$700 million to US$2.09 billion in five years. Controlling inflation then becomes virtually impossible.
We are all well aware that the price of food on the global market is driven by increased demand for more sophisticated food by China and India, Peak Oil, i.e. the inability of the world's petroleum production system to meet demand, hence the increasing cost of transportation and production costs of food, salination and erosion of soils, the movement of land away from food production to that of alternative fuels, failure of crop production in certain countries due to poor weather and climate change.
This price increase is affecting all of the countries in the world whether they import food or not, and they, as we, are experiencing increasing food prices. However, the corresponding current annual food price increases in say India is ten per cent, Nigeria - 36 per cent, US - 3.5 per cent, Europe - 2.5 per cent, Singapore - 2.9 per cent, China - 18.2 per cent and T&T - 20 per cent.
Surely, then, the price increases of imported and local food in T&T stands out in stark contrast to the other countries with the exception of China and Nigeria. In China we see that its currency is undervalued, there is a large positive balance of trade and the liquidity in the country is very high. Its Central Bank is again poised to increase interest rates so as to reduce credit, liquidity and even exports.
T&T is in a similar boat with good balance of trade due to its petroleum exports, massive government spending and, based on the Real Economic Exchange Rate, an undervalued local currency. Hence, food prices in T&T are not simply driven by economic supply constraints but, like China, also the increase in money supply in the country.
Core inflation in these other countries is also well below what we have in T&T, again demonstrating the more general push on prices by high liquidity. But should we, like Singapore, allow the nominal exchange rate of the T&T dollar to appreciate, which as stated in last week's article could reduce the liquidity in the country and also put more purchasing power in the hands of the consumer particularly with respect to imported food?
If our economy was sustainable - i.e. did not depend almost solely on the exploitation of the depleting petroleum resource then the obvious monetary solution would include an appreciation of the TT dollar. The other variable in the equation is that we have to save foreign exchange earned given the volatility of petroleum prices, the ensuing depletion of reserves and the fundamental need to reconstruct the on-shore economy, i.e. reverse the effects of the Dutch Disease. It is encouraging that our new Minister of Finance has accepted the use of part of the RSF for economic diversification - development of the on-shore sector, a song I have sung for ages in the Senate.
It is impossible, like Norway, to use only the earnings of the RSF at this time. Instead we have to live as though, say, the price of oil was US$30. In order to prevent inflation in domestic prices our fiscal and monetary policies have to be in step. The Central Bank Governor is calling on the Government to reduce spending, as is the IMF.
Government's budget spending has to be restricted to that based on the revenues that would have accrued if the petroleum price were actually US$30 i.e. the liquidity has to be controlled at the source - Government spending.
The present Budget allocation by law is not based on the desire to save but on the "error" in the Government's expected price of petroleum. The Central Bank with its monetary policy must release just enough US dollars into the local market so as to maintain and manage the exchange rate at a value consistent with the US$30 price - and allow it to float when necessary to compensate for higher import prices by compatible monetary and fiscal policies.
The present model, however, sees the Executive rapidly expanding its spending to increase GDP, based on rising petroleum revenues with the TT dollar pegged to the depreciating US dollar. The Central Bank, to the detriment of our need to save, is struggling to prevent a depreciation of the exchange rate by increasing its sale of US dollars into the local economy - from US$700 million to US$2.09 billion in five years. Controlling inflation then becomes virtually impossible.
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