T&T’s productive capacity declining

from the Business Guardian (Trinidad and Tobago)..

July 4, 2013

T&T’s investment in its productive capacity has been on the decline, a leading economist has said.

“Gross Fixed Capital Formation (GFCF) in T&T has been declining since 2005,” RBC Caribbean group economist Marla Dukharan said on June 26 while speaking at the release of a foreign direct investment (FDI) study at the Arthur Lok Jack Graduate School of Business (Lok Jack GSB) in Mt. Hope.

“This is not a good trend.GFCF measures total investment on a national scale, and is linked to growth potential – and has been declining since 2005,” her power point presentation said.

GFCF is higher in Cuba, the Dominican Republic and Jamaica. Only Suriname is growing its productive capacity at a slower pace than T&T.

“They are still adding to their productive capacity whereas we are not,” she said. It begs the question, the Lok Jack GSB auditorium heard, what is T&T spending on if not GFCF? She said there is a downward trend in capital expenditure by Government, and an upward trend in government expenditure on “transfers and subsidies.”

Dukharan said: “It is clearly a cause for concern that we have the capacity to spend on capital, but it is not being spent in that manner.”

In 2010, T&T’s GFCF stood at about 12 per cent (see graphs) of gross domestic product (GDP).

“We have a situation here where we are seeing increases in the level of net FDI inflows, yet we are seeing declines in Gross Fixed Capital Formation. GFCF is made up of two broad components: foreign and domestic. We know the foreign component is rising. So if overall GFCF is falling, then the domestic component is falling faster than the foreign component is rising. Hope you are following me here.

“And if the domestic component is falling, why? The domestic component is made up of two things – private and public (government). Just like we, (the nation) cannot directly control the foreign component, we cannot directly control the level of domestic private component of GFCF,” she said.

“But we (the nation/Government) can control how much it spends on its capital budget. So we look at government spending, and we see that the Government is spending much less on capital than it had, during 2008-09, and also, they are spending increasing levels on transfers and subsidies, for example, which does not directly add to the productive capacity of the nation (GFCF),” Dukharan said.

“If GFCF continues to decline, and we are therefore adding less and less over time to the productive capacity of our nation, we limit the country’s future potential to grow and create employment.”

Dukharan said: “Note also that we are running fiscal deficits, which means we are borrowing, raising debt to finance this expenditure. If we were borrowing to add to the productive capacity of the country, and therefore give us the means by which to repay this debt in the long term, then this approach would make sense. However, if we are borrowing to spend relatively more on transfers and subsidies, this does not add to our capacity to service the debt we have incurred.”

The Central Bank’s Annual Economic Survey for 2012 reported an overall fiscal deficit for 2011/12 of $1.78 billion or 1.2 per cent of GDP, which was well below the target of $7.6 billion, Dukharan said in the June 2013 edition of the bank’s Caribbean Economic Report.

For the current fiscal year, the Government now estimates that the budgeted deficit of $7.7 billion (or 4.6 per cent of GDP) would actually rise to $9.2 billion, based mainly on increasing recurrent expenditure. It is estimated that the balance of payments recorded an overall deficit of US$622 million in 2012, versus a surplus of US$752.6 million in 2011—an overall year-on-year deterioration of US$1.375 billion.

Link to the article: http://www.guardian.co.tt/business-guardian/2013-07-04/tts-productive-capacity-declining

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