As energy revenues have dropped, production in the country’s non-energy sectors has grown. This is not a coincidence.
According to the Central Bank’s Annual Economic Survey 2023, “Buoyed by the strong performance of the non-energy sector, domestic economic activity continued to display signs of recovery over the course of 2023.” Trinidad and Tobago’s non-energy sector expanded by 4.2%, while the energy sector contracted by 1.3%.
The main sectors contributing to the 2.5% growth in real GDP were trade and repairs, transportation and storage, and accommodation and food services. A similar phenomenon occurred during the recession of the 1980s. The Central Bank’s Index of Domestic Production shows that the non-energy sector almost doubled from 109 in 1978 to 205 in 1986. By 1995, the index had reached 308 but then, as oil prices rebounded, started to decline.
This is a demonstration of the resource curse in action. In countries where governments get revenues from natural resources, such as gold, diamonds or fossil fuels, politicians have no incentive to provide services to the people. All they have to do is collect payments from the companies that extract these resources. Then they spend just enough on transfers, subsidies and make-work projects to keep citizens placated. This also creates what is known as “Dutch disease”, where rents undermine productive sectors of the economy, especially agriculture and manufacturing.
By contrast, when governments depend on a productive private sector for taxes to run the country, politicians must institute free market policies that allow firms and entrepreneurs to flourish. This includes containing violent crime and corruption, along with providing efficient health and education services.
Unfortunately, this administration is not yet fully implementing the lessons of lower rent revenues. The Central Bank’s survey noted that Central Government’s overall expenditure grew in 2023 by $4.6 billion to $57.9 billion, mainly because of additional spending on transfers and subsidies. In 2019, the Government spent $26.909 billion on transfers and subsidies, comprising 18.5% of GDP. In 2023, this figure rose to $30.527 billion, which was 16% of GDP. And, by the end of September 2023, Government debt was 69% of GDP, up from 66% in 2022.
This is not sustainable, yet the Government is clearly reluctant to reduce its spending. Even so, the administration’s spokesmen have been sounding uncharacteristic warnings. In May, Energy Minister Stuart Young revealed that T&T has about ten years of gas production left, based on proven reserves. Finance Minister Colm Imbert, having spent the past decade making wildly optimistic predictions about economic turnarounds, in his mid-year budget review earlier this month was cautious about any energy rebound within the next three years.
The counter-intuitive lesson here is that the decline of T&T’s energy sector will, in the long run, be good for the country. The challenge is for the Government to negotiate that transition without inflicting too much pain on citizens. That can be accomplished through sensible economic policies, instituted sooner rather than later.
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