QUOTE: 

‘Your recent experience in the energy sector should protect you from falling victim to the delusion that somehow oil and gas will again rescue us.’   

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Dear Larry,

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Congratulations on your appointment as this country’s Minister of Finance and the Economy. Yours is not an enviable position. You have taken center stage at a time when our people are eagerly awaiting something different to rekindle hope and dispel fear in the future of the Republic. There is no doubt that in terms of experience and competence, you are well suited to the job. As a banker, you have built a legacy of success which we very genuinely hope will continue in your current portfolio, for the sake of all of us as well as the generations to come.   

 

Perhaps you may wish that the timing of your ascendancy was more favourable. History does not seem to favour such appointments. Selby Wilson, Gerald Yetming and Karen Nunez Tesheria all have at least one thing in common. Like you, they were all sent in to replace a Finance Minister by prime ministers who went on to lose the subsequent general election. Naturally, you will be hoping to break the cycle.  

 

As Minister of Finance and the Economy you are not only the keeper of the public purse. Your immediate mandate is to steer the economy out of its economic slump towards sustained growth. The ultimate goal must be long term onshore transformation and sustainable development. Your playfield is defined by the basic fiscal equation: Revenue + Loans = Expenditure +Saving. To win, you must come to grips with the playing conditions on the field as well as the external determinants. You will then be in a position to determine the objectives and appropriate strategies to accomplish the elusive goal of economic transformation.  

 

Statements from your initial public address suggest that you have taken a realistic view of the economic situation. It was refreshing to hear the Finance Minister speak candidly about the state of the economy rather than resort to spin that has become the norm. Good start. Unlike many of your cabinet colleagues, you recognize that you are dealing with an informed population which does not take kindly to having its intelligence insulted. From this perspective, you will appreciate the gravity of the situation and the pressing need for a completely new philosophy and strategy from the Financial Complex.

 

On the revenue side of the equation, your recent experience in the energy sector should protect you from falling victim to the delusion that somehow oil and gas will again rescue us. The vital signs are not encouraging. Much has been said about the long-term decline in crude oil production. The situation is compounded by a steady fall in oil prices. In the last week, WTI was trading at less than US$80/ per barrel. When adjustment is made for quality and freight the average realized well head price is likely to be well below the budgeted price of US$75.

 

In the last two decades, the nation has embraced natural gas as the new staple. For us, however, the reality is that the growth rate has plateaued. A combination of reserve constraints and weak investor appetite means that the growth rates experienced in the period 1992 to 2006 are unlikely to be repeated. Moreover, on the international markets, the price decline seen in the US is likely to spread across to other markets as the gas trade expands-. The bottom line, Larry, is that the goose is less prolific than before. It is a reality the country now has to face. For all its promise the energy sector wealth will lead to just periods of boom and bust unless it is properly harnessed in a deliberate strategy of onshore transformation. Bearing in mind that your predecessor returned to Parliament, for the second straight year, to increase the size of expenditure budget, the fiscal equation must be in disarray.

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In the short term therefore, you must identify other revenue sources even as you begin to prepare the population for a different economic future. Several low hanging fruits can be picked almost immediately. These include:

• Improved tax administration,

• Measures to improved productivity

• Increase taxes on wealth assets.

 

With respect to the latter, while your political colleagues campaigned on the theme of “Axe the Tax’, you must now place the harsh reality of the revenue crunch before them and in whatever name, return to the business of property tax.  As the situation with Wayne Kubablansignh has shown, it is not uncommon for politicians to say one thing on the campaign trail in order to win an election, act in a manner diametrically opposed, manner once in office. After all, we have all been taught that yesterday was yesterday and today is today.

 

The fiscal challenge you inherited comes from the expenditure side.  In your examination of recent trends, you will discover how successive governments have treated windfall revenue as though it was the new norm. In this respect, although your predecessor appeared to be tight fisted, he actually outperformed Mr. Manning. Recurrent expenditure grew by 12.3 % per annum in the first two years of the PP Government, notwithstanding stagnant revenue. An important lesson of the economic slump of the 1980’s is that expenditure cuts are difficult to administer without a rise in social and political discontent. Your largest gains here could come from a redirection of expenditure. Your biggest task is to wean the population off the subsidies created over the years which currently absorbs some 52 per cent of the national budget. If you embrace this as an imperative then you should be aware that the process of change should start right inside the Cabinet.  The wanton waste of public funds for private purposes cannot be condoned. So, too, is the largesse of political patronage that passes as employment creation.

 

With a shrinking revenue base very little will be left over for capital expenditure; in the circumstances, the deficit spending financed by local of foreign banks is one option. Two important factors to bear in mind: The first is what you have already observed in your maiden speech – the debt to GDP ratio is rising and if we are not careful we could get into uncomfortable zones. The second issue is that, as a banker you would know that borrowed funds need to be channelled into projects with the highest net socio-economic benefit. To put it another way, you cannot allow politics to dictate priorities on the capital expenditure programme.

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As a career banker you are very familiar with the value of savings and investments. The principles that you instilled in your customers now need to be sold to the Cabinet. From what we have seen this far, savings appear to be a residual for the PP Government. But in a resource-based economy, exposed as we are to the vagaries of international commodity price fluctuations, savings for the future must be a conscious and deliberate act.  I therefore hope you would agree to allocate the value of 5% of the hydrocarbon produced each year to a Heritage Fund, separate and apart from a stabilization Fund. With respect to investments, I anticipate that you would move expeditiously to fulfil the promise of last Budget to place the shares of First Citizens on the Stock Exchange. In so doing however, you need to ensure that there is widest distribution of public holdings. To do otherwise would be to betray the underlying philosophy that led to the formation of First Citizens legacy companies.

 

Beyond the arithmetic, your fiscal policy choices must be aimed at fostering economic expansion. Since independence our economic strategy has been two-pronged, focusing on import replacement and the resource monetisation. We have experienced two periods of economic boom during the post-independence period and in your lifetime. On both occasions we managed to set the foundation for expansion of the offshore staple without at anytime focussing on the challenge of onshore transformation. While the resource-based strategy has worked well, conditions in the global market and domestic resource constraints suggest that it may have run its course.

 

The basis for such transformation lies in the creativity of our people. At the Lloyd Best Institute, we propose the multiplicity of small indigenous enterprises, what we call the maroon firm, as the key to transformation. Now that the Point Lisas Strategy is in sunset, we need to take our lessons and apply it elsewhere. Point Lisas offers two important lessons:  First, it combined indigenous resources- natural gas and people skill, with foreign technology and marketing expertise to create a winning formula. Second, the seeds were, however, sown with considerable fertilising of state funds. No other sector has been afforded that kind of support, certainly not the high local content, foreign-exchange earning, import-displacing enterprises on which our future depends. In approaching the task of transformation, I wish to encourage you to look internally, to reinforce your belief in our people. The more people who can be directed to sustainable jobs of their own making, with the potential for wealth creation, the less will be the need for social security welfare payments and make-work allocations. A paradigm shift is required and, on this day, the historic responsibility falls upon you.