Linda Hutchinson-Jafar, Business Writer
Ewart Williams, governor of the Central Bank of Trinidad and Tobago, says Port of Spain must act to improve food self sufficiency in order to contain inflation. - file
PORT-OF-SPAIN, Trinidad:
Control of the inflation rate which moved upwards in July for the first time in ten months, continues to pose a major headache for Trinidad and Tobago's Central Bank despite different measures to absorb high liquidity in the market.
The bank, however, plans to intensify efforts to mop up excess liquidity through open market operations and sale of foreign exchange.
"Strong demand pressures continue to impact on the domestic price level," the bank said in a statement.
"In addition to the high level of fiscal injections, private sector credit expansion remains unusually rapid, notwithstanding the intensification of open market operations and sizeable sales of foreign exchange."
Warning
It warned that continued increases in food import prices along with the current imbalance between the demand and supply for agricultural commodities will exert upward pressure on the domestic price level while fiscal policy announced in the 2007/08 budget is likely to continue to have an expansionary impact on inflation.
The latest data released by the state-agency, the Central Statistical Office, indicate that headline inflation rose to just under 8.0 per cent on a year-on-year basis to July from 7.3 per cent in the previous month.
Food price inflation, whose decline was responsible for the fall in headline inflation over the past seven months, however, showed a reversal with a year-on-year increase of 17.2 per cent in July compared to 14.7 per cent in June.
On a year-on-year basis, food price inflation reached 26.5 per cent in October 2006.
Rise in food prices
On a monthly basis, food prices rose by 2.8 per cent in July 2007 - the largest monthly increase for the year to date.
Core inflation remained at around 4.5 per cent, the same level for the last three months.
"This rigidity suggests that underlying inflationary pressures have not yet been fully contained," the bank said.
Bank Governor, Ewart Williams, said the evolution of inflation since the mid-1990s underscores the fact that the increase in food prices has been the main driver of inflation.
He told participants at a government-sponsored consultation on food prices that the country's inflation rate is also not too far out of line with its main Caricom partners.
Inflation at seven per cent
Barbados which traditionally had among the lowest inflation rates in the region, now has a rate of 7.0 per cent while Jamaica has brought down its inflation rate from 14 per cent to under 6.0 per cent.
"One obvious reason for the increase in food prices is the declining or sluggish agricultural production," said the central bank chief.
"According to CSO data, most agricultural commodities are showing production declines from levels obtaining at the beginning of the decade. The increase in import prices has also been impacting on the domestic prices of basic commodities, and very much so, recently."
Developed and developing countries alike are also reeling from the recent rise in food prices, he noted.
The food component of the CPI in OECD countries has accelerated to 12-year highs; in Britain, food inflation at 6.0 per cent is more than double the rate of the official CPI and the highest rate of increase in six years, while in June this year, poultry and dairy prices recorded their largest increases since 2004 in the United States.
Among the factors, he identified, as affecting food prices are rising global demand, led by China and India, climate change and rising demand for biofuels resulting in the divergence of corn, soybean and sugar supplies.
Williams said international forecasts are for global food price increases of 20-50 per cent over the next few years.
"It's clear that we need to act to improve our level of food self-sufficiency, " he told the forum.
New urgency
Prime Minister Patrick Manning conceded that the current world situation has given new urgency to his Government's push to expand agricultural production to help reduce food prices and begin the move to agricultural self-sufficiency.
Based on a recent public consultation on food prices, Government plans to implement a number of interim measures designed to expand the supply of food and ensure that the momentum with respect to the reduction in food prices and inflation is maintained.
Among them is the establishment of a Prices Advisory Council to address the level of prices in the economy.
There is also a Consumer Advisory Board to advise the Minister of Consumer Affairs on all matters relating to prices and consumerism and to monitor prices.
Commission established
An Agricultural Development Commission comprised of representatives of a wide cross-section of stakeholders in the sector, is being established to advise the Minister of Agriculture on developments and a review of the entire package of incentives related to small and large farms, organic farming, and agro-processing.
Opposition leader, Kamla Persad-Bissessar, describing the budget as an "inflationary one" predicts that government's fiscal spending as outlined in the 2007/08 budget will result in double-digit inflation before the end of the year.
The budget is projecting an average inflation rate of 6.0 per cent in 2008.
Noting that the budget increased the minimum wage, old age pensions, and disability grants, Persad-Bissessar said these will amount to nought as consumers face higher prices for goods and services, particularly food.
"In addition to having to pay higher prices for goods and services, particularly food, people will now find it more expensive to borrow money as liquidity control mechanisms will push interest rates up," she said.
The affected groups, said Persad-Bissessar, would include those holding mortgages with floating rates of interest and new borrowers.
"The business sector would also be adversely affected as increased interest rates are translated to increased financing charges and increased overdraft costs leading to a further decline in competitiveness.
Because these are usually passed-on-costs, consumers will be subjected to yet another round of price increases.
"The combined effect of the new round of government induced inflation contained in the budget, and the Central Bank's response to it will negate the material benefit to be derived from the proposed increase in the depreciation allowance for plant and machinery," she said.
Urging the government to curb excessive spending, economist Dr. Dhanayshar Mahabir said more savings should be channelled towards the Heritage and Stabilisation Fund, which currently has savings of US$2 billion, representing unbudgeted revenues gained from high international oil prices.
In light of the recent Ryder Scott report which gave the country a reserves to production ratio of 12 years, Mahabir said the government should be conservative on spending and more focused on saving for the next 10 years.
"The Government needs to act as though we need to be more cautious in light of uncertainties. We should not have three billion in saving a year but double up our saving rate over the next ten years to six billion a year," said the UWI, St Augustine campus economist.
He also criticised the government for its US$7 billion fiscal package and said it should have been reduced to promote a stable economy.
"There is a need for the government to be cautious about the fragile macro-environment. Expenditure should have been decreased," said Mahabir.
"This would have eased the pressure on inflation, prevent the Central Bank from having to intervene in the controlling of inflation and interest rates."
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