Gerard Johnson, General Manager of the Caribbean Country Department, Inter-American Development Bank (IDB): Interview

Interview: Gerard Johnson

What policy interventions should be prioritised given the current low commodity price environment?

GERARD JOHNSON: Trinidad and Tobago has a high dependence on the energy sector, making it economically susceptible to external shocks in commodity prices. Energy income accounts for about half of the government’s total revenues. As such, the recent decline in oil prices and increased uncertainty in global energy markets are major challenges for T&T. These factors have brought into sharp focus the vulnerabilities of being heavily dependent upon the hydrocarbons sector. The IDB’s country strategy, which was previously agreed with the government, anticipated this situation, as it is squarely focused on a transition from high dependence on hydrocarbons. This includes: diversification of economic activity and exports; more efficient public expenditure systems and increased fiscal revenue from other sectors; and reform of the transfers and subsidies systems. Since 2010 the IDB has lent close to $1bn for projects in T&T and the current efforts to focus on increased productivity; strengthening T&T’s public financial management; boosting innovation and competitiveness; and advancing the single electronic window are fully consistent with this strategy.

How do small and medium-sized enterprises (SMEs) in T&T compare with other countries at a similar stage of development?

JOHNSON: T&T is the most industrialised economy in the English-speaking Caribbean, with strong institutions, political stability and improving educational levels. While there is a clear comparative advantage in terms of low energy prices, resource allocation towards the non-energy tradable sector remains a challenge. SMEs could play a leading role in diversifying away from resource-based industrialisation. There are over 20,000 SMEs operating in T&T. Analysing the nationally representative sample of the World Bank’s Enterprise Survey, the average annual sales growth rate for private enterprises in T&T is only 56% of the average for small economies within the upper-middle or high-income group. These firms have been operating longer, 20 years compared to 15 years in comparable economies, and are not as engaged in international trade, with 8% of T&T firms’ products exported, compared to 16%.

How have other comparable countries been able to increase the levels of SMEs’ internationalisation?

JOHNSON: Estonia is a good example of a commodity-exporting small economy that has been successful in developing a programme to provide grants for Estonian start-ups. Similarly, though in a much larger economy, the Brazilian Micro and Small Business Support Service assists SMEs in building export capabilities and facilitates their participation in foreign business summits. For T&T, it makes sense for policymakers to pick sectors for which the country has a comparative advantage and which are consistent with strategic aims. Programmes like the IDB’s ConnectAmericas Programme can help small local firms to diversify and expand markets, business partners and suppliers.

What steps can be taken to generate sustainable access to finance for T&T’s SMEs?

JOHNSON: Commercial banks have historically perceived Caribbean SMEs as high risk. High interest rates, combined with risk aversion, have resulted in a lack of funding for many start-ups. T&T is no exception: 29% of local firms consider access to finance to be a major or severe obstacle. Secured transactions reform would widen the range of acceptable collateral and partially mitigate risk perception. The government could also facilitate lending through the promotion of small financial institutions or non-government organisations that could serve as second-tier banks to provide microfinance solutions to small enterprises. Furthermore, a national strategy for a unique borrower identification system could be developed to reduce information asymmetries in local capital markets. It is important to create incentives to comply with established disclosure regulations.