International Finance

IMF opines Trinidad and Tobago could use its buffers to smooth out the pace of adjustments

Directors commended steps taken in FY2016/17 and in the FY2017/18 budget proposal towards fiscal adjustment

On October 23, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Trinidad and Tobago.

Trinidad and Tobago has faced several years of weak or negative growth on the back of low global energy prices and energy supply shocks, which have led to sharp deteriorations in the country’s internal and external balances. Combined with an 11 percent fall in energy sector output, a 2 percent decline in non-energy sector activity saw real GDP shrink by 6 percent in 2016, with a further decline of 3¼ percent projected by IMF staff in 2017. The combined impact of weak growth and low energy sector revenues increased the overall fiscal deficit to 12.1 percent of GDP in fiscal year 2016, though it is expected to drop to 11.0 percent of GDP in fiscal year 2017. Meanwhile, the current account deteriorated by 14 ½ percentage points to a deficit of 10.7 percent of GDP in 2016, with an 8 ½ percent of GDP deficit expected in 2017, on the back of low energy export prices and volumes. Gross reserves fell slightly, from US$9.9 billion (10¼ months of imports) in 2015 to US$9.5 billion (9½ months of imports) in 2016, and are projected to fall by another US$1 billion (1 month of imports) this year, albeit amid continued foreign exchange shortages. Headline and core inflation remained low at 3 percent and 2 percent (y/y), respectively, at end-2016, while unemployment ticked up to 4 percent.

The government has taken steps to adjust fiscal imbalances, through efforts to reform the energy tax regime, reduce fuel subsidies, and boost non-energy revenues. The authorities have engaged the World Bank to conduct a Public Expenditure Review, which will aim to identify cost-savings in health, education, and social services. On the monetary front, the Central Bank stopped its tightening cycle at end-2015, given the severity of the economic downturn, and has since held interest rates constant. As pressures in the foreign exchange market became more aggravated, the nominal exchange rate against the US dollar was allowed to depreciate by about 7 percent in the second half of 2016, but has been held steady since, and external balance models suggest a substantial real exchange rate overvaluation persists. The banking sector remains resilient and profitable.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They noted that continued low energy prices and production and weakness in the non-energy sector have taken a significant toll on the fiscal and external positions. The risks to the outlook are tilted to the downside. With this backdrop, Directors considered that Trinidad and Tobago could use its buffers to smooth out the pace of adjustment. The draft FY2017/18 budget constitutes a significant step along the needed fiscal adjustment path. However, restoring macroeconomic stability, managing external imbalances, and supporting broad based and inclusive growth would require additional fiscal consolidation, measures to restore balance in the foreign exchange market and structural reforms.

Directors commended steps taken in FY2016/17 and in the FY2017/18 budget proposal towards fiscal adjustment. These steps included the introduction of property, excise and gaming taxes, royalties on natural gas production and elimination of fuel subsidies. However, more adjustment is needed. In this vein, the proposed budget introduces processes to improve revenue collection, streamline expenditure and achieve full cost recovery pricing to significantly reduce transfers to public utilities, which, if they lead to further budgetary savings, would constitute another significant step in the right direction. In addition, Directors noted the need to further broaden the VAT base and consider raising the overall VAT rate to the regional average; finalize reforms of the fiscal regime for oil and gas; and significantly reduce the cost of transfers and subsidies through better targeting, while protecting vulnerable segments of the population.

Directors noted that the external position has deteriorated due to the large terms of trade shock. The external position in 2016 was weaker than suggested by fundamentals, although the international reserves cover is still relatively strong. Going forward, policy measures are needed to deal with foreign exchange shortages, which undermine investor confidence and country risk perceptions. Directors encouraged the authorities to swiftly reduce and eventually eliminate these imbalances and distortions, including through an exchange rate adjustment as part of a broader package of fiscal adjustment and structural reforms. Directors supported the pause in monetary tightening to strike a balance between supporting growth and managing capital flows.

Directors observed that the financial system remains resilient and profitable despite the prolonged economic weakness. They commended the central bank for its efforts towards the adoption of Basel II standards by June 2018. Directors also encouraged the authorities to pass long awaited insurance legislation, address deficiencies in the AML/CFT framework, and comply with the Global Forum’s standards on tax transparency.

Directors underscored the importance of steadfast implementation of structural reforms to boost potential growth. In this regard, key areas include removing distortions to the labor market and pervasive rigidities in the public sector, improving the business climate for the non-energy sector, raising the efficiency of state owned enterprises, and improving procurement practices. Directors welcomed progress toward the creation of the National Statistical Institute to address remaining data shortcomings to strengthen policy making and surveillance.

It is expected that the next Article IV consultation with Trinidad and Tobago will be held on the standard 12-month cycle.

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