IMF Executive Board Concludes 2016 Article IV Consultation with Trinidad and Tobago
Trinidad and Tobago’s output has continued to shrink while declines in global energy prices are leading to surging fiscal deficits and are pushing the external current account into deficit. Energy output is sharply lower due to supply-side constraints. Combined with weak non-energy growth, real GDP is estimated to have declined 2.1 percent in 2015 and is expected to fall another 2.7 percent in 2016. The lower energy prices and weaker growth have contributed to a steep fall in fiscal revenues, raising the FY 2014/15 (October to September) deficit to 4.7 percent of GDP, and once the full-year impact is felt, to a projected 10.9 percent of GDP in FY 2015/16.2 In addition, lower energy prices reversed Trinidad and Tobago’s usual current account surplus, with the current account estimated at a deficit of 5.4 percent in 2015, while gross official reserves fell from US\\$11.3 billion to US\\$9.8 billion during 2015. Core inflation remained anchored at 2.0 percent yoy in 2015, while headline inflation fell to 1.5 percent (yoy). Unemployment remained low (3.6 percent in September 2015), in part as make-work programs continue to facilitate employment, though layoffs are picking up.
The new government has undertaken fiscal adjustments intended to bring the economy back into balance. It introduced new revenue measures with the FY 2015/16 budget, and made further adjustment measures mid-year when it became clear that even the seemingly conservative energy price assumptions in the budget were overoptimistic, due to the subsequent continued decline in energy prices. The Central Bank began tightening monetary policy to mitigate capital outflows beginning in late 2014, before pausing in January 2016. Although the currency has been allowed to depreciate modestly against the U.S. dollar, external balance models suggest the currency remains substantially overvalued (although the degree of overvaluation is subject to uncertainty due to historical shortcomings in domestic data), while foreign exchange shortages persist. Banks remain strong, while there has been some progress on structural reforms, notably with respect to a significant start on efforts to remedy statistical shortcomings.
Executive Board Assessment3
Executive Directors noted that the recent sharp decline in energy prices is posing major challenges to Trinidad and Tobago’s economy. Directors welcomed the efforts taken by the new government and encouraged further policy actions, including additional fiscal consolidation and structural reforms, to preserve macroeconomic stability, diversify the economy, and enhance medium-term growth prospects.
Directors concurred that a strong medium-term fiscal plan is needed to re-establish a sustainable fiscal path and ensure debt sustainability. They commended the authorities for the important steps taken thus far and encouraged them to put in place a comprehensive fiscal framework to guide their multi-year adjustment efforts. Directors agreed that priority should be given to broadening the revenue base with a comprehensive VAT reform, improving tax administration, phasing out fuel subsidies, while improving targeted social protection. In this context, they also welcomed the authorities’ intention to pursue a comprehensive expenditure review.
Directors supported the current pause in monetary policy tightening given the challenges to growth. They noted that while the immediate policy priority is to focus on maintaining external balance, addressing foreign exchange shortages on current transactions would be important. Directors noted that a well-communicated move to greater exchange rate flexibility, as part of a comprehensive demand-management package, would help strengthen the foreign exchange market and support the needed macroeconomic adjustment. Some Directors highlighted the importance of mitigating volatility in the foreign exchange market, and recommended a careful adjustment strategy.
Directors noted that strong comprehensive structural reforms are needed to achieve sustained and inclusive growth over the medium term. They emphasized the importance of pushing ahead with energy sector taxation reforms, addressing inefficiencies in the public service, and strengthening financial sector supervision and regulation, particularly the non-bank financial regulatory framework. They also welcomed ongoing efforts to further strengthen the AML/CFT framework.
Directors encouraged continued efforts to reform the labor market, improve the business climate, and make further progress on the establishment of a tax policy unit and the National Statistical Institute to address the remaining shortcomings.