Abstract
This paper examines economic developments in Trinidad and Tobago during 1990–94. Economic activity in 1992–93 was severely affected by a fall in output in the oil/gas sector, a sharp drop in the average oil export price, and persisting weakness in the nonpetroleum sector. As a result, real GDP declined further by a cumulative 3½ percent in the two-year period, and unemployment rose to more than 20 percent. Real domestic expenditure fell by 3½ percent a year, with declines in both consumption and investment.
III. Recent Economic Developments
1. Developments in 1992-93
Beginning in 1992, the pace of structural adjustment was intensified with the revamping of taxation of the oil/gas sector to encourage increased exploration 2/; the liberalization of the exchange and trade systems through progressive reductions of import tariffs, the removal of exchange controls and quantitative trade restrictions, and a move to a market-determined exchange rate following a 26 percent devaluation of the currency (in foreign currency terms) in April 1993; and a further streamlining of the public sector through privatization of enterprises, improvements in the efficiency of the public utilities, and rationalization of public sector work force. In addition, the tariffs of public utilities and services were raised in 1992-93 to bring them closer to actual costs--with increases of 15 percent for electricity, 20 percent for public transport, and 35 percent for water and sewerage.
In the event, economic activity in 1992-93 was severely affected by a fall in output in the oil/gas sector, a sharp drop in the average oil export price, and persisting weakness in the nonpetroleum sector. As a result, real GDP declined further by a cumulative 3 1/2 percent in the two-year period and unemployment rose to over 20 percent (Table 1). Real domestic expenditure fell by 3 1/2 percent a year, with declines in both consumption and investment. National savings fell less sharply in relation to GDP from 15 percent in 1991 to about 14 1/2 percent in 1992-93, and the external current account shifted from a deficit of about 1 percent of GDP in 1991 to an average surplus of about 1 1/2 percent of GDP in 1992-93.
Trinidad and Tobago: Selected Economic and Financial Indicators
From December 1993 to October 1994.
In relation to liabilities to the private sector at the beginning of the period. The financial system excludes finance houses, and thrift and development banks.
Before debt rescheduling.
Deficit presented as negative.
Including errors and omissions.
Imports of goods and nonfactor services.
Trinidad and Tobago: Selected Economic and Financial Indicators
| 1991 | 1992 | 1993 Prel. |
1994 Est. |
|||
|---|---|---|---|---|---|---|
| (Annual percentage change, unless otherwise specified) | ||||||
| National income and prices | ||||||
| Real GDP | 2.7 | -1.7 | -1.7 | 4.0 | ||
| GDP deflator | 2.0 | 4.2 | 9.9 | 9.2 | ||
| Consumer prices (end of year) | 2.3 | 8.5 | 13.5 | 5.9 | ||
| (period average) | 3.8 | 6.5 | 10.8 | 8.3 | ||
| External sector | ||||||
| Exports, f.o.b. | -8.3 | -5.7 | -13.7 | 10.9 | ||
| Imports, c.i.f. | 28.5 | -16.5 | -2.9 | 3.3 | ||
| Export volume | 1.3 | -1.3 | -5.3 | 6.7 | ||
| Import volume | 29.6 | -16.2 | -0.8 | 1.8 | ||
| Terms of trade (deterioration -) | -8.6 | -4.0 | -6.9 | 2.4 | ||
| Nominal effective exchange rate; and of period (depreciation -) | 3.9 | 3.9 | -25.1 1/ | -5.8 | ||
| Real effective exchange rate; and of period (depreciation -) | 1.0 | 9.0 | -17.7 1/ | -5.2 | ||
| Central Government | ||||||
| Revenue and grants | 20.5 | -9.9 | 11.2 | 13.0 | ||
| Total expenditure | 15.6 | -1.1 | -0.2 | 14.8 | ||
| Financial system 2/ | ||||||
| Net domestic assets | 14.0 | 2.7 | -0.4 | -4.1 | ||
| Of which: credit to public sector | -1.0 | 3.0 | -8.1 | -5.3 | ||
| credit to private sector | 12.8 | 1.6 | 3.3 | -4.0 | ||
| Money and quasi-money | 6.0 | -3.0 | 17.3 | 6.3 | ||
| Liabilities to private sector (LPS) | 6.6 | 1.0 | 11.5 | 7.8 | ||
| Deposit rate (weighted) | 7.1 | 8.3 | 8.8 | 9.5 | ||
| Lending rate | ||||||
| Prime | 12.9 | 15.5 | 15.5 | 15.0 | ||
| Weighted | 11.9 | 12.5 | 12.7 | 14.0 | ||
| Treasury bills | 7.6 | 9.3 | 9.5 | 10.7 | ||
| (In percent of GDP) | ||||||
| Overall central government balance 3/ 4/ | -0.2 | -2.8 | 0.2 | -0.3 | ||
| Overall public sector balance 4/ | 0.1 | -2.1 | 1.1 | -3.1 | ||
| Domestic financing | 4.3 | 4.4 | -- | 2.7 | ||
| Foreign financing | -4.2 | -2.3 | -1.1 | 0.4 | ||
| Gross investment | 16.1 | 12.3 | 13.1 | 13.4 | ||
| Gross national savings | 15.2 | 14.0 | 14.7 | 15.5 | ||
| External current account balance 4/ | -0.9 | 1.7 | 1.6 | 2.1 | ||
| Trade balance 4/ | 5.9 | 8.5 | 6.8 | 9.0 | ||
| Net capital inflow 4/ 5/ | -2.1 | -2.3 | 1.8 | 0.9 | ||
| External public debt (end-period) | 45.9 | 40.7 | 48.9 | 43.4 | ||
| (In percent of exports of goods and nonfactor services) | ||||||
| External public debt service | 29.5 | 34.4 | 34.8 | 30.4 | ||
| Interest payments | 10.6 | 8.6 | 8.2 | 8.0 | ||
| (In millions of U.S. dollars) | ||||||
| Overall balance of payments 3/ | -297.0 | -102.3 | 155.7 | 150.5 | ||
| Change in net official reserves (increase -) | 173.9 | 32.5 | -155.7 | -150.5 | ||
| Gross official reserves, end-period | 340.2 | 207.3 | 223.9 | 302.4 | ||
| (in months of imports) 6/ | 2.5 | 1.7 | 1.9 | 2.5 | ||
From December 1993 to October 1994.
In relation to liabilities to the private sector at the beginning of the period. The financial system excludes finance houses, and thrift and development banks.
Before debt rescheduling.
Deficit presented as negative.
Including errors and omissions.
Imports of goods and nonfactor services.
Trinidad and Tobago: Selected Economic and Financial Indicators
| 1991 | 1992 | 1993 Prel. |
1994 Est. |
|||
|---|---|---|---|---|---|---|
| (Annual percentage change, unless otherwise specified) | ||||||
| National income and prices | ||||||
| Real GDP | 2.7 | -1.7 | -1.7 | 4.0 | ||
| GDP deflator | 2.0 | 4.2 | 9.9 | 9.2 | ||
| Consumer prices (end of year) | 2.3 | 8.5 | 13.5 | 5.9 | ||
| (period average) | 3.8 | 6.5 | 10.8 | 8.3 | ||
| External sector | ||||||
| Exports, f.o.b. | -8.3 | -5.7 | -13.7 | 10.9 | ||
| Imports, c.i.f. | 28.5 | -16.5 | -2.9 | 3.3 | ||
| Export volume | 1.3 | -1.3 | -5.3 | 6.7 | ||
| Import volume | 29.6 | -16.2 | -0.8 | 1.8 | ||
| Terms of trade (deterioration -) | -8.6 | -4.0 | -6.9 | 2.4 | ||
| Nominal effective exchange rate; and of period (depreciation -) | 3.9 | 3.9 | -25.1 1/ | -5.8 | ||
| Real effective exchange rate; and of period (depreciation -) | 1.0 | 9.0 | -17.7 1/ | -5.2 | ||
| Central Government | ||||||
| Revenue and grants | 20.5 | -9.9 | 11.2 | 13.0 | ||
| Total expenditure | 15.6 | -1.1 | -0.2 | 14.8 | ||
| Financial system 2/ | ||||||
| Net domestic assets | 14.0 | 2.7 | -0.4 | -4.1 | ||
| Of which: credit to public sector | -1.0 | 3.0 | -8.1 | -5.3 | ||
| credit to private sector | 12.8 | 1.6 | 3.3 | -4.0 | ||
| Money and quasi-money | 6.0 | -3.0 | 17.3 | 6.3 | ||
| Liabilities to private sector (LPS) | 6.6 | 1.0 | 11.5 | 7.8 | ||
| Deposit rate (weighted) | 7.1 | 8.3 | 8.8 | 9.5 | ||
| Lending rate | ||||||
| Prime | 12.9 | 15.5 | 15.5 | 15.0 | ||
| Weighted | 11.9 | 12.5 | 12.7 | 14.0 | ||
| Treasury bills | 7.6 | 9.3 | 9.5 | 10.7 | ||
| (In percent of GDP) | ||||||
| Overall central government balance 3/ 4/ | -0.2 | -2.8 | 0.2 | -0.3 | ||
| Overall public sector balance 4/ | 0.1 | -2.1 | 1.1 | -3.1 | ||
| Domestic financing | 4.3 | 4.4 | -- | 2.7 | ||
| Foreign financing | -4.2 | -2.3 | -1.1 | 0.4 | ||
| Gross investment | 16.1 | 12.3 | 13.1 | 13.4 | ||
| Gross national savings | 15.2 | 14.0 | 14.7 | 15.5 | ||
| External current account balance 4/ | -0.9 | 1.7 | 1.6 | 2.1 | ||
| Trade balance 4/ | 5.9 | 8.5 | 6.8 | 9.0 | ||
| Net capital inflow 4/ 5/ | -2.1 | -2.3 | 1.8 | 0.9 | ||
| External public debt (end-period) | 45.9 | 40.7 | 48.9 | 43.4 | ||
| (In percent of exports of goods and nonfactor services) | ||||||
| External public debt service | 29.5 | 34.4 | 34.8 | 30.4 | ||
| Interest payments | 10.6 | 8.6 | 8.2 | 8.0 | ||
| (In millions of U.S. dollars) | ||||||
| Overall balance of payments 3/ | -297.0 | -102.3 | 155.7 | 150.5 | ||
| Change in net official reserves (increase -) | 173.9 | 32.5 | -155.7 | -150.5 | ||
| Gross official reserves, end-period | 340.2 | 207.3 | 223.9 | 302.4 | ||
| (in months of imports) 6/ | 2.5 | 1.7 | 1.9 | 2.5 | ||
From December 1993 to October 1994.
In relation to liabilities to the private sector at the beginning of the period. The financial system excludes finance houses, and thrift and development banks.
Before debt rescheduling.
Deficit presented as negative.
Including errors and omissions.
Imports of goods and nonfactor services.
Public sector consumption declined by 1 1/2 percent a year in 1992-93, reflecting continued downsizing of the work force as well as cuts in the purchase of other goods and services. Private sector consumption fell by 3 percent a year in response to lower real incomes. Public investment fell from 8 percent of GDP in 1991 to an average of 5 percent of GDP in 1992-93 partly because of ongoing privatization of public enterprises and partly because of project implementation difficulties. Private investment fell initially from 8 percent of GDP in 1991 to 7 percent of GDP in 1992, as uncertainties about the future course of economic policies caused some faltering, but picked up to 8 1/2 percent of GDP in 1993 as investment opportunities emerged in new areas. Mainly because of the adverse effect of the fall in oil prices on government revenue, public sector savings fell from 7 1/2 percent of GDP in 1991 to 3 percent of GDP in 1992, but recovered to about 6 percent of GDP in 1993 as spending was curbed.
Reflecting the pass-through effects of higher indirect taxes in 1992, the increases in utility rates and the currency devaluation in 1993, the 12-month rate of inflation accelerated from about 2 percent at the beginning of 1992 to about 13 1/2 percent at end-1993. The prices of food and beverages rose by 18 percent and of household supplies by 16 percent mainly because of their import contents. Also, the reduction in subsidy for liquified petroleum gas (LPG), kerosene, and gasoline led to higher energy and transportation costs; the price index for transportation rose by 10 percent in 1993.
The consolidated public sector position shifted from an overall balance in 1991 to a deficit of 2 percent of GDP in 1992 before recording a surplus of 1 percent of GDP in 1993. The deficit in the operations of the Central Government widened to nearly 3 percent of GDP in 1992 but shifted to a small surplus of 0.2 percent of GDP in 1993 following improvement in non-oil/gas tax administration and cuts in current expenditures. 1/ The operations of the nonfinancial public enterprises registered surpluses of about 1/2 percent of GDP in 1992 and 1 percent of GDP in 1993 mainly because investments by energy-related enterprises were postponed.
Total revenue of the Central Government declined from about 30 percent of GDP in 1991 to an average of 26 1/2 percent of GDP in 1992-93 mainly because of a 5 percentage points loss in oil tax receipts attributable to the lower corporate income taxes paid due mainly to the fall in oil prices and the restructuring of oil/gas taxation. This decline was partly offset in three main areas: by the full effect in 1992 of the value-added tax introduced in 1990; higher income tax revenues from the non-oil/gas sector because of a temporary increase in the top marginal rates for personal income taxes from 30 percent to 35 percent in 1992; and a significant improvement in the collection of excise duties following increases for petroleum products, alcoholic beverages and tobacco products. At the same time, Central Government expenditure was reduced from 30 percent of GDP in 1991 to an average of 28 percent of GDP a year in 1992-93. The bulk of the reduction was in capital expenditure and net lending, which fell from about 3 1/2 percent of GDP in 1991 to an average of about 1 1/2 percent of GDP a year in 1992-93. Current expenditure remained at about 26 1/2 percent of GDP a year mainly because of significant increases in interest payments.
The financial operations of the public enterprises remained broadly unchanged with operating surpluses of about 2 1/2 percent of GDP a year in 1992-93. This reflected continued progress with restructuring of activities and reduction of the work force. Current and capital transfers from the Central Government declined from 4 percent of GDP in 1991 to an average of 2 percent of GDP a year in 1992-93. Investment by public enterprises declined from 4 percent of GDP in 1991 to about 3 percent of GDP a year in 1992-93 mainly because of the postponement of energy related projects.
The net domestic assets of the financial system increased by the equivalent of 3 percent of the liabilities to the private sector at the beginning of the year in 1992 and declined slightly in 1993. Slow growth in credit as the economy contracted and a significant net repayment by the Central Government in 1993 were the main factors behind this pattern. Overall bank credit expansion to the private sector slowed from about 13 percent in 1991 to about 2 1/2 percent a year in 1992-93. The tightening of credit policy, which included higher reserve requirements established at end-1991 and an increase in the Central Bank’s rediscount rate in 1992, also contributed to slow down credit expansion. Growth in the financial system liabilities to the private sector decelerated from 6 1/2 percent in 1991 to 1 percent in 1992 as a result of a decline in narrow money as holdings were adjusted to reflect downturn in the economy. In 1993, liabilities to the private sector increased by 11 1/2 percent, with little change in money velocity despite the rise in inflation.
The overall balance of payments recorded a deficit of US$100 million in 1992--about one-third of the deficit in the previous year--and a surplus of US$150 million in 1993. As indicated earlier, there was a marked turnaround in the external current account, with surpluses of about 1 1/2 percent of GDP a year in 1992-93, largely because of reductions in import volumes associated with the drop in investment outlays in 1992 and the devaluation in 1993. The decline in imports was especially pronounced in raw materials, and intermediate and capital goods--as activity began to adapt to structural changes; imports of consumer goods also fell by about 16 percent in 1993 reflecting the effects of the devaluation as well as the continued economic downturn. Export receipts fell by 8 percent a year in 1992-93 mainly because of declines in both volume (3 percent a year) and unit value (6 percent a year). The declines were mainly in fuel and chemicals, as nontraditional exports increased somewhat. Net service payments increased in 1992 as a result of higher interest payments on public external debt and large repatriation of earnings, but dropped in 1993 reflecting lower international interest rates.
The capital account (including errors and omissions) improved steadily from a deficit of US$250 million in 1991 to a surplus of US$80 million in 1993, owing mainly to a decline in scheduled amortization of public external debt in 1992, the placement of Eurodollar bonds in 1992-93, and the inflow of proceeds from the privatization of public enterprises which offset large foreign debt repayments and private capital outflows in 1993. The overall balance of payments outturns in 1992-93 were insufficient to cover repurchases to the Fund of US$230 million (67 percent of quota), and gross official international reserves fell from US$340 million at end-1991 to US$220 million at end-1993--equivalent to two months of imports of goods and nonfactor services.
Trinidad and Tobago’s external public debt (including debt to the Fund) declined from US$2,438 million (46 percent of GDP) at end-1991 to US$2,215 million (41 percent of GDP) at end-1992. It fell further to US$2,096 million in 1993 but as a proportion of GDP it rose to about 49 percent as a consequence of the devaluation in April 1993. The level of debt outstanding in terms of U.S. dollars remains sensitive to exchange rate movements among major currencies, as only about 60 percent of Trinidad and Tobago’s debt in denominated in U.S. dollars.
2. Developments in 1994
In 1994, the economy started to respond favorably to the various policies and structural measures implemented in recent years. Real GDP is estimated to have grown by 4 percent mainly as a result of expansion in the oil/gas sector--reflecting higher production of natural gas, methanol and nitrogenous fertilizers. Growth in the non-oil/gas sector is estimated at about 2 percent with a recovery in commerce and agriculture.
Inflation declined to less than 6 percent by end-1994 with the completion of the pass-through effects of the currency devaluation in the previous year. The price increases for most consumer goods and services decelerated, except for food, which increased by 11 percent due to domestic shortages of fresh produce at the beginning of the year. The unemployment rate fell to about 18 percent, as a result of the turnaround in economic activity.
The consolidated public sector is estimated to have shown an overall deficit of about 3 percent of GDP in 1994--compared with zero balance envisaged at the beginning of the year--because investment by public enterprises in the oil/gas sector accelerated with the implementation of the projects that were postponed in the previous years. The operations of the Central Government are estimated to have been in an overall deficit of 0.3 percent of GDP in 1994. The financial position of the Central Government was weakened as a result of the fall in oil prices during the first quarter of 1994 which was more pronounced than had been envisaged at the time the budget was formulated, and by unanticipated expenditure--mainly for transfers to the utilities and to the University of West Indies (to unlock approved foreign assistance). In these circumstances, there was an effort to contain current expenditure through a further reduction of the public sector work force, the application of stricter limits on the purchases of goods and services, and reductions in subsidies and transfers to other public entities. In addition, various fees and charges were raised.
Total revenue of the Central Government is estimated to have remained at about 27 percent of GDP in 1994, as one half of a percentage point fall in oil tax receipts was almost offset by an improvement in non-oil revenues. Income tax continued to show strong buoyancy and nontax receipts nearly doubled because of net profit transfers from the new lottery scheme, off-setting a shortfall in collections from import taxes and excise duties. Central government expenditures is estimated to have risen slightly to about 27 percent of GDP in 1994 as most et the increase in capital expenditure and net lending was offset by one half of a percentage point of GDP reduction in current expenditure stemming from the containment of the wage bill.
Credit policy was tightened around mid-1994 in the face of the weaker fiscal position in an effort to help bring inflation down, contain private capital outflows, and ease the pressures on the exchange rate that had emerged. Bank reserve requirements were raised from 16 percent to 18 percent in April 1994 and to 20 percent in July. In addition, the financial system was liberalized with the removal of all selective credit and interest rate controls. 1/ Interest rates firmed in the second half of the year with both lending and deposit rates rising by about 1 percentage point to 14 percent and 9 1/2 percent, respectively. Overall credit declined by about 10 percent. Credit to the private sector (in relation to liabilities to the private sector at the beginning of the year) is estimated to have dropped by 4 percent in 1994, and net credit to the public sector to have fallen by 5 percent; the financial system liabilities to the private sector are estimated to have increased by 8 percent, about in line with nominal GDP.
The balance of payments is estimated to have recorded an overall surplus of US$150 million in 1994, approximately the same as in the previous year. The external current account surplus-rose to 2 percent of GDP as a result of a strong increase in chemical and nontraditional exports and a decline in imports. The increase in chemical and nontraditional exports reflect to a large extent full capacity production of new petrochemical plants and the stimulus provided by the reforms of the trade and exchange systems. The surplus in the account capital (including errors and omissions) is estimated to have declined to US$46 million in 1994 as a result of large external debt repayments and sizable private capital outflows. The latter were a consequence of continued portfolio realignment by insurance companies and commercial banks, following the introduction of the floating exchange rate system and the removal of restrictions on their holding of foreign assets. After repurchases to the Fund, gross official international reserves rose to the equivalent of over 2 1/2 months of imports of goods and nonfactor services. External public debt is estimated to have declined slightly to US$2088 million in 1994 (43 percent of GDP); the currency composition remained largely unchanged.
The exchange and trade system of Trinidad and Tobago has been liberalized in several steps since 1989. 2/ The Trinidad and Tobago dollar was pegged to the U.S. dollar at the rate of TT$4.25 per U.S. dollar between August 17, 1988 and April 12, 1993. On April 13, 1993, the currency was devalued by 26 percent in foreign currency terms to TT$5.72 and was allowed to be market determined. Since then, the exchange rate has moved within a narrow range and the mid-point between buying and selling rates was TT$5.89 per U.S. dollar at end-December 1994. The real effective exchange rate at end-October 1994 was about 5 percent more depreciated than at end-1993 and some 22 percent more depreciated than at end-1992. 1/ The trade system is free of controls, except for restrictions on imports of a few items relating to health and security.
For more detail on the petroleum tax regime, see Appendix II of the 1993 report on recent economic developments (SM/93/249;11/3/93).
Military expenditure is fully reflected in the fiscal, debt, and balance of payments data, although it is identified separately only in the fiscal data. The deficit of the Central Government excludes proceeds from the divestment of public enterprises.
Section VII describes the financial liberalization in Trinidad and Tobago over the last decade and Section VIII examines the stability of the demand for currency and broad money.
A detailed description of the exchange and trade system at the end of 1993 is contained in the IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, 1994.
Indicators of competitiveness are examined in Section X.