Trinidad and Tobago: Economic Developments and Selected Background Issues
Author: International Monetary Fund
Publication Date:
14 Mar 1995
eISBN:
9781451837520
Language:
English
Keywords:
ISCR; CR; export of crude oil; island of Tobago; investment; wage cost; gas GDP; divested enterprise; trade protection; investment activity; Public sector; Oil; Public investment spending; Manufacturing; Private investment; gas output base
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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.

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.

IV. Economic Structure, Investment and Savings

Over the period 1970-94, the structure of output changed, reflecting the Government’s industrialization policy as well as the rate of exploitation of the crude oil reserves. The share of oil/gas in GDP declined from 22 percent in 1970 to 16 percent in 1973-81 when crude oil production was reduced. However, as oil/gas production was increased to offset decline in prices, the sector’s share rose to 25 percent in 1982-89 and to about 26 percent in 1990-94. Non-oil/gas output base of the economy expanded rapidly in 1973-81 as a result of the Government’s industrialization strategy to diversify output toward manufactured products with higher value added. The share of manufacturing in GDP increased from 10 percent in 1970 to about 11 percent in 1973-81 and the share of services increased from 60 percent in 1970 to 67 percent in 1973-81. However, these activities developed behind extensive protection and large government subsidies. With the fall in incomes stemming from the decline in oil and petrochemical prices in 1982-89, manufacturing, distribution and hotel and financial services experienced problems and contracted. In 1982-89 the share of manufacturing relative to GDP fell to 7 1/2 percent and that of services dropped to 65 percent. As the structural reforms were deepened, the decline in output was arrested in the subsequent years. In 1990-94 the share of manufacturing rose slightly to 8 percent of GDP but services further contracted to 62 percent.

1. Oil/gas sector

Proven oil reserves in Trinidad and Tobago are currently estimated at 490 million barrels of oil and 8.4 trillion cubic feet of natural gas, representing about ten years of current production. The largest oil and gas producers are foreign companies and state-owned enterprises. In 1994, the operation of Amoco--a foreign company--accounted for 41 percent of the oil production and for over 70 percent of the gas production. The state-owned Petrotrin and Trimmer are responsible for 28 percent of oil production; and the remaining 31 percent of oil production and 2 percent of gas production are undertaken by a number of small foreign companies.

Oil and gas production declined by about 1 1/2 percent a year in 1973 89 as existing wells matured and exploration remained low (Chart 1). At the same time, oil exports rose from US$5 million (2 percent of exports) in 1970 to an average of DS$1,055 million (65 percent of exports) in 1973-81 before declining to an average of US$808 million (40 percent of exports) a year in 1982-89. Since then, receipts from oil exports have remained at about the same level as in 1982-89. To reverse the declining trend in oil and gas production, the Government introduced a new petroleum tax regime in 1992 aimed at strengthening the incentives for exploration and secondary recovery. 1/ Encouraged by the new tax regime, deep drilling increased significantly, boosting both output and reserves. In 1994, oil production increased by 5 1/2 percent and gas production increased by 5 percent.

CHART 1
CHART 1

Trinidad & Tobago Developments in the Oil/Gas Sector

Citation: IMF Staff Country Reports 1995, 016; 10.5089/9781451837520.002.A004

Sources: Central Statistical Office; and Fund staff estimates.1/ In percent of oil/gas GDP.2/ In U.S. dollars deflated by import prices.

In the late 1970s and early 1980s, the Government expanded the petrochemical industry with the construction of ammonia, urea and methanol plants. As a result, output of petrochemicals increased by an average of 17 percent a year in 1982-89 compared with 4 percent a year in 1973-81. However, because of the weakening of international prices and limited access to external markets, government transfers to petrochemical industries rose to an average of 0.2 percent of GDP a year in 1985-89. This situation improved significantly with the subsequent recovery of international prices for petrochemicals. As a result of the construction of the second methanol plant in 1992-93, the value-added of the petrochemical industries increased from 1 1/2 percent of GDP in 1973-89 to more than 3 percent in 1994. Export earnings from these products increased from an average of 16 percent of total exports in 1973-89 and to 26 percent by 1994.

2. Agriculture

Agriculture accounts for about 12 percent of total employment with traditional outputs of sugar, rice, dairy, roots and starches. The share of the agricultural sector in real GDP has declined steadily from about 7 percent in 1970 to 3 percent in 1990-94. Among the major factors contributing to the relative decline of the sector are the loss of agricultural land that was diverted to other uses and increased losses in the cultivation of sugar--the largest agricultural activity. The acreage under cultivation in the agriculture sector declined from 131,000 hectares in 1963 to 107,400 hectares in 1982 and to 83,800 hectares by 1991.

The output base of agriculture is centered on sugar and rice production. Because sugar has been an important source of foreign exchange earnings and rice an important food input for domestic consumption, the two crops received government support in the form of guaranteed prices, discounted input supplies and protection from imported competing goods. In 1973-89 government transfers related to these crops were about 1 percent of GDP a year, accounting for almost 90 percent of total transfers to the agricultural sector. In recent years, the gradual withdrawal of government’s price support and trade protection for these crops led some farmers to move from the production of sugar and rice to nontraditional crops such as citrus and aquaculture.

Sugar production experienced increasing losses in recent years because unit production costs have increased relative to export prices. 1/ For instance, in 1973-81 unit labor costs in the sector increased by an average of 22 percent a year while sugar price increased by an average of 14 percent a year. In 1982-89 the unit labor costs increased by an average of 17 percent a year, exceeding by 15 percent the average increase in sugar prices during this period. However, the unit labor costs fell by an average of 14 percent a year in 1990-94 largely due to restructuring efforts, thereby reducing the loss in sugar operations.

The Government initiated major structural adjustment efforts in the agriculture sector in 1992. 1/ These efforts include restructuring the sugar sector to improve its operations, increasing acreage under cultivation, identifying areas for agricultural diversification and reducing protection. At the same time, the Government’s role is being limited to providing infrastructure, information on markets, technical assistance and other extension services.

3. Nonpetroleum manufacturing sector

The nonpetroleum manufacturing sector accounts for about 10 percent of total employment and 8 percent of GDP. It consists of both capital-intensive heavy industries producing steel, cement and automobile assembly, and labor-intensive light industries producing food, beverages, electronic appliances, textiles and wood products (Table 4). Output grew by an average of 5 percent a year in 1973-81. As indicated earlier, this expansion was made possible by protection in the form of import restrictions, high tariff on competing imported goods and duty concessions on imported inputs. As domestic demand weakened after the fall of oil and petrochemical prices, manufacturing output contracted by an average of 3 percent a year in 1982-89 even as the Government increased subsidies to loss making industries.

Table 2.

Trinidad and Tobago: Sectoral Contribution to Real Growth of Gross Domestic Product

(In percent)

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Sources: Central Statistical Office; and Fund Staff estimates.
Table 3.

Trinidad and Tobago: Ratios of Gross Domestic Product by Sector of Origin

(In percent of GDP at 1985 prices)

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Sources: Central Statistical Office; and Fund Staff estimates.
Table 4.

Trinidad and Tobago: Manufacturing Production by Activity, at 1985 Prices

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Sources: Central Statistical Office; and Fund staff estimates.

Beginning in 1988, the Government shifted its development strategy towards increasing the role of the private sector and of outward-looking industries. In this context, several public enterprises have been divested--particularly in 1992-94--including the cement and steel plants. The participation of foreign ownership in the divested enterprises has brought increased market access, new technology and improved management. The removal of duty exemptions from products for the local market, the reduction in the level of tariffs, the elimination of import restrictions and the realignment of relative prices through devaluation have all encouraged manufacturers to move towards export-oriented activities. Export of cement as a percent of output increased from an average of less than 15 percent in 1982-89 to 55 percent in 1990-94, and exports of food products rose from less than 20 percent of total output in 1973-89 to about 40 percent in 1990-94. At the same time, the share of assembly products for the local market declined from an average of 20 percent in 1973-89 to an average of 14 percent in 1990-94.

4. Nontradable sector

The nontradable sector, mainly comprises the service activities including construction, provides about 84 percent of total employment. In 1973-81, the nontradable sector expanded at a rate of 8 percent a year due to increased domestic demand led by the rapid expansion of public sector spending. For instance, construction activity jumped from 6 percent of GDP in 1970 to 12 percent of GDP a year in 1973-81, and financial services expanded from 7 percent of GDP in 1970 to 13 percent of GDP a year in 1973-81. However, the growth of the nontradable sectors declined by 4 1/2 percent a year in 1982-89 largely as a result of the decline in the country’s income and the drop in activity in the other sectors.

The nontradable sector also has experienced significant restructuring since early 1990s. Government services declined as a result of its adjustment to lower revenue. In contrast, following a large drop in 1982-89 to an average of 10 percent of GDP financial services sector recovered slightly in 1990-94. The financial restructuring and liberalization measures, such as removal of credit and foreign exchange controls explain in part the expansion of activity in the financial services sector.

5. Investment

Investment declined from an average of 28 percent of GDP a year in 1973-81 to 21 percent of GDP a year in 1982-89 and to 14 percent of GDP a year in 1990-94 (Table 5). This reflected to a large extent the behavior of public sector investment which declined from an average of 17 percent of GDP a year in 1973-81 to 13 percent of GDP a year in 1982-89 and to 6 percent in 1990-94.

Table 5.

Trinidad and Tobago: Savings and Investment

(In percent of GDP at 1985 prices)

article image
Sources: Central Statistical Office: and Fund staff estimates.

Includes transfers from the other sectors of the economy.

Equivalent to inverse of the current account of the balance of payments.

Equivalent to public sector overall balance.

a. Public sector investment

Public sector investment became dominant in 1973-81 as a result of the Government’s acquisition of private enterprises and entry into capital-intensive heavy industries (Chart 2) made possible by oil-related windfalls to the Government. Over this period, the share of public sector investment in the oil/gas sector was 70 percent; in agriculture and manufacturing sector 65 percent; and in the nontradable sector, including utility and transportation, 50 percent (Table 6). With the fall in oil revenue, increased operating losses of the public enterprises and the shift in government development strategy led the public sector’s share in total investment to decline to an average of 46 percent in 1990-94.

CHART 2
CHART 2

Trinidad and Tobago Distribution of Public Sector Investment 1/

Citation: IMF Staff Country Reports 1995, 016; 10.5089/9781451837520.002.A004

Source: Ministry of Finance1/ For the period 1973-81.2/ Includes health, education and hotel.
Table 6.

Trinidad and Tobago: Investment by Sector and Activity

(In percent of total investment)

article image
Sources: Central Statistical Office; and Fund Staff estimates.

The focus of public sector investment has moved gradually away from the productive sectors. With privatization of most manufacturing activities, public investment in these activities decreased from 20 percent of total investment in 1973-89 to 3 percent in 1990-94, while its investment in utilities increased steadily from 7 percent of total investment in 1973-89 to 11 percent in 1990-94.

b. Private investment

Private sector investment in 1973-89 was concentrated on heavily protected import substituting light industries, such as food processing, assembly, and textile activities and in the nontradable sector. With the increase in labor costs in 1973-81, these labor-intensive sectors lost competitiveness, and the private sector investment declined significantly. However, foreign investment rose from an average of 2 percent of GDP a year in 1973-89 to 4 percent a year in 1990-94, or from an average of 30 percent of total private sector investment in 1973-89 to about 60 percent in 1990-94. Part of this increase came about from the Government’s efforts to improve the environment for private investment. In addition to withdrawing from direct involvement in some activities, structural reforms and the reduction of domestic and external imbalances improved the attractiveness of Trinidad and Tobago as destination for investment.

In response to the liberalization and privatization measures, private sector investment has moved from nontradable sectors to tradable sectors and from import substituting industries to export-oriented ones. Private sector investment in nontradable sector fell from an average of 21 percent of total investment in 1973-89 to 15 percent in 1990-94, while the share of investment in the tradable sectors increased from less than 20 percent in 1973-89 to about 40 percent in 1990-94. Private sector investment in the oil/gas sector increased from about 9 percent of total investment in 1973-89 to 30 percent in 1990-94 as a result of public sector divestment of the urea factory, establishment of the new methanol plant by the private sector and increased activity in oil exploration and secondary recovery. Private sector investment in the nontraditional export-oriented sectors also increased steadily from less than 9 percent of total investment in 1973-81 to 11 percent by 1990-94. The trade liberalization efforts and the removal of restrictions on the location of the free zones--a policy that aims at insulating manufacturing for export from protracted administrative procedures while granting tax holidays for imported inputs--encouraged both local and foreign investment in export-oriented sectors.

6. National savings and financing of investment activities

National savings has been affected to a large extent by changes in the terms of trade (Chart 3 and see Table 5). The increase in international oil prices caused national savings to rise from 12 percent of GDP in 1970 to an average of 33 percent of GDP in 1973-81. Being the major recipient of oil windfall gains, the public sector was able to generate large savings that averaged 22 percent of GDP a year. Private sector savings also increased from 7 percent of GDP in 1970 to an average of 11 percent of GDP a year in 1973-81. About 70 percent of the private sector savings was from the oil/gas sector. However, following the deterioration of international oil prices and the attendant drop in disposable income, national savings fell to an average of 14 1/2 percent of GDP a year in 1982-89, reflecting declines in public sector savings to 4 percentage of GDP a year and in private sector savings to 10 1/2 percent of GDP a year.

CHART 3
CHART 3

Trinidad & Tobago Domestic Savings

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 016; 10.5089/9781451837520.002.A004

Source: Central Statistical Office1/ Domestic savings minus net factor Income and transfers from abroad.2/ Percentage change.

During 1973-81 more than 20 percent of public sector savings was invested in the oil/gas sector and about 50 percent was used to purchase equity in private businesses. Part of private savings in the petroleum sector was reinvested in the oil/gas sector and the remainder was repatriated. However, the sharp reduction in public sector savings in 1982-89 led to a rapid increase in public sector external borrowing from about 1 percent of GDP a year in 1973-81 to 6 percent of GDP a year in 1982-89; while domestic borrowing shifted from net repayment of 6 percent of GDP a year in 1973-81 to net borrowing of 3 percent of GDP in 1982-89. As public investment remained at the relatively high level of 1973-81, total borrowing financed 70 percent of public sector investment in the period 1982-89, compared to net savings in the earlier period.

National savings strengthened by 2 percentage points to an average of 16 percent of GDP in 1990-94. Public sector savings increased to an average of 5 1/2 percent of GDP a year owing to the authorities’ efforts to contain public sector consumption. Savings of the private non-oil/gas sector rose in part as a result of lower subsidies and higher indirect taxes, which discouraged consumption. In contrast, savings in the oil/gas sector remained weak due to low international oil prices.

7. Labor productivity

Productivity, in the non-oil/gas sector increased by 5 percent a year in 1973-81 mainly as a result of rapid industrialization and output expansion (Chart 4). Labor productivity dropped sharply by 4 percent a year in 1982-89 as output contracted and the Government attempted to maintain employment through special works program in the non-oil/gas sector. 1/ However, over the same period, productivity in the manufacturing sector rose by 10 percent owing to increased investment in the more capital intensive petrochemical industry.

CHART 4
CHART 4

Trinidad & Tobago Productivity & Wage Costs

(percentage change)

Citation: IMF Staff Country Reports 1995, 016; 10.5089/9781451837520.002.A004

Source: Central Statistical Office1/ In non-oil/gas sector.2/ Output per non hour in manufacturing sector (Including petrochemicals).3/ Output/employment.

In 1990-94, productivity in the non-oil/gas sector increased by an average of 3 percent a year largely because of reduction in labor in both public and private sectors. At the same time, the increase in average weekly earnings dropped from an average of 9 percent a year in 1982-89 to less than 2 percent in 1990-94.

1/

For a description of the new oil tax regime, see Appendix II of SM/93/249.

1/

The sugar operations are undertaken by a public enterprise--CARONI Ltd. The current quota in the U.K. market is 46,000 tons a year and the one in the U.S market is 9,000 tons a year. In 1993, the average sugar price was US$0.27 a pound in the EU market and US$0.22 a pound in the U.S. market.

1/

The Cabinet appointed a tripartite committee was appointed by Cabinet in April 1992 with the aims of restructuring CARONI’s operations and setting up diversification strategy for the agricultural sector.

1/

In early 1980s, a special works program spent an estimated TT110 million in employing 50,000 people. (See Richard Auty and Alan Gelb, “Oil Windfalls in a Small Parliamentary Democracy: Their Impact on Trinidad and Tobago”, World Development, Vol. 14, No. 9, pp. 1161-1175, 1986.)

Same Series

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Cover IMF Staff Country Reports
Trinidad and Tobago: Economic Developments and Selected Background Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1995: Issue 016
Publisher:
International Monetary Fund
ISBN:
9781451837520
ISSN:
1934-7685
Pages:
162
DOI:
https://doi.org/10.5089/9781451837520.002

Trinidad & Tobago Developments in the Oil/Gas Sector

Trinidad and Tobago Distribution of Public Sector Investment 1/

Trinidad & Tobago Domestic Savings

(In percent of GDP)

Trinidad & Tobago Productivity & Wage Costs

(percentage change)