Trinidad and Tobago: Economic Developments and Selected Background Issues
Author: International Monetary Fund
Publication Date:
14 Mar 1995
eISBN:
9781451837520
ISBN:
9781451837520
Language:
English
Keywords:
ISCR; CR; export of crude oil; island of Tobago; investment; GDP deflator; U.S. dollar terms; petroleum export price; goods price; export production; Labor costs; Export prices; Producer prices; Import prices; import substitution
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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.

X. Indicators of Competitiveness

With the collapse of oil prices since 1982 and the sharp decline in the external prices for petrochemicals that followed, Trinidad and Tobago experienced a deterioration in its terms of trade of 22 percent in 1982-85 and a further 40 percent in 1986-93. At the same time, export earnings fell from about US$2.6 billion in 1981 to US$1.4 billion in 1986 and remained around that level through 1993. In an effort to adjust the economy to the lower level of external income and to stimulate non-oil/gas exports, the authorities started in 1988 to implement measures to strengthen the competitiveness of the economy, including a devaluation of the Trinidad and Tobago currency, structural reforms comprising the liberalization of the exchange and trade systems and privatization of public enterprises, wage restraint, and financial policies to help limit the macroeconomic imbalances that had emerged. This section examines the trends of various indicators of competitiveness, mainly related to domestic costs. 1/

1. Overall trends

Labor costs--measured by the index of average earnings per man hour--increased by about 6 percent a year in nominal terms during 1986-93 compared with an average increase of 21 percent a year during 1981-85 (Table 19). Over the period 1986-93 average earnings declined by 32 percent in U.S. dollar terms and by 21 percent in real terms. This decline together with improvements in productivity, contributed importantly to consolidating the gains achieved with the devaluations of the domestic currency in 1985, 1988 and 1993; the Trinidad and Tobago dollar depreciated in real effective terms by about 36 percent during 1986-93.

Table 19.

Trinidad and Tobago: Indicators of Competitiveness

(Indices with 1980=100)

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Sources: IMF International Financial Statistics, Information Notice System, and World Economic Outlook; Central Bank of Trinidad and Tobago Quarterly Economic Bulletin and various IMF, Staff Reports and Recent Economic Developments.

Derived as non-oil/gas export prices divided by import prices.

Derived as the unit labor cost (expressed in terms of the U.S. dollars) devided by the unit labor cost of major trading partners (index from WE0).

Non-oil/gas export prices (Px); index for home good prices (Ph): and index for non-oil/gas sector GDP deflator (np-GDP).

Index of import prices (Pm); index of food prices in the RPI basket (RPIf): and index 9 clothing prices in the RPI basket (RPIc).

Unit labor costs fell fairly steadily in terms of the U.S. dollar, and by 1993 they were 40 percent below the levels in 1985. The index of relative unit labor cost declined by 67 percent during the same period. Also, producer prices strengthened somewhat during 1986-93, although relative to consumer prices they declined. This pattern, to a large extent, reflected the relatively rapid rise in the prices for services during the period.

2. Export Production

A number of ratios have been calculated in order to examine the movement in relative price incentives for export production. These ratios express nonpetroleum export prices relative to wages, to indices of home goods prices, and to indices of production costs (with producer prices and nonpetroleum GDP deflator as proxies). These indices reveal that incentives to nonpetroleum exports increased after the devaluations in 1985 and 1988, but the gains tended to dissipate fairly quickly by further declines in the terms of trade and the increases in domestic costs. For instance, after improving by about 17 percent in 1989 following the devaluation of August 1988, by end-1992 nonpetroleum export prices had fallen by about 26 percent relative to average earnings, by about 27 percent relative to home goods prices, and by about 14 percent relative to producer prices. This performance suggests that the devaluations were insufficient to offset the relative worsening in export prices and were not supported with enough structural measures aimed at reducing production costs and, thereby, help preserve the favorable impact on exports.

The improvement in competitiveness following the 1993 devaluation is expected to be more lasting as financial policies were tightened and structural reforms deepened. Preliminary indications are that the profitability of nonpetroleum exportables has increased significantly in 1993-94, and the large foreign direct investment that is taking place suggests that the competitiveness of the economy has improved significantly.

3. Imports and import substitution

Indicators of incentives for consumption of imported goods show that import prices rose faster than domestic goods prices during 1986-93. This suggests that in the product categories in which domestic and foreign goods are close substitutes, there was a strong disincentive to consume imports. Moreover, the profitability of import substitution seems to have strengthened, as both import prices and domestic retail prices appear to have increased at much faster rates than labor costs. Therefore, there appears to have been some factors that inhibited a more intensive drive in efficient import substitution. Since the indicators of profitability are broadly appropriate, then there may have been structural impediments that offset the substantial incentive provided by relative prices. It is in this regard that measures to improve the incentive framework for private investment and simplify further investment regulations--including a revision of the Foreign Investment Act and the licensing and approval procedures for foreign investment--would contribute considerably.

STATISTICAL APPENDIX

Table 20.

Trinidad and Tobago: Gross Domestic Product by Sector of Origin at Constant 1985 Prices

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Sources: Central Statistical Office; and Fund staff estimates.
Table 21.

Trinidad and Tobago: Gross Domestic Product by Sector of Origin at Current Market Prices

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Sources: Central Statistical Office; and Fund staff estimates.
Table 22.

Trinidad and Tobago: Implicit GDP Deflators by Sectors

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Sources: Central Statistical Office; and Fund staff estimates.
Table 23.

Trinidad and Tobago: National Accounts by Final Expenditure at 1985 Prices

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Sources: Central Statistical Office; and Fund staff estimates.
Table 24.

Trinidad and Tobago: National Accounts by Final Expenditure at Current Market Prices

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Sources: Central Statistical Office; and Fund staff estimates.

Includes statistical discrepancies.

Table 25.

Trinidad and Tobago: Savings and Investment at Currant Market Prices

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Sources: Central Statistical Office; and Fund staff estimates.
Table 26.

Trinidad and Tobago: Production and Utilization of Crude Oil and Refined Products

(In thousands of barrels)

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Sources: Ministry of Energy; Central Statistical Office; and Fund staff estimates.

Supply (production plus imports) minus use (exports plus changes in stock).

Product use (supply to stock plus exports plus domestic consumption) minus product supply (refinery output plus imports).

Table 27.

Trinidad and Tobago: Retail Price Index

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Sources: Central Statistical Office; and Fund staff estimates.

Weights were revised in September 1993 based on 1988 Household Budgetary Survey.

Table 28.

Trinidad and Tobago: Index of Producer Prices by Industry

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Sources: Central Statistical Office; and Fund staff estimates.

Over corresponding period 1993.

Table 29.

Trinidad and Tobago: Domestic Prices of Selected Refined Petroleum Products

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Sources: National Petroleum Marketing Company; Central Statistical Office; and Fund staff estimates.
Table 30.

Trinidad and Tobago: Labor Force and Employment

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Sources: Central Statistical Office; and Fund staff estimates.

Midyear estimates.

Includes persons with unstated activity.