Statement by Murilo Portugal, Executive Director for Trinidad and Tobago, and Charles de Silva, Assistant to Executive Director

Trinidad and Tobago has enjoyed positive growth, low inflation, and a steady decline in unemployment, but challenges remain. Executive Directors commended the prudent management, and stressed the need for a macroeconomic framework underpinned by a three-year rolling budget and pension reform. They welcomed Trinidad and Tobago's role as a regional financial center, the soundness of the banking system, and structural reforms. They emphasized the need to tighten fiscal and monetary policies, and encouraged Trinidad and Tobago to participate in the general data dissemination system.


Trinidad and Tobago has enjoyed positive growth, low inflation, and a steady decline in unemployment, but challenges remain. Executive Directors commended the prudent management, and stressed the need for a macroeconomic framework underpinned by a three-year rolling budget and pension reform. They welcomed Trinidad and Tobago's role as a regional financial center, the soundness of the banking system, and structural reforms. They emphasized the need to tighten fiscal and monetary policies, and encouraged Trinidad and Tobago to participate in the general data dissemination system.

1. The Trinidad and Tobago economy remains fundamentally strong, the result of the comprehensive structural measures implemented during the last decade, which included significant tariff reform, liberalization of the current and capital accounts, floating of the currency, and extensive privatization of state enterprises. The country’s external debt is now manageable and sustainable and the financial sector has been strengthened through improvements in the legislation as well as supervisory practices. Developments in the global and regional economies constrained growth in Trinidad and Tobago, in 2002, especially in the non-energy sector. Nevertheless, prospects favor acceleration in 2003 and further strengthening over the medium term. This outlook is based on anticipated strong energy sector investment, increased social expenditure by government (particularly in education, health and housing) in the near term, and increased oil production and natural gas expansion in the medium term. The staff has raised with our authorities issues related to fiscal behavior in light of the expected strong growth phase and potential increase in fiscal revenue. The Trinidad and Tobago authorities have indicated that there are significant demands in the social and physical infrastructure that need to be met if the country is to lay a strong foundation for self-sustaining growth in the non-energy sector. Our authorities have welcomed the dialogue with the Fund and wish to express their appreciation for the candid discussions held with the staff. They look forward to the publication of the report.

Recent Economic Developments

2. The Trinidad and Tobago economy registered its ninth consecutive year of positive growth in 2002. Real GDP grew by 3.2 percent in 2002, slightly below the rate of 4 percent recorded in the previous year. The slowdown occurred against the backdrop of a weak global economic recovery, while at home there was a great deal of uncertainty on account of the parliamentary deadlock resulting from the general elections of December 2001. Growth was propelled mainly by the energy sector where, in addition to an upturn in oil production, a new ammonia plant was commissioned and annual export capacity of LNG more than doubled with the coming on stream of a second LNG train. Prices for Trinidad and Tobago’s major energy exports also trended upward during the year. However, the uncertain global environment and the slowdown in the regional economies, which account for over a quarter of Trinidad and Tobago’s exports, constrained the growth of the non-energy sector, especially manufacturing.

3. Inflation has remained low and stable in the context of the authorities’ firm anti-inflationary monetary stance and a weakening of domestic demand. Headline inflation as measured by the All-Items Retail Price Index (RPI) rose moderately by 4.2 percent in 2002 compared with 5.6 percent in 2001, but core inflation, gauged by the non-food component, was almost zero. The gap between the two indicators may be largely due to a measure of upward bias in the food component, arising from a technical problem, which is now being addressed with the rebasing of the RPI by the Central Statistical Office.

4. Labor market conditions have continued to improve in step with the continued expansion of the economy, with the unemployment rate declining to 10.4 percent of the labor force from 10.8 percent in the previous year. Most of the new jobs were generated in the services sector notwithstanding the fact that there were some job losses in the construction sector, in 2002, as many projects in the energy sector neared completion.

5. The central government recorded a fiscal deficit of 0.3 percent of GDP in 2002 against the backdrop of a projected balanced budget for that year. This deficit resulted mainly from lower-than-projected revenue collections and increased expenditure. Revenue collections declined primarily due to lower tax receipts from oil and petrochemical companies. As a result of the declining revenue, our authorities maintained a tighter control on the growth in spending thus keeping the deficit within an acceptable range.

6. The Central Bank has been conducting monetary policy with the aim of keeping inflation low and maintaining orderly conditions in the foreign exchange market, two closely related objectives given the openness of the economy. In May 2002, our authorities introduced a new tool in its monetary policy framework based on an announced overnight repurchase or ‘repo’ rate at which the Central Bank is prepared to provide liquidity to the banking system. The benchmark repo rate, which was initially set at 5.75 percent, is expected to provide a signal to the public and the markets of the Central Bank’s monetary policy intentions. The rate was lowered to 5.25 percent in August in the context of weak domestic demand and subdued inflation at home, and the further softening of interest rates abroad. This first adjustment to the repo rate triggered reductions across the spectrum of domestic interest rates, such that by the end of the year the prime lending rate had fallen by 300 basis points from its starting level. In the face of continuing weak credit growth, the repo rate has since been maintained at 5.25 percent. In the foreign exchange market, the Central Bank intervened to counter swings in liquidity and on a net basis sold over US$300 million in 2002, against a background of strengthening official reserves. Periods of tightness in the market were associated in part with a high level of direct investment abroad as well as capital issues raised mainly by regional governments on the local bond market. Gross official reserves, at the end of 2002, amounted to just about US$2.0 billion, equivalent to 5.8 months of prospective imports.

7. Financial indicators for the banking system suggest that the system remains sound and adequately capitalized. On the supervisory front, there has been significant progress in the implementation of risk-based supervision of commercial banks, and the regulatory capacity of the Central Bank has been strengthened through recruitment and training of staff. With the assistance of the IDB, our authorities have embarked on a program of strengthening and modernizing regulatory systems of the non-banks with a view to bringing them in line with international norms. Legislation will soon be presented to Parliament to transfer supervisory responsibility for insurance companies and private pension funds from its present location in the Office of the Supervisor of Insurance of the Ministry of Finance, to the Central Bank. This measure will enhance the capacity of regulators to deal with the phenomenon of universal banking, now a reality within the financial sector, and this should also allow for efficiency gains by having one supervisory agency. The authorities are also considering extending the integrated supervision framework to include other classes of financial institutions. A Credit Union Supervisory Unit has been established within the Ministry of Finance and is working towards institutional strengthening of that sector, including the updating of legislation and the strengthening of supervision. In the context of ongoing efforts to enhance the financial infrastructure, the Office of the Banking Services Ombudsman was established in May 2003 under the auspices of the Central Bank, and plans for the establishment of a Credit Rating Agency are at an advanced stage.

External Sector

8. On the external front, Trinidad and Tobago recorded reduced surpluses on the overall balance of payments and on the current account, with the fall-off in the value of energy exports largely explaining both these developments. Further, the capital account has begun to weaken in line with the expected decline in FDI, as a number of major energy sector investment projects neared completion. At the same time, there has been an upward trend of outward direct investment by local firms seeking opportunities in the regional markets and in North America. With a greater reliance on non-debt creating flows, the stock of public sector external debt is down to a comfortable 16 percent of GDP, from 40 percent of GDP some five years ago. The external debt service ratio remains viable at just about 5 percent of exports of goods and non-factor services. Trinidad and Tobago has enhanced its creditworthiness through prudent economic management, and this has enabled it to secure an investment grade rating on its sovereign debt. In April 2003, Standard and Poor’s upgraded the country’s sovereign credit rating to BBB from BBB-, which is among the highest in Latin America.

Prospects and Policies

9. Our authorities project real GDP growth averaging 4 to 6 percent over the years 2003–2005, led by strong energy sector expansion. While natural gas is fast becoming more important in the energy sector, oil production will continue to be significant, with output projected to rise by more than 60 percent in the next three years as a result of recent new discoveries. In May 2003 - a matter of weeks ago - a third LNG train was added to the two that are already in production, and a fourth will become operational in 2005. This will establish Trinidad and Tobago as one of top five LNG producers in the world. In addition, work continues on two mega-methanol plants; one of which will begin operations in 2004 while the other is in gestation and due for completion in two years. These two plants will help to double methanol production and reinforce Trinidad and Tobago’s position as the leading global methanol exporter. A new ammonia facility will begin operations in early 2004.

10. While the main engine of growth will continue to be the energy sector, our authorities will intensify their efforts to create the conditions necessary to support the expansion of the non-energy sectors of the economy, given their potential for job creation. They see the preservation of macroeconomic stability, specifically the maintenance of low and stable inflation and a competitive exchange rate, as critical elements of the incentive framework for domestic and external private sector investment as they press ahead with their social and economic agenda. They intend to continue to rely on strong fiscal discipline and prudent monetary policy. In fact, the authorities have just recently undertaken a mid-year review of the fiscal accounts, which has resulted in a revised fiscal deficit of just under 1.0 % of GDP for the current fiscal year. The revised fiscal deficit reflects the re-allocation of expenditures as well as increased revenues from the petrochemicals sub-sector.

11. Our authorities are particularly cognizant of the significant risks, both to macroeconomic stability and to long-term competitiveness, that could arise from overly rapid monetization of energy based revenue inflows. In light of their commitment to social equity, our authorities are shifting the structure of expenditure more towards education, health, housing, and social safety net programs. This strategy is critical for helping to promote sustainable growth in the non-energy sectors geared towards supporting the long-term growth and development agenda of the country.

12. The establishment of a Revenue Stabilization Fund is viewed as a critical fiscal management tool by our authorities. They also keenly appreciate the need to guard against vulnerabilities arising from price volatility in the energy markets and to deal with inter-generational equity in the distribution of the country’s oil and gas wealth. They are now actively considering how best to structure the asset management, operational, and governance aspects of the proposed Revenue Stabilization Fund (RSF). They anticipate that legislation to establish the RSF will be presented to Parliament by the end of December 2003. Work is continuing apace on the improvement of the fiscal regime for the energy sector, taking into account recent studies on the sector including the report submitted by FAD

13. Our authorities are moving decisively to address systemic deficiencies affecting the buoyancy of non-oil revenue. They consider that tax reforms introduced during the nineties, including the introduction of a value added tax (VAT) and the progressive lowering of direct taxes, have worked well. Nevertheless, there are concerns about the efficiency of the VAT, and our authorities are proposing to undertake a comprehensive review of the VAT. In addition, our authorities have moved to strengthen revenue administration with the decision to establish a Revenue Authority, which will consolidate the functions of the Board of Inland Revenue and the Customs and Excise Division.

14. Our authorities are continuing to address the inefficiencies of the state enterprises and have commenced the process of restructuring Caroni (1975) Limited, which is the state sugar company. They have also embarked on the process of introducing the private sector into the operations of National Broadcasting Network and the Port Authority.

15. Trinidad and Tobago has become the leading financial centre in CARICOM, and prospects for further development of the financial system will be enhanced by the measures currently being undertaken to reform this sector. In addition, dismantling barriers to trade and financial flows under CSME will contribute to further enhancement of this sector. Our authorities have issued for public comment a Green Paper on the financial sector, which sets out various recommendations for fostering a more efficient, integrated, and dynamic financial system. In this context, our authorities recognize that participation in an FSAP could bring a fresh perspective and independent review to financial sector issues.

16. Our authorities are committed to the development of a well functioning and modern information infrastructure to support sound macroeconomic policy making. In this regard, they are considering subscription to the GDDS as a first step in improving the dissemination of economic and financial information.

17. In conclusion, our authorities would like to assure the Executive Board that they remain committed to the implementation of sound fiscal, monetary, and structural policies geared towards enhancing the long-term stability, growth, and development of Trinidad and Tobago.

Trinidad and Tobago: 2003 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Trinidad and Tobago
Author: International Monetary Fund