Recent Economic Developments

The Trinidad and Tobago economy grew at a robust pace in 2003, extending the expansion that began in 1994 to its tenth consecutive year. The updated GDP calculation, rebased to the year 2000 from its previous 1985 base, put real GDP growth in 2003 at 13.2 percent, almost double the rate of the previous year. The statistical revision was undertaken in order to better reflect the changed structure of the economy, in particular the substantially enlarged production share of natural gas. Growth was led by the energy sector, whose expansion largely reflected the rapidly increasing levels of activity in the petrochemicals sub-sector and the commissioning of a third LNG plant, but crude oil production also increased. The accelerating recovery of the global economy also helped to create favorable demand conditions for Trinidad and Tobago’s energy exports which enjoyed significantly higher prices compared with the previous year. Although growth in the non-energy sector was generally more modest, energy sector investment projects gave a strong boost to the construction sector, an important source of job creation, while manufacturing staged a moderate recovery following the post-September 11 decline of the previous year.

The fiscal accounts recorded a surplus of the order of 2 percent of GDP in FY 2002–2003 and preliminary data point to a surplus of 0.6 percent of GDP in the just concluded fiscal year, after taking account of transfers to the Revenue Stabilization Fund. As expected, fiscal performance has strengthened substantially in the last two years based on the sharp increase in energy-sector revenue while there were also clear signs of expenditure restraint.

Headline inflation remained well under control in 2003. Although the overall increase in prices was held to an average of 3.8 percent, lower than in the previous year, food prices were substantially more volatile, recording an increase of 13.8 percent in 2003 and maintaining this trend into the current year. The twelve month increase in these prices to August 2004 measured 10.5 percent.

Despite the fact that there was some net job creation, the unemployment rate remained sticky throughout the year as new entrants joined the labor force. The unemployment rate averaged 10.5 percent, marginally higher than the previous year, but more recent data from the Central Statistical Office has pointed to an encouraging pick-up in employment, with a substantial number of new jobs being added in the construction sector, manufacturing and in business and financial services. The CSO has put the end-June unemployment rate at 7.8 per cent, the lowest rate in over four decades.

The economy’s external performance strengthened appreciably in 2003 as reflected in enlarged surpluses on the current account and on the overall balance of payments. Buoyant prices for the country’s key energy exports combined with volume increases to push the current account surplus to 12.8 percent of GDP and the overall balance to 3.2 percent of GDP. The capita] account remained in deficit as domestic investors continued to participate heavily in regional bond issues and investment outflows accelerated in the expected aftermath of the heavy influx of FDI that occurred over the last few years. The country’s strong resource position has largely obviated the need for official external borrowing, such that official capital transactions resulted in net outflows and a further paying down of official external debt to reduce it to 15.3 percent of GDP and to a projected 12.9 percent of GDP by end-2004. In keeping with Trinidad and Tobago’s steadily improving fundamentals and the authorities’ commitment to disciplined and sensible macroeconomic policies, Standard and Poor’s raised the country’s long-term foreign currency sovereign rating to BBB½ in 2004, citing the strength of the fiscal and external balance sheets and the country’s strong growth prospects. This was the second successive upgrade for Trinidad and Tobago in just over one year.

Against the backdrop of a pick-up in the global economy, the central bank remained firmly focused on its anti-inflationary policy objective in its conduct of monetary policy, but also sought to respond to continuing slow growth in the non-energy sector. With private sector credit demand responding only sluggishly to earlier interest rate reductions, the bank considered that there was room for further monetary casing and lowered its benchmark repo rate by 5 percentage points in September, capitalizing on the space provided by the low-inflation environment and the strong external position. In furtherance of its commitment to the use of more market-based systems of monetary control and to fostering greater efficiency in the financial intermediation process, the bank also continued the phased reduction of the reserve requirement which had stood as high as 21 percent two years earlier. This second reduction from 18 to 14 percent supported the transition to lower interest rates, marked by a fall in banks’ prime lending rate from 11.50 percent to 9.50 percent. This process has since been taken further with another reduction to 11 percent in September 2004 which triggered a further decline in the prime rate to 8.75 percent. A stable US/TT dollar exchange rate continued to provide a firm anchor for domestic inflationary expectations in 2003, with the central bank maintaining a strong supportive role in the foreign exchange market. Nevertheless, the bank remained open to allowing greater flexibility of the exchange rate in the event of fundamental shifts in external sector conditions.

Against the backdrop of a buoyant economy the banking system remained sound and profitable with no sign of a deterioration in asset quality despite a marked heightening in loan marketing induced by high liquidity. Capital ratios averaged well above the minimum requirement of 8 percent and licensed financial institutions easily met the additional capital charge for foreign exchange risk introduced in 2000. Trinidad and Tobago consolidated its status as the financial center of the region with local financial institutions arranging over US$500 million in bond issues for regional clients and undertaking own investments of about US$250 million in regional issues. Following the recent passage of legislation to tighten insurance supervision, further regulatory strengthening for the financial sector has been put on the agenda for 2005. The authorities have also requested and have reached agreement with the Fund and Bank on the commencement of an FSAP in February 2005.

Prospects and Policies

The outlook indicates that over the next three years Trinidad and Tobago will enter a period of even more dynamic growth, though the authorities expect that the trajectory will be somewhat smoother than indicated in the staff report, which they believe understates the growth of the economy beyond 2006 and will need to be revised. The planned start-up of a new LNG plant in 2006 has now been delayed, as a result of which the initial impact on growth will partly be felt in the following year. This will build on output increases from several additional energy sector projects including a new methanol plant and a DRI plant that should be operational by end-2005. The authorities project real GDP growth of 6.7 percent in 2005, rising sharply to about 8–9 percent in 2006 and stabilizing around 5 to 6 percent thereafter with the coming to fruition of a number of technology-based growth industries, to be established in an already fully subscribed high-tech industrial park. Further down the road the construction of an aluminum smelter, for which an MOU has already been signed, and attendant co-generation facilities are planned. In the medium term non-energy growth will derive considerable stimulus from an acceleration in construction activity, infrastructure development and private sector projects.

The authorities are acutely aware that the prevailing economic and financial circumstances of the country pose significant challenges to macroeconomic management, chief among which are strengthening and preserving the competitiveness of the non-oil sector, ensuring the long-term sustainability of the use of its non-renewable energy resources and, in the short run, defusing the potential for an inflationary take-off. The authorities are similarly mindful that the present conjuncture offers a unique opportunity to establish the foundations for sustainable long-term growth and to propel the country towards its goal of achieving developed country status within the next two decades. For this reason the authorities are placing special emphasis on poverty alleviation and on improvements in health, housing and education in the medium term, while continuing to respect the absorptive constraints of the economy and the principles of sound macroeconomic management.

Maintaining price stability will remain the main focus of the Central Bank in the months ahead. In the absence of strong signs of a pick-up in domestic demand, monetary policy is likely to remain accommodative for the time being, but changes in the external interest rate environment could also influence the policy stance. The Bank also intends to press ahead with its schedule for lowering the cash reserve requirement applicable to banks to the 9 percent level that currently applies to non-banks. This should lead to a further tightening of intermediation spreads and, other things being equal, a further reduction in domestic interest rates.

The authorities remain committed to the establishment of a Revenue Stabilization Fund as a key tool of fiscal management and for preserving a share of the country’s natural resource wealth for future generations. Notwithstanding that legislative bottlenecks have delayed formal establishment of the Fund, the authorities in 2004 made deposits totaling TT$1263.2 million to the Interim Revenue Stabilization Fund in keeping with pre-established guidelines. The cumulative balance in the Fund now stands at TT$2775.6 million. Legislation will be enacted early in 2005 for the establishment of the Fund which will be based on the following design principles:

• i. The annual estimate of oil and gas revenues will be determined by the long-term prices of crude oil and gas;

• ii. the larger part of the excess reserves (up to 60 percent) will be earmarked for stabilization or inter-generational transfers;

• iii. the remainder of the excess (up to 40 percent) will be available to be allocated to strategic investments.

The authorities concur fully with staff on the need to improve competitiveness in the non-energy sector and are focusing on wide-ranging structural reforms as the most effective way of addressing this objective. In the area of tax reform, the authorities are currently drawing on technical assistance from the Fund to undertake an assessment of the VAT system, which was introduced in 1990, but whose productivity has declined over time. In the area of enterprise reform, the difficult and politically sensitive restructuring of the state-owned sugar company has been decisively addressed and further divestment and restructuring of the state’s role are being aggressively pursued in areas such as port operations, forestry and broadcasting among others.

In keeping with the thrust to strengthen the basis for policy making and to promote greater transparency in economic reporting, Trinidad and Tobago has recently begun participating in the GDDS and has published comprehensive information on its statistical production and dissemination practices on the IMF’s Dissemination Standards Bulletin Board. The authorities intend to build on this foundation with a view to eventually subscribing to the SDDS.

In conclusion, our authorities wish to record their appreciation of the candid exchange of views and helpful advice provided by the Fund during the course of the Article IV discussions and of the Fund’s continuing support for Trinidad and Tobago through the provision of technical assistance.