This Selected Issues paper analyzes the energy sector and labor market developments in Trinidad and Tobago. It discusses monetary and exchange rate policy and describes the institutional setting and economic structure within which monetary and exchange rate policy is conducted. The framework under which monetary policy is formulated and implemented is outlined. The paper also reviews the evolution of monetary and exchange rate policies, and presents some comments on the effectiveness of monetary and exchange rate policy.
V. Structural Reforms21
68. The government of Trinidad and Tobago has outlined a wide-ranging structural reform agenda, aimed at addressing competitiveness issues, fostering economic diversification, promoting employment, and reducing poverty. These reforms are being pursed and formulated in the context of the government’s Vision 2020 initiative, which is geared toward achievement of developed-country status by the year 2020. The broad reform elements pertain to the central government, the public enterprises, the financial sector, and the supply side of the economy.
69. Greater efficiency on both the revenue and the expenditure side of the budget are viewed as needed to improve both competitiveness and income distribution. On the revenue side, the government sees scope for tax policy enhancements and improved revenue generating capacity. In this context, it has approved the establishment of an independent revenue authority that will consolidate the operations of the current Inland Revenue Division and Customs Department. Concurrently, the government will implement a tax reform with regard to both the energy and non-energy sectors. It is at an advanced stage of preparation of a new energy tax regime, aimed at better capturing the rents from natural gas while still providing the necessary incentives for investment and exploration. Such a regime is expected to go into effect concurrently with the FY 2004/05 budget. In addition, the government intends to undertake a comprehensive reform of the non-energy tax regime envisaged to take effect in FY 2005/06. To this end, it has requested technical assistance from the IMF’s Fiscal Affairs Department.
70. Regarding the expenditure side of the budget, the government intends to reform the procurement regime and adopt output budgeting. In June 2004, the government issued a green paper for public discussion, detailing a plan for the reform of the procurement regime. The key proposal is to adopt a decentralized system based on best international practices of transparency and accountability. Output budgeting, which is expected to be introduced in the context of the FY 2005/06 budget, will aim to improve the delivery of services by requiring ministries and agencies to submit their budget proposals along with a clear specification of targets and related costs. Nearly 1,000 officials have been trained in output budgeting in various ministries, including the core staff of the Treasury and the Budget Division. In addition, the government intends to transition over the next two years to a computerized Integrated Financial Management Information System, aimed at strengthening the budgeting, monitoring, and control of government transactions and debt management.
71. The government is in the process of designing a reform of the pension system. This will include a move to a fully funded contributory pension scheme for government employees; integration of Old Age Pension with the National Insurance Scheme (NIS), in the context of a deeper reform of the NIS; and improvement of the legal and regulatory framework for private pension schemes.
72. In June 2003, the government closed down the state-owned sugar company, CARONI 1975, in the context of a restructuring of the sugar industry. The sugar cane production and refining operations of CARONI had become unprofitable, which had required substantial government transfers, including for servicing some of debts of the company. The restructuring of the sugar industry entailed the devolution of sugar cane production to the private sector and the establishment of a new government-owned company, the Sugar Manufacturing Company Limited (SMCL), dedicated solely to sugar manufacturing. In order to mitigate the impact of the restructuring on the labor force of nearly 9,000 (including the former sugar cane farming segment), the government is implementing a safety net scheme, including severance payments, training, and priority to former CARONI workers to lease state lands for agricultural and housing purposes.
73. The government is reviewing the corporate governance framework for the public enterprises, with a view to ensuring adherence to appropriate standards of governance, transparency, and accountability. To strengthen monitoring of the public enterprises, the ministry of finance has developed a range of guidelines relating, inter alia, to contracts, executive compensation, litigation procedures between state agencies, and borrowing authority. In the interest of transparency, the state enterprises have been mandated to publish, in at least one major daily newspaper, a summary of the audited financial statement, within four months of the end of their financial year. They are also to publish a summary of the unaudited half-yearly statements within two months of the mid-year date. Concurrently, the authorities are reviewing the legislative framework governing the public enterprises. In this connection, a committee is working toward the development of Standard By-Laws for State Agencies; a Code of Best Practice is also under consideration.
74. Trinidad and Tobago has emerged as the main regional financial center. In view of the increasing financial flows through the country’s financial sector to the region, the authorities see a heightened need to upgrade the related supervisory and regulatory framework. In this context, the central bank’s supervisory role was expanded, in May 2004, through an amendment to the Insurance Act that transferred responsibility to supervise insurance companies, insurance intermediaries, and pension plans, from the Office of the Supervisor of Insurance (in the ministry of finance) to the Central Bank of Trinidad and Tobago. This transfer of supervisory authority is expected to enhance coordination in the oversight of the financial system through greater consistency in supervision over similar financial services and products. In order to upgrade the regulatory and supervisory framework for the financial system to a level consistent with its increasing regional role, the authorities are developing a broad legislative agenda, including amendments to the Financial Institutions Act, Insurance Bill, and the Securities Industry Act. Regulations governing credit unions will also be strengthened.
75. The authorities are taking steps to deepen the capital market. In this context, and also with the aim of improving public debt management, in July 2004 the central bank introduced an expanded auction system for government securities. The new system incorporated the provision of noncompetitive bids of up to TT$20,000, which seeks to encourage participation of small investors. Meanwhile, work is underway at the ministry of finance to strengthen the Public Sector Finance Management Unit, including through the adoption of a debt management and financial analysis system.
Supply side reforms
76. The telecommunications sector is viewed as key for external competitiveness. In July 2004, the Telecommunications Act was amended to pave the way for full liberalization of the sector. The amendment allows competition and removes the monopoly of the Telecommunication Services of Trinidad and Tobago. A new regulatory body for the telecommunications sector, the Telecommunication Services Authority, has already been established, and is developing a broadcast code for the liberalized sector.
77. To improve the efficiency of the port operations, the government is at an advanced stage of planning to restructure the Port Authority of Trinidad and Tobago. This restructuring would entail majority private sector participation in the cargo handling operations under a new company, while rationalizing other port activities. Legislation to support the proposed restructuring plan has already been drafted. Discussions are also taking place with the labor unions to work out a manpower separation plan similar to that applied successfully in the case of the now closed sugar company CARONI 1975. In addition, the Regulated Industries Commission is implementing a strategic plan whereby the public utilities (Trinidad and Tobago Electricity Company and Water and Sewage Authority) will be given incentives to rationalize their operations in line with international employment and cost standards. In this context, it is envisaged that Water and Sewage Authority move fully to a metering-based tariff system over the medium term.
78. The supply-side measures are being supplemented by a shift in the composition of the Public Sector Investment Program, away from direct government involvement in productive activities toward economic infrastructure (e.g., roads) and social spending (e.g., education and health). In this context, the government is developing a new industrial estate dedicated to the promotion of high-technology industrial development. This development is expected to benefit from synergies with the new University of Trinidad and Tobago, which will be located in the same estate.
Prepared by Saqib Rizavi (WHD).