This 2006 Article IV Consultation highlights that economic developments in Trinidad and Tobago continue to be underpinned by a favorable international environment. Surging energy prices, the exploitation of new gas fields, and an expansion of industrial capacity helped sustain robust economic activity. However, there are signs that the economy is operating at, or near, potential. The monetization of foreign currency energy receipts by the government has introduced a substantial degree of liquidity into the financial system. The banking sector remains profitable, nonperforming loans are low, and provisioning increased compared with the last year.
1. This statement provides additional information that has become available since the circulation of the staff report on September 21, 2006. This information does not alter the thrust of the staff appraisal.
2. Recent data confirm that the economy is operating at full capacity.
In the second quarter the unemployment rate was 7.2 percent compared to 8 percent in the same quarter of last year. The 12-month average unemployment rate fell to 7.2 percent from 7.4 percent in the first quarter.
In August, inflation reached 9.0 percent on a year earlier, compared to 8.6 percent in July. Core inflation fell to 3.9 percent from 4 percent.
3. The central bank has continued to tighten monetary conditions.
Yields on treasury-bills have continued to increased faster than in the U.S. The spread between U.S. and Trinidad and Tobago short-term interest rates has widened to 193 basis points, compared to 61 bp in February when rates on treasury-bills were allowed to rise.
The repo rate was increased on September 29 by 25 bp to 8 percent.
A remunerated reserve requirement of 2 percent on prescribed liabilities was also introduced at that time. This additional reserve requirement is remunerated at repo rate minus 350 bp. In staff’s view, it would have been preferable to set the remuneration in line with market interest rates.
4. The FY 2006/07 budget was submitted to parliament. The budget is predicated on conservative assumptions: real GDP growth of 6.2 percent, inflation of 7 percent, and oil prices of US$45 per barrel. The budget provides for an increase in pensions and broadens the eligibility criteria, reduces residential property transfers tax, and increases taxes on tobacco products and alcohol. Staff estimates indicate that the nonenergy deficit envisaged in the FY2006/07 budget is in line with projections presented in the staff report.
5. Staff has obtained additional information on the exchange system-related issues identified in paragraph 7 of the staff report. However, further information is required before staff is a position to assess the jurisdictional implications of the developments observed in the foreign exchange system.