Abstract
Trinidad and Tobago showed strong economic performance led by the buoyant energy sector. Executive Directors welcomed the robust economic activity, and the decline in public debt and external reserves. Directors stressed the need for strong macroeconomic and structural policies to enable the efficient absorption of energy revenues. They supported the tightening of fiscal policy and commended the monetary stance that has helped to contain inflation. They urged the authorities to improve the business environment and spur investment in the non-energy sectors and also encouraged plans to strengthen financial regulations and supervision.
1. The Trinidad and Tobago authorities thank Management and staff for their ongoing support and for the helpful policy dialogue during the recent Article IV consultations.
2. The Trinidad and Tobago economy continues to perform well and macroeconomic stability remains well entrenched. Robust GDP growth has generated record-low unemployment (5 percent), fiscal discipline has been maintained, and the external accounts remain strong, facilitating the accumulation of sizeable foreign exchange reserves. In addition, gross public debt now measures only 28 percent of GDP, compared with 60 percent in 2001. Reflecting the good performance and prospects of the TT economy, the country enjoys favorable international debt ratings of A+ and Baa1 by Standard and Poor’s, Moody’s, respectively.
3. The authorities agree with staff that the medium-term prospects for TT are favorable and that external vulnerabilities are limited. Growth, led by activity in the oil and energy sector, should remain strong, with an improving contribution from the non-oil sector. The sizeable accumulation of external reserves and the low level of external public debt will attenuate risks from a fall in oil prices. Inflation is expected to fall to 7 percent by end-2007. Core inflation has stabilized at about 4.5 percent.
4. As many other developing-country oil producers, Trinidad and Tobago aims to avail of present favorable international oil prices to accelerate development. This is being done in the context of the government’s integrated long-term plan (Vision 20/20), among whose objectives are the diversification of the economy, the enhancement of physical and human capital, and the reduction of poverty, all while paying due attention to the maintenance of macroeconomic stability and saving for future generations. The authorities concur with staff on the need to transform energy wealth into a balanced combination of external financial assets and physical and human capital, supported by a prudent mix of macroeconomic and structural policies. The authorities believe that this indeed characterizes their approach.
5. The authorities are aware that in the context of a fast-expanding macro economy and accelerated developmental thrust, inflation will continue to emerge as the major macro economic challenge. In this context the major successes recorded in containing inflation are noteworthy. Since peaking at 10 percent in October 2006, headline inflation has shown steady monthly declines (except for July 2007) as a result of an aggressive approach by the Central Bank on the monetary side, and the government on the supply side. To the end of July 2007 inflation registered 8 percent, and the government is confident that the target of 7 percent could be attained by the end of the calendar year.
Monetary Policy and Exchange Rates
6. Since October 2006, the Central Bank has redoubled its efforts to tighten liquidity and reduce the growth of domestic demand, mainly by complementing normal open market operations with stepped up issuance of long-term bonds, the proceeds of which have been sterilized. Bond issues in the first seven months of fiscal year 2006/07 (October 2006 to April 2007) totaled TT$2.4 billion whereas there were no issues in the similar period of fiscal year 2005/06. This unprecedented supply of bonds along a wide maturity spectrum also provided investment opportunities for institutional investors and will form a platform for the development of a secondary bond market in the coming months. This is consistent with the Central Bank’s objective of enhancing the financial and monetary environments to facilitate more effective monetary management.
7. Central Bank sales of foreign exchange were scaled up by 100 percent in 2006 to US$1.5 billion to assist in liquidity control, and a similar total is likely for 2007 (US$1 billion). With tighter liquidity management, short-term interest rates and commercial bank lending rates have trended upward and, with the slowdown in the tightening cycle in the US, the differential between the TT and US short-term rates widened to 202 basis points in April 2007 from 174 basis points in October 2006.
8. With strong growth likely to continue into the foreseeable future, the authorities see inflation risks continuing to emanate from strong domestic demand, possible increases in import prices, particularly food prices, and the pattern of wage settlements. On the latter score, the staff has correctly noted that some wage settlements now include a cost of living adjustment (COLA) clause. The Central Bank is of the view that its consistent policies and clear communications will continue to bolster its credibility and help anchor inflation expectations. The authorities are committed to scaling up bond issuance to regulate liquidity, but will take other measures if necessary to achieve the established targets.
9. The authorities welcome staff’s assessment that the TT economy exhibits no signs of external instability. They note the evaluation of some misalignment of the exchange rate, but also the observation with respect to the uncertainties in the analysis given Trinidad and Tobago’s status as a large exporter of non-renewable resources. While a nominal appreciation could assist the Central Bank in its inflation objective, in practice, results may be limited if local supply conditions face bottlenecks, for example in distribution.
Fiscal Policy
10. The government’s fiscal operations in fiscal year 2006–07 are projected to result in an overall surplus of TT$ 1,268.7 million compared with a surplus of TT$ 28.5 million forecast in the budget. Expenditure in 2006–07 included the allocation of TT$ 2,030.2 million to the Heritage and Stabilization Fund, the vehicle established for saving for future generations. With this allocation, total savings in the HSF now stands at US$1,396 million or 8 percent of GDP. The government has also taken the decision to save the over-performance in fiscal 2006–07 in the HSF.
11. The government notes staff’s recommendation to reduce the non-energy deficit for demand management and fiscal sustainability considerations. As staff observes, the government’s intention is to reduce the non-energy deficit to 10 percent by 2010. At present, however, the more pressing considerations for curtailing expenditure seem to be demand management and spending efficiency reasons, as plans for a new fiscal regime for the oil sector hold the promise of significant new discoveries of oil and gas. For fiscal 2007–08, government expenditure is budgeted to increase by 7.6 percent, which is marginally above projected annual inflation. The expenditure budget for fiscal 2008 contains settlement of salary arrears that cannot be postponed much longer. In addition, in keeping with developmental and social objectives considerable attention is being given to improving infrastructure, education and health.
12. Nevertheless, the government is also aware that removing supply bottlenecks has an important role to play in alleviating emerging demand pressures as capacity constraints intensify. Efforts by the government on the supply side have played an important part in the success against inflation since October 2006. These efforts included measures to increase competition in food distribution and improving marketing arrangements for agricultural goods. In addition, the government removed the common external tariff on a range of basic food items. The government sees room for further improvement of supply conditions. The budget for 2007–08 proposes a substantial increase on the focus on agriculture production to further impact food price inflation. While, as can be expected in a situation of rapidly rising prices, especially for food, calls have emanated from certain sectors of the population for the introduction of price controls, the government has no intention of taking this path.
Structural Policies
Saving for the future
13. In March 2007, the Heritage and Stabilization Fund (HSF) replaced the Interim Revenue Stabilization Fund, which existed since 2000. Modeled on best practices for commodity funds worldwide, the HSF will be used to accumulate savings from the country’s exhaustible oil and gas assets for future generations as well as insulate the economy from swings in international oil and gas prices. Governance structures are already in place. As mentioned above, the HSF now contains US$1,396 million.
Public Financial Management
14. The authorities are grateful to staff for the useful analysis of fiscal procedures undertaken during the mission. They have already begun elaborating a proposal for Fund technical advice in implementing the recommendations. It is hoped that by fiscal year 2008/09 the budget could be presented in the context of a medium-term framework. On another note, the tax administration system will be enhanced by the coming on stream of a Revenue Authority in September 2007.
Dealing with capacity constraints
15. The government is taking a multi-faceted approach to treating the problem of capacity constraints. One approach is the importation of labor through the CARICOM movement of labor mechanism. Labor inflows are expected to intensify as more skill categories are included in the movement of labor provisions of CARICOM. The authorities have also embarked on an intensive and wide-ranging program to expand the labor force in certain skill areas, which includes training for the young and on the job training.
The business climate
16. The authorities continue to take measures to enhance the business climate. The government is accelerating the implementation of the National Information and Communication Technology Plan and the liberalization of the telecommunications sector. Following the passage of the Fair Trading Act in 2006, a Fair Trading Commission is now being established. A Bill has already been presented to Parliament seeking to review the bankruptcy legislation to facilitate debt restructuring of ailing businesses. Customs processes are being updated by the introduction of ASYCUDA++ and the electronic processing of customs entries.