Statement by Paulo Nogueira Batista, Executive Director for Trinidad and Tobago and Nicole Des Vignes, Senior Advisor to Executive Director

The economic slowdown as a result of the global crisis has been severe, and the recovery has not yet taken hold. Despite ample buffers, including large fiscal space and strong international reserves, the policy response to the crisis has been constrained. Inflation has resurfaced as a concern after falling to a historical low in 2009, but the data are misleading. The monetary policy stance has been generally supportive but ineffective in the context of large excess liquidity. Medium-term growth prospects depend on the energy sector outlook.


The economic slowdown as a result of the global crisis has been severe, and the recovery has not yet taken hold. Despite ample buffers, including large fiscal space and strong international reserves, the policy response to the crisis has been constrained. Inflation has resurfaced as a concern after falling to a historical low in 2009, but the data are misleading. The monetary policy stance has been generally supportive but ineffective in the context of large excess liquidity. Medium-term growth prospects depend on the energy sector outlook.

1. The authorities of Trinidad and Tobago thank Mrs. Gold and her team for the high-quality dialogue during the Article IV Consultation mission and for their candid and useful policy advice. They also thank the MCM mission team for the in-depth analysis and recommendations on the financial system.

2. Since the last Article IV Consultation in January 2009, the economic circumstances in Trinidad and Tobago have changed. Trinidad and Tobago was well positioned to face the crisis, having strong international reserves, significant accumulated savings in the Heritage and Stabilization Fund, and ample fiscal space. Moreover, the unemployment rate had fallen to only 3.9 percent at the end of 2008. As a consequence of the global financial and economic crisis, real GDP declined for the first time in fifteen years and both the fiscal and external balances turned negative. The collapse of CL Financial in early 2009 added further to the challenges. Following a year of subdued economic activity in 2010, the immediate focus of the authorities is on restoring growth while maintaining fiscal and debt sustainability.

Recent Economic Developments

3. Against the backdrop of a fragile global recovery, regional economic challenges and uncertainty in the domestic economy, growth in 2010 remained flat. The energy sector is estimated to have increased in 2010, while the rate of decline in the non-energy sector has slowed. The unemployment rate doubled since end-2008 (staff estimates a rate of 7.8 percent at end - 2010). Despite weak domestic demand, inflation remained a challenge in 2010, mainly due to higher food prices caused by weather-related supply shocks in the agricultural sector. Staff has raised the issue of a possible upward bias in the calculation of the Retail Price Index, which could lead to consistent overestimation of headline inflation. Our authorities appreciated the advice and are taking steps to revise the methodology and the index in 2011.

4. The balance of payments returned to a surplus position in 2010 in light of the more favorable energy prices. At the end of 2010, the level of gross international reserves in months of imports stood at around 14. With a more buoyant external position, Central Bank’s support to the foreign exchange market to ease periodic demand pressures in 2010 was lower than in 2009. Moreover, the exchange rate remained relatively stable throughout the year, with the weighted average selling rate depreciating to US$1 = TT$6.4234 at the end of December 2010 from US$1 = TT$6.3794 at the beginning of the year.

5. The authorities continue to monitor the developments in the foreign exchange market with a view to identifying emerging imbalances as a basis for policy adjustment. The data indicate that requests for foreign exchange are met relatively quickly and that clients do not have to wait an inordinate length of time to obtain foreign exchange.

6. On the monetary front, the authorities faced the dual challenge of containing inflationary pressures while supporting the economic recovery. In light of the weak economic recovery and the stabilization of core inflation around 4 percent, the monetary policy stance for 2010 was accommodative. Accordingly, the repo rate was lowered from 5 percent in January 2010 to 3.75 percent currently. Further, there has been an involuntary build-up of excess liquidity in the banking system which has served to depress short-term interest rates.

7. Recently revised data show that the outturn for the fiscal year 2010 (October 2009 – September 2010) was much better than anticipated, with the central government deficit (excluding CLICO support) narrowing to 0.3 percent of GDP. Revenue collection was much higher than projected due to more favorable energy receipts while spending was lower. The public sector debt, which had been on a declining trend, began rising in 2009. While the current debt levels are manageable and well below those of many countries in the Caribbean, the authorities are concerned about debt sustainability. Accordingly, they have requested technical assistance from MCM in public debt management and a mission visited Trinidad and Tobago in December to conduct a preliminary assessment.

Outlook for 2011 and Addressing the Macroeconomic Challenges

8. The authorities largely agree with staff’s outlook for 2011. The economy is expected to recover, although risks remain on the downside. The budget highlights several fiscal and other measures aimed at stimulating activity, diversifying the economy, revitalizing the energy sector, encouraging new investment, improving competitiveness, and nurturing small business development and innovation.

9. The fiscal deficit is expected to widen in 2011 as the authorities’ policy stance remains expansionary. Over the medium term, the authorities are committed to fiscal prudence and will seek to bring the fiscal position back into balance. They prefer a gradual approach to fiscal consolidation as they must also balance this with the growth objective while safeguarding the social safety net.

10. The authorities are working towards resolving a number of outstanding issues such as the CL Financial/CLICO issue, settlement of public sector wage negotiations, payment of outstanding arrears to contractors and VAT refunds to businesses to support private sector confidence and the overall business environment. A loan from the IDB has been secured to support the execution of the public sector investment program, which is geared to improving the socio-economic infrastructure of the country and should boost economic activity.

11. The authorities are taking steps to support the vitality of the energy sector given its importance to economic growth, foreign exchange earnings, and government revenues. Accordingly, the government has revised the Petroleum Taxes Act to help stimulate activity in Deep Water Blocks and in the crude oil sector. The government also believes that the country is well positioned to benefit from the export of energy advisory services. The government’s energy policy also promotes the development of alternative sources to supplement the exhaustible crude oil and natural gas resources. These measures, which include lower taxes, investment tax credit, and other incentives, became effective January 1, 2011.

12. Further, plans are afoot to improve the business environment and enhance private sector development. To make it easier to do business, the authorities are in the process of establishing the International Business Centre (IBC), which in conjunction with the Economic Development Board and the Competitiveness and Innovation Council will be responsible for designing an innovation and investment strategy for the country. Also, a number of initiatives are being undertaken to help encourage small business development and innovation.

13. Monetary policy will focus on supporting the economic recovery while carefully monitoring inflation. The rate of inflation is expected to decline in 2011 as the authorities implement measures in the agriculture sector to boost domestic food production.

Financial Sector Developments

14. The first ever Financial Stability Module was conducted on Trinidad and Tobago’s financial system and the findings of this mission are well documented in the Financial System Stability Assessment. According to the findings, the banking and insurance sectors remained resilient in spite of the global financial crisis, the CL Financial shock and the slowdown in economic activity. Of note, stress tests show that with the present capital and liquidity buffers the banks are well positioned to withstand severe shocks. However, rising non-performing loans and concentration risk presents vulnerabilities. In the insurance sector (excluding CLICO), the larger life and general insurance companies are profitable and well capitalized. While areas of weaknesses remain to be addressed, staff recognized that the authorities have taken major steps to strengthen the regulatory and supervisory framework of the banking and insurance sectors since the 2005 FSAP.

15. The authorities are working quickly to resolving the issue of CL Financial and CLICO. As highlighted in the budget, the authorities have separated CLICO’s insurance business from its short-term investments and mutual funds business, with the intentions of merging the insurance businesses of CLICO and British American Trinidad (BAT) into a single entity for divestment. Further, they have decided on a payment strategy for the CLICO and BAT policy holders, which has been amended since the passage of the budget to accommodate the affected credit and trade unions, given their importance and wide coverage. Payments in 2011 will be made to individuals holding short-term deposits and mutual funds up to a maximum of TT$75,000. Those individuals with policies valued in excess of TT$75,000 will be paid the remainder in the form of a twenty-year bond at zero interest rate, which could be traded in the secondary market. With respect to the affected credit and trade unions, they will be paid 50 percent of their exposures in 2011 and the remainder in 2012. In addition, a compassionate window has been established to assist individuals in emergency situations. The authorities are in the process of reviewing the CL Financial and its subsidiaries to divest assets and recover public funds.

Data Development

16. In late 2009, an IMF statistical mission visited Trinidad and Tobago to identify gaps in Trinidad and Tobago’s macroeconomic data sets and to help the country prepare for subscription to the SDDS. A national co-ordinating committee has been set up and key data sets for the monetary, financial and balance of payments domains have been prepared. The authorities are working to provide data sets on nominal GDP and the fiscal statistics on a more timely and consistent basis. The Central Statistical Office will also be rebasing the CPI and the Index of Domestic Production.