Statement by Otaviano Canuto, Executive Director for Trinidad and Tobago and Veronica Ramcharan, Senior Advisor to the Executive Director, May 20, 2016

This paper discusses economic developments, outlook, and risks in Trinidad and Tobago. The economic output of Trinidad and Tobago has continued to shrink. Ongoing maintenance and further declines in gas and oil production are estimated to have driven energy output 4.7 percent lower (year over year) as of September 2015. The longstanding current account surplus turned into a 5.4 percent of GDP deficit in 2015. The significant terms-of-trade shock implies that the real effective exchange rate has become more overvalued. Risks to growth are tilted to the downside, and much will depend on the authorities' ability to navigate the transition to the lower energy price environment.


This paper discusses economic developments, outlook, and risks in Trinidad and Tobago. The economic output of Trinidad and Tobago has continued to shrink. Ongoing maintenance and further declines in gas and oil production are estimated to have driven energy output 4.7 percent lower (year over year) as of September 2015. The longstanding current account surplus turned into a 5.4 percent of GDP deficit in 2015. The significant terms-of-trade shock implies that the real effective exchange rate has become more overvalued. Risks to growth are tilted to the downside, and much will depend on the authorities' ability to navigate the transition to the lower energy price environment.

On behalf of our authorities, we wish to thank the mission team for the constructive discussions on macroeconomic developments and policy issues in Trinidad and Tobago. In line with staff recommendations, the authorities are focused on consolidating the fiscal position and implementing strategic structural reforms towards enhancing the country’s competitiveness and medium-term growth prospects.

Despite the significant challenges posed by the need to adjust to lower energy prices, Trinidad and Tobago is far from a crisis situation. The country has enormous strengths, including low levels of public debt, substantial financial buffers, a well-educated work force and a stable political system.

Upon assuming office in September 2015, the new administration had less than one month to present a budget to Parliament. Recognising that energy prices could remain low over the long term and faced with considerable structural challenges to increase economic diversification, the budget accommodated the fiscal adjustment requirements but was also carefully balanced to avoid exacerbating the economic slowdown. Under no illusions about the external environment, the authorities refined the budgetary framework during the Mid- Year Budget Review (MYBR) presented in April 2016 and further calibrated policy adjustments to meet their medium term economic objectives. The MYBR reflected expectations of lower oil and gas prices and entailed both adjustments in government spending and measures to broaden revenue sources.1

Economic Developments and Outlook

Trinidad and Tobago has suffered major consecutive shocks to its economy given the global financial crisis, followed more recently by a large terms of trade shock. Despite the negative impact of the global financial crisis, the country’s economy remained resilient and quickly rebounded. Since mid-2014, the economy has been hard hit by the sharp decline in oil and gas prices. Indeed, growth contracted in 2014 and 2015, and lower domestic absorption is expected to continue in 2016. Given the permanent nature of the decline in hydrocarbons prices, the economy has been gradually adjusting to a new reality.

Underpinned by the authorities determined efforts, including significant fiscal adjustment measures in order to maintain macroeconomic and external stability, GDP is expected by staff to rebound sharply to 2.3 percent in 2017 and maintain steady positive growth over the medium term. Despite the enormous challenges faced by the country, headline inflation has been well contained by historical standards and the unemployment rate has remained very low. The resilience of the employment numbers suggests that private sector employment has also held relatively firm, and that employment has not been solely dependent on government “make-work” programs. In addition, the economy is protected by substantial financial buffers, including US$9.8 billion in international reserves or 13.4 months of import cover and a Heritage and Stabilization Fund (HSF) with US$5.8 billion, which together is equivalent to about 63 percent of GDP in 2015.

In an environment of heightened uncertainty and downside risks in the global economy, the authorities remain vigilant and focused on strengthening resilience. They recognize the enormous challenges stemming from the volatility of hydrocarbon prices and its impact on the main source of fiscal revenue generation. The new government has undertaken significant fiscal consolidation measures and implemented a tactical reform agenda designed to preserve macroeconomic stability and promote sustainable and inclusive growth. Beyond the short term, measures include structural reforms to raise productivity, promote constructive value-added economic diversification and further advance regional and global integration.

Fiscal Policy

The Ministry of Finance recently introduced a Medium-Term Fiscal Consolidation Framework which is an important anchor in supporting the authorities’ efforts to meet budgetary targets, improve expenditure prioritization, and foster improved government performance. This plan also aims to invigorate high value-added investments, intensify human capital development and enhance public sector delivery, within the constrained fiscal space. The course of fiscal consolidation is underpinned by further reforms to broaden the government’s revenue base, rationalize subsidies and better optimize supplies and services expenditure. As such, in the fiscal year 2016 the authorities intend to reduce total expenditure by TT$4 billion than originally budgeted in October 2015. Consequently, the fiscal deficit for 2016 is expected to be around 4 percent of GDP using the cash basis accounting methodology.

The financing gap for 2016 and 2017 will be closed through several available avenues, including borrowings and one-off items of extraordinary income, such as recoveries from the sale of CLICO assets, dividends from the National Gas Company (NGC), drawdowns from the HSF, and proceeds from the Phoenix Park IPO. By 2018 the authorities are determined to be well on their way to achieving a balance between current income and expenditure, with reliance on borrowings only for capital expenditure. Moreover, the authorities noted that if revenues disappoint, they are willing to further reduce expenditures.

The authorities have remained steadfast in their commitment towards fiscal consolidation, careful debt management and prudent expenditure restraint. Trinidad and Tobago’s external debt continues to be low, despite a projected increase over the medium term to moderate but sustainable levels. The authorities have made significant progress towards establishing a medium term debt management framework, which will significantly enhance their capacity to address potential risks.

Alongside cuts in recurrent spending – including the reduction of operational expenditure by 7 per cent for all ministries – fiscal consolidation is being led by increased revenue generation from more diverse sources as well as enhanced tax efficiency and compliance. Some measures include the implementation of a property taxation system; broadening of the VAT base; increasing excise taxes; elimination of fuel subsidies and reducing other subsidies and transfers; and the introduction of wage and hiring restraint mechanisms. Furthermore, a levy of 7 percent on online purchases of goods and services from overseas retail companies will be effective from September 01, 2016. In addition, the capital investment program for fiscal year 2016 was reduced by 14.2 percent from the previous fiscal year and has been re-prioritised, refocused and, where necessary, consolidated towards areas and activities that will stimulate growth and achieve economic and social transformation.

The government has also made major efforts towards improving revenue administration, and proposes to establish a unified revenue authority in the near future. This will facilitate greater information sharing among revenue agencies, tighten rules on transfer pricing, and increase resources devoted to tax enforcement, which over time are expected to substantially increase revenue yields. This has been done in conjunction with amendments to several pieces of pertinent legislation, facilitating the required fiscal measures, including the passage of the Finance Act No.1 of 2016 in February and the Finance Bill No.2 of 2016, which is expected to be passed later this month. The government has also instituted steps to establish a “General Accounting Office”, which will be responsible for the continuous real-time assessment of actual budget performance, and is also in the process of establishing a Tax Policy Unit, with technical assistance (TA) from the Fund.

The authorities have also commenced discussions with the energy industry on reforming energy taxes, and have requested TA from the Fund in this area as well. As noted in the MYBR, the removal of fuel subsidies have commenced and will be carried out in a phased manner, using the savings to improve the social safety nets and reduce transportation costs for low-income groups. The authorities also propose to implement a new pricing mechanism that will allow world oil price changes to pass through to local fuel prices.

Given the significant level of consolidation required, the authorities noted the importance of public support to ensure the success of the required adjustment. Accordingly, they have increased efforts to enhance transparency and consultations on a regular basis, and inaugurated a National Tripartite Advisory Council in March 2016 consisting of stakeholders from the government, private sector and labor sector.

Going forward, fiscal policy will continue to be focused on ensuring sound public finances while remaining supportive of policies for sustainable and balanced growth. In particular, measures to improve the quality and efficiency of public service delivery will be complemented by socio-economic support to vulnerable households. The authorities in collaboration with the World Bank have undertaken a comprehensive review of social expenditures to reduce costs and improve program efficiency, without sacrificing the social safety nets needed to protect the most vulnerable.

Monetary and Exchange Rate Policy

While monetary policy is primarily aimed at controlling inflation, which remains well contained, the Central Bank of Trinidad and Tobago (CBTT) follows a multiple policy objective framework, which provides much needed flexibility in light of the volatile global environment. The policy rate of 4.75 percent as of December 2015 is assessed to be appropriate given the balance of risks to the outlook for domestic inflation and growth, as well as taking into consideration the downside risks emanating from the external environment. The CBTT Monetary Policy Committee (MPC) continues to closely monitor the heightened external risks and assess the implications on macroeconomic and financial stability.

The exchange rate policy is aimed at minimizing market volatility, and is reflective of supply and demand conditions in the foreign exchange market. Going forward the policy would also be guided by the presumption that the terms of trade shock is permanent. Reflective of supply and demand conditions in the foreign exchange market, the TT dollar exchange rate has begun to depreciate against the US dollar since the end of 2015. Official intervention in the foreign exchange market will continue to take place via biweekly auctions, and the rate and volumes at each intervention will continue to be informed by economic conditions at the time, particularly anticipated foreign exchange inflows and outflows.

In April 2016, the government announced that the TT dollar would not be allowed to depreciate more than 7 percent from its September 2015 level. The authorities emphasize the need for caution in light of the on-going fiscal consolidation coupled with the significant austerity measures being undertaken to protect macroeconomic stability. The impact of a swift depreciation of the exchange rate could result in significant inflationary pressures, increases in wage pressures and even lead to labor unrest. Consequently, the government has given assurances that the currency will not become unstable and that monetary and fiscal policies will be conducted to support the level of depreciation signaled above.

Regarding the Article VIII issue, the authorities maintain that they have not “imposed restrictions on the making of payments and transfers for current international transactions” nor “have their official exchange rate used by the CBTT for government transactions deviated by 2 percent or more from the prevailing market exchange rate”, and therefore do not agree that their exchange rate policy gives rise to exchange restrictions and multiple currency practices.

While the IMF staff has noted that there is a shortage of foreign currency in the market, there was no evidence that the authorities had imposed a restriction on making payments and transfers. Trinidad and Tobago de facto exchange rate regime is classified as a stabilized arrangement by the Fund. The aggregate data collected from the financial institutions on a daily basis illustrates that there has generally been a distributional problem among the commercial banks themselves leading to the formation of occasional queues, and in such circumstances the CBTT will make special interventions to clear the queues. In this regard, at the conclusion of the Article IV consultation, the Minister of Finance specifically requested TA from the Fund to analyze the issues surrounding the foreign exchange market and to find a suitable resolution to the assumed distributional issue.

Financial Sector Reform

The authorities recognize that there have been delays in passing important financial legislation, including the Insurance Bill, which pose certain risks to the financial sector. Therefore, as a matter of priority, they are committed to rectifying this problem and intend to lay the Insurance Bill and the Credit Union Bill in Parliament shortly. It should be noted that the long outstanding Procurement Bill has been enacted and the necessary regulations and amendments are in train to effect the proclamation of the Act. This should be finalized by the end of 2016. The authorities are also reviewing several other pieces of legislation, including the Financial Intelligence Unit Act and the Central Bank Act to align them with international best practice and will bring to Parliament their full legislative agenda, within the current fiscal year.

The authorities are also committed to addressing all AML/CFT shortcomings arising from the recently conducted Caribbean Financial Action Task Force (CFATF) evaluation and continue to take the necessary action to further strengthen the AML/CFT framework.

Pertaining to the long-standing issues related to CL Financial, the authorities continue to progress the resolution of this matter and the plan entails the sale of a number of assets in order to satisfy long outstanding liabilities in the context of the Memorandum of Understanding signed in 2009. Subsequently, the traditional insurance portfolio will be divested in an orderly fashion.

Structural Reforms

Trinidad and Tobago has earned a reputation as an excellent investment destination for international businesses and has one of the highest per capita incomes in Latin America and the Caribbean. Nonetheless, the authorities recognize that diversification is absolutely critical to ensure long term economic growth and sustainability. As such, they are determined to push ahead with the diversification drive to ensure a socio-economic environment that is attractive to domestic and foreign investment. Taking into account policy constraints, the authorities have targeted initiatives in areas that can deliver the greatest growth return within these constraints.

The diversification strategy is centered around international financial services, tourism and related maritime activities. The authorities have commenced discussions with several foreign investors pertaining to a set of integrated projects which include the expansion of the international financial centre, a new commercial port, a maritime and shipbuilding complex, an industrial park and the development of Special Economic Zones.

Trinidad and Tobago is well positioned to establish a viable and robust maritime economy. An initial step is the establishment of a maritime maintenance facility to meet the requirements of the existing fleet of government-owned naval and maritime assets. Such a facility will catalyze the development of a ship-repair and ship-building industry, eventually emerging as a hub within the CARICOM region, thereby creating a New Maritime Economy.

A Tourism Growth Strategy is currently being developed along with the reconvening of the Trinidad Tourism Standing Committee. The strategy will inform the direction of the industry, and address major issues impacting tourism development, such as airlift, marketing, product development and destination management. Tourism development will also be facilitated through the Tobago Comprehensive Development Plan, which sets out a road map for the development of the island, towards ensuring that the tourism sector becomes an important driver of economic growth.

Public-Private Partnerships (PPPs) will continue to play a major role in infrastructure development. The authorities have made provisions to support the growth and development of the technical and operational aspects of PPP arrangements. Trinidad and Tobago is already utilizing PPPs to deliver public infrastructure services in several areas, including health, education and ICT (Information and Communication Technologies). Technical capabilities are being incorporated into a number of government ministries and the authorities intend to continue using PPPs when establishing long-term contracts with investors for infrastructure development. In addition, the authorities remain committed to the implementation of a modern, transparent and fair public procurement system. They are currently in the process of conducting a review of the existing legislation and expect to table the appropriate amendments and institute the New Procurement Agency in 2016.

The authorities are also assessing a number of work programs, in particular CEPEP and the Unemployment Relief Program (URP), with the objective of achieving cost efficiencies and streamlining the operational framework to ensure value-added output. Moreover, the government has established a High-Level Committee to oversee the reform of the Government Assistance for Tuition Expenses (GATE), to rationalize expenditure and ensure that program objectives are aligned with the country’s development needs. In an effort to promote a competitive and productive industrial relations climate, the authorities have undertaken a comprehensive review of all labor legislation, including the Industrial Relations Act and the Retrenchment and the Separation Benefits Act.

Despite ongoing diversification efforts, the authorities recognize that the energy sector remains their major source of revenue and must continue its development. During the last five years, fiscal incentives were provided for the sector. However, there were no specific incentives that targeted the development of small and marginal gas fields. These are important resources which can make a significant contribution to addressing the current supply/demand imbalance. Accordingly, the government has initiated discussions with all relevant stakeholders on the adoption of appropriate strategies and incentives, which will result in new production in these fields. They will also move forward with a comprehensive review of existing arrangements along the natural gas value chain and, where necessary, implement appropriate measures on key aspects of the oil and gas sector.

Pertaining to outstanding data deficiencies, the authorities have made considerable progress – within a very short space of time – towards the establishment of an independent and autonomous National Statistical Institute (NSI). The required legislation establishing the NSI is expected to be passed in 2016. In collaboration with CARTAC, the operational efficiency of the Central Statistical Office has greatly improved as data backlogs have been significantly reduced, along with the generation of new time series data.


April 2016 assumption: US$35 per barrel and a gas price of $2.00 per mmbtu; October 2015 assumption: $45 per barrel and a gas price of $2.75 per mmbtu.