2018 Article IV Consultation-Press Release and Staff Report
2018 Article IV Consultation-Press Release and Staff Report
On August 31, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Trinidad and Tobago and considered and endorsed the staff appraisal without a meeting.2
Executive Board Assessment
Trinidad and Tobago is slowly recovering from a deep recession. The economy continued to contract but at a slower pace, underpinned by the strong recovery in gas production, while weak activity in construction, financial services, and trade, continued foreign exchange (FX) shortages, and slow pace of public investment dampened non-energy sector growth. Positive growth should return from 2018 as the recovery takes hold in both sectors. Good progress has been made in fiscal consolidation through spending cuts, but public debt continued to rise, approaching the government’s soft target of 65 percent of GDP. The external position is weaker than the level consistent with medium-term fundamentals and desirable policies, but gross international reserves provide significant financial buffers, along with the Heritage and Stabilization Fund (HSF), although reserves are projected to fall gradually given the current FX regime. The financial sector remains stable, with profitable, well-capitalized banks, while the recent decline in asset quality, rising household debt, large domestic and regional sovereign exposures, and an interconnected financial system create pockets of vulnerability.
Economic prospects are expected to improve over the medium term, but remain heavily dependent on the energy sector. The medium-term growth, fiscal and external outlook is vulnerable to negative surprises in energy prices and output, a sizeable primary deficit, and elevated levels of public debt. Possible delays in completing the ongoing fiscal adjustment and reforms, persistence of FX shortages, tightening of financial conditions, and ongoing regional financial sector challenges also tilt the risks to the downside.
A multi-pronged strategy is needed to ensure a sustained recovery, and safeguard fiscal and external sustainability. Such a strategy should aim at improving the economy’s resilience to future shocks, focusing on: (i) completing the fiscal adjustment to put the public debt on a downward trajectory to safeguard sustainability, while reducing the economy’s over-reliance on the energy sector; (ii) safeguarding financial stability; and (iii) creating an enabling environment for the non-energy sector as an engine of growth, by removing the obstacles to its development, while increasing transparency of the operating environment for the energy sector.
The authorities should take advantage of the impact higher energy prices had on the fiscal position and complete the ongoing adjustment, given the inherent volatility in energy prices. Efforts should focus on speedy implementation of the delayed revenue reforms, finalizing the energy taxation reform, and reducing reliance on noncore revenues, including through increased tax compliance. Improved efficiency and containment of public spending should continue. Further cost savings from increased utility tariffs and reduced transfers and subsidies should be redirected to the most vulnerable segments of society and public investment targeted at closing skills and infrastructure gaps to reduce adverse impacts of adjustment. Paced over the medium term, an adjustment equivalent to 4.4 percent of GDP should create fiscal space to confront future shocks, alleviate market concerns about the adequacy of adjustment, and put the public debt on a downward trajectory to safeguard sustainability.
An appropriate Medium-Term Fiscal Framework (MTFF) could provide a systematic tool for countercyclical fiscal policy and help insulate the economy from energy price swings. Adopting an appropriate formal fiscal target within a clearly-communicated MTFF to guide fiscal policy could provide a tool to anchor fiscal adjustments. The HSF should be fully integrated with the MTFF, by linking transfers to/from it to the fiscal target. Such a mechanism can shield the government from pressure to deviate from the adjustment path, and allow the HSF to build reserves during revenue booms to use during downturns. Managing public debt and the HSF in an integrated framework may limit situations where the government must borrow to save into the HSF. Establishing a medium-term debt strategy may clarify the desired debt composition and limit adverse implications of borrowing strategies. The government should settle the overdraft balance with the Central Bank of Trinidad and Tobago (CBTT), and rely on market-based financing.
The continued state of FX market imbalance must be addressed on an urgent and sustained basis. Notwithstanding the reduced tightness in the market, owing to increased FX inflows from energy companies, continued FX shortages affect market confidence, raise the cost of doing business, hampers non-energy sector activity, and could result in responses that further feed shortages. The authorities could take advantage of the current relatively stable period with low inflation and progress in fiscal consolidation to address the shortages, while minimizing distortions.
Going forward, the exchange rate could play a more active role in an economy exposed to frequent terms-of-trade shocks and help manage the transition to a more balanced FX market. Allowing gradually some market forces in determining the exchange rate (e.g., within a widening band) could facilitate adjustment to external shocks, help restore competitiveness, and safeguard foreign reserves. Permitting two-way exchange-rate variation could help reduce incentives for FX-hoarding and one-way currency bets, while allowing the exchange rate to anchor inflation expectations with some scope for flexible monetary policy. Such a move requires careful design and implementation to avoid adverse balance-sheet problems or second-round effects and needs to be supported by a prudent fiscal, monetary, financial, and structural policy mix, adequate safety nets, and well-designed intervention and communication strategies.
Preserving financial stability calls for careful monitoring of the sources of systemic risk and swift implementation of the ongoing reforms. Staff welcomes the authorities’ cautious and proactive approach, given a highly-indebted household sector, bank-sovereign linkages domestically and regionally, and rising interest rates in a complex, interconnected financial system. Efforts must focus on risk-based, consolidated, cross-border supervision with appropriate prudential regulations, and completing the ongoing regulatory reforms, including Basel II, the Insurance Law, and nonbank supervisory frameworks. Trends in Correspondent Banking Relationships (CBRs) should be systematically monitored, given the ongoing weaknesses in AML/CFT and tax transparency regimes. Ensuring compliance with international standards, risk-based supervision, and complete legislative processes should accompany banks’ ongoing due-diligence, relationship-maintenance, and risk-management efforts.
A structural reform agenda should create an enabling environment for the non-energy sector, and boost its potential to support sustainable growth and resilience. Institutional reforms should focus on improved tax collection and contract enforcement and strengthening existing legal frameworks that hinder legislative-passage of ongoing reforms. Reduced cost of doing business, addressing crime (with prevention and response efforts), reducing skills gaps (with ongoing training programs), and sustained government support in removing obstacles to diversification within and outside the energy sector should help reduce heavy reliance on the energy sector, enhance FX-earning potential, and attract foreign investment.
The quality and timeliness of data continue to present a significant challenge to surveillance and policymaking. Staff welcomes the progress made, and calls for further efforts to complete data improvements needed for surveillance, prioritize operationalization of the independent statistical authority, and enhance interagency cooperation.
It is recommended to hold the next Article IV consultation on the standard 12-month cycle.
Trinidad and Tobago: Selected Economic Indicators
Includes VAT and Financial Intermediation Services Indirectly Measured (FISIM).
2017 reflects Staff projection.
Data refer to FY year; for example, 2017 covers FY17 (October 2016-September 2017).
Defined as non-energy revenue minus expenditure of the central government.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.