Press Information Notice: IMF Concludes Article IV Consultation with Trinidad and Tobago

June 24, 1998

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On June 15, 1998, the Executive Board concluded the Article IV consultation with Trinidad and Tobago1.


Since emerging from a decade-long decline in output and international reserves in the early 1990s, the Trinidad and Tobago economy has expanded at a steady, if moderate rate underpinned by growth in the oil, gas and petrochemical sectors. More recently, the economy is experiencing an acceleration in growth owing to the strength of investment in the petrochemical sector. Extensive structural reforms have substantially liberalized the external and financial sectors and downsized the public sector. While inflation has declined steadily to a rate near that of trading partners in the past several years, unemployment has fallen more modestly from its peak of about a quarter of the labor force in the mid-1980s to about 15 percent in 1997, because of the capital intensive nature of the important energy and petrochemical sector.

The fiscal accounts and the balance of payments have registered consistent, but declining surpluses in recent years. In the public sector, the surplus has contracted because profitable state enterprises have been divested, income taxes have been reformed, external tariffs have been reduced, and public infrastructure investment has been stepped up. More recently, revenues have been weakened by large investment-related write-offs, the drop in world oil prices, and the lack of progress in improving tax administration. However, these losses have been temporarily offset by divestment proceeds and advance payments for oil exploration contracts. In the external sector, the current account has opened a sizeable deficit as raw material and capital goods imports related to the boom in energy and petrochemical investment have risen sharply. Nevertheless, large private capital inflows, particularly of foreign direct investment, have financed these imports and permitted the continued accumulation of international reserves.

Rapid innovation in the financial system to circumvent the high reserve requirements has undermined the effectiveness of monetary policy, and the authorities have recently initiated measures to address the issue.The real effective exchange rate has varied only about 2 or 3 percent around its average since the currency was floated in 1993. However, the currency has been under intermittent downward pressure, and the central bank has alternated between moral suasion and periodic intervention to stabilize the nominal rate.

Executive Board Assessment

Directors commended the authorities for having successfully pursued sustained growth with low inflation in recent years. The economy is now experiencing an investment boom in the petrochemical sector, which would sharply accelerate economic growth in 1998. Directors endorsed the authorities’ efforts to maximize the beneficial spillover effects of this boom on the rest of the economy by increased attention to infrastructure investment needs. However, Directors noted the impact on the public finances of the recent drop in oil prices and the temporary loss of revenue due to the intensified use of investment tax credits, as well as the challenges posed to the effectiveness of monetary policy by the rapid pace of innovation in domestic financial markets. In this environment, Directors supported the authorities' efforts to maintain a prudent fiscal stance and to move promptly to restore the effectiveness of monetary policy instruments.

Directors supported the authorities’ efforts to maintain the 1998 central government fiscal surplus target by cuts in discretionary expenditure, while noting the importance of increasing the proportion of expenditure on education, health, and social programs. They stressed, nevertheless, that to ensure medium-term sustainability, high priority should be given to implementing improvements in tax administration and enforcement, drawing on the IMF’s recommendations. They also suggested addressing skilled personnel shortages in the public sector by correcting the compression in the structure of the salaries.

Directors encouraged the authorities to continue the efforts to restructure some of the public utilities, but expressed concern about the prospect of continued losses by certain large state enterprises, namely Caroni and Petrotrin, and recommended actions to limit the financial burden imposed by these enterprises. They also recommended the adoption of a comprehensive plan to shorten significantly the long list of remaining state-owned enterprises.

Directors expressed concern about developments in the domestic financial markets that had reduced the effectiveness of monetary control and resulted in an unduly rapid growth of credit in the economy. Innovation in domestic financial instruments, aimed at circumventing high andnon-uniform reserve requirements, has created distortions and undermined the central bank’s ability to control the growth of credit. They welcomed the initial measures taken by the authorities in response to these developments, but urged the authorities to take prompt steps to address the problem of high and uneven unremunerated reserve requirements, noting that delay may have undesirable effects. Directors recommended that legal reserves be lowered to prudential levels, and that they be applied uniformly to all commercial bank liability categories, including those in foreign currency. Some Directors also expressed concern about the proliferation of nonbank financial intermediaries and their relationship with the banking system. In this regard, they encouraged the strengthening of banking supervision. Directors endorsed steps under way to develop indirect instruments for monetary policy, along the lines of the recommendations of the recent mission of the IMF’s Monetary and Exchange Affairs Department.

Although there is no evidence of a parallel market for foreign exchange, Directors expressed concern over the extended use of moral suasion in exchange rate management, which had resulted in periodic queuing for foreign exchange purchases. Directors urged a more flexible approach to exchange rate management, and closer monitoring of external competitiveness.

Directors noted that the quality and timeliness of some economic data required for effective surveillance, especially in the public sector vis-à-vis public enterprises and utilities, need to be improved. They urged the authorities to bring about a substantial improvement in areas of statistical weakness.

The authorities’ decision to continue with the arrangement of informal monitoring of their economic program by the staff was welcomed as a clear indication of their commitment to sound economic management.

Trinidad and Tobago: Selected Economic Indicators

  1993 1994 1995 1996 Prel.

  (Annual percentage changes)
Output and prices  
Real GDP at factor cost -1.5 3.6 3.8 3.5 3.2 6.0
GDP deflator 10.0 15.5 3.8 4.0 3.7 3.0
Consumer prices (period average) 13.1 3.7 5.3 3.3 3.7 4.0
Unemployment rate (percent of labor force) 19.8 18.4 17.2 16.3 15.0 14.0
  (In percent of GDP)
Investment and savings  
Gross investment 14.4 20.2 16.0 17.2 21.8 20.0
Gross national savings 12.0 24.7 21.0 18.4 9.6 13.4
Budgetary operations  
Total revenue 27.6 25.8 27.0 28.1 27.2 26.9
Total expenditure 27.4 26.1 26.8 26.4 25.4 25.7
Overall Central Government balance 1/ 0.2 -0.3 0.2 1.7 1.8 1.1
  (In millions of U.S. dollars)
External sector  
Exports, f.o.b. 1,662 1,972 2,477 2,506 2,543 2,491
Imports, c.i.f. 1,499 1,374 1,885 2,159 3,036 2,930
External current account balance -108 221 270 69 -547 -401
Foreign direct investment 204 278 274 356 863 680
Capital account balance 89 -34 -36 36 837 565
External public debt (end-of-period) 2,096 2,058 1,905 1,876 1,527 1,646
Gross reserves (in months of imports) 2/ 1.6 2.6 2.0 2.8 2.6 3.3
Real effective exchange rate (1990=100) end-of-period -17.2 -3.3 -1.5 -1.8 4.1 ...
  (Changes relative to the opening stock of liabilities to the private sector)
Monetary sector  
Net foreign assets 11.9 14.5 -2.0 9.2 5.2 7.5
Net domestic assets -0.1 -1.4 21.3 10.2 17.9 -1.2
Broad money 3/ 8.7 11.2 16.0 14.5 15.4 4.6
Liabilities to the private sector (LPS) 11.8 13.2 19.3 19.4 23.0 6.2

Sources: Data provided by the Trinidad and Tobago authorities; and IMF projections.

1/ The 1997 figure reflects the proceeds from the sale of the Methanol Company equivalent to 2.1 percent of GDP and in 1998 includes the equivalent of 1.2 percent of GDP from additional divestment.
2/ Imports of goods and nonfactor services.
3/ Includes new financial

1Under 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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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