Public Information Notice No. 03/85

Public Information Notice: IMF Concludes 2003 Article IV Consultation with Trinidad and Tobago

July 10, 2003

On June 23, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Trinidad and Tobago.¹

Background

Trinidad and Tobago recorded its ninth consecutive year of economic growth in 2002 despite the global economic slowdown and the lingering negative impact on regional trading partners of the September 11, 2001 attacks. Unemployment fell from 14 percent in 1998 to about 10 percent in 2002, while inflation remained subdued. In March 2003, Standard & Poor's upgraded Trinidad and Tobago's credit rating to BBB from BBB-.

Despite the government's efforts to lower expenditures, the overall fiscal position of the central government weakened somewhat in FY 2001/02 with an overall deficit of nearly 1½ percent of GDP reflecting lower tax collections (by 4 percentage points of GDP) as a result of tax write-offs for dry wells and higher than anticipated tax-deductible capital expenditures by a major oil company. Reflecting a steady decline in the buoyancy of non-energy revenues, the non-energy fiscal deficit of the central government widened to about 10 percent of non-energy GDP from 4 percent in 1998. The overall deficit was mainly financed through domestic borrowing. A number of public enterprises continued to depend on government transfers to service their debts, while some continued to implement infrastructure projects on behalf of the central government.

At end-2002, the total public sector debt was 66 percent of GDP; of which guaranteed debt was equivalent to 19 percent of GDP, and external debt 20 percent of GDP. The bulk of domestic debt is held by commercial banks.

Monetary conditions eased in 2002 resulting in appreciable declines in interest rates. Reserve requirements were lowered from 21 to18 percent during the course of the year. However, despite declining borrowing costs, growth in private sector credit remained weak. This reflected the economic slowdown exacerbated by increased uncertainty due to the political stalemate. The central bank introduced a new liquidity management mechanism in May 2002, based on the announcement of an overnight repo rate, with an initial rate of 5¾ percent. This rate was reduced to 5¼ percent in August 2002, and has since remained unchanged.

The external current account weakened in 2002 to record a small deficit (¼ percent of GDP). This partly reflected a continuing weak demand for manufactured exports as economic growth slowed in the Caribbean. The overall balance of payments recorded a sharply smaller surplus of ¼ percent of GDP (down from 5½ percent) as direct investment slowed. Gross official reserves cover remained at around five months of imports.

Executive Board Assessment

Executive Directors observed that Trinidad and Tobago has enjoyed an extended period of positive growth, low inflation and a steady decline in unemployment. Directors commended the authorities for their prudent management of the economy in recent years despite the global and regional slowdown, but noted that challenges remain. These include the strengthening of the non-energy fiscal and external balances and the improvement of the performance of public enterprises.

Directors viewed the effective use of prospective higher energy revenues as key to Trinidad and Tobago's future development and growth. They noted that the authorities' plan to achieve developed country status by 2020 through establishing a highly educated work force, and strengthening infrastructure, is a commendable objective, but cautioned that the government needs to tailor its spending in line with the country's absorptive capacity. Specifically, they recommended that the authorities take advantage of the higher-than-budgeted oil prices to raise the primary surplus, and transfer part of it to a strengthened revenue stabilization fund (RSF), whose assets could be invested abroad to generate income for future generations. Expenditures—particularly permanent entitlements—should be kept under tight control given that increased revenues may not be sustained. Directors supported higher spending on health, education and infrastructure, while cautioning that adequate attention should be paid to the efficiency of such spending.

Looking ahead, Directors encouraged the authorities to give priority to developing a well articulated medium-term macroeconomic framework underpinned by a three-year rolling budget. They urged the government to target overall budget surpluses and avoid pro-cyclical fiscal policies, strengthen efforts to reduce the non-energy fiscal deficit, and curtail tax exemptions. Directors welcomed the creation of a unified revenue authority, which they saw as a major step in strengthening tax and customs administration. Directors also noted that the planned reactivation and strengthening of the RSF—to make it more transparent and flexible—should be an integral tool of prudent fiscal policy. They recommended a comprehensive review of the country's fiscal management entailing a public expenditure review by the World Bank; a review of fiscal standards and codes; a revision of the gas taxation regime in line with earlier Fund recommendations; and a review of the VAT.

Directors welcomed the system of pre-announced repo rates as a market benchmark. They noted that a deepening of capital markets through additional public debt instruments would render repo rates a more effective tool of liquidity management. In this regard, they also welcomed the newly established Capital Markets Committee.

Directors observed that the managed float has helped to ensure low inflation and an orderly foreign exchange market. Noting that external competitiveness appears adequate at this time, they encouraged the authorities to monitor it closely, especially as the energy sector expands, to protect growth prospects in the non-energy sector.

Directors welcomed Trinidad and Tobago's role as a regional financial center, which warrants heightened supervision, especially of the nonbank sector. They viewed the banking system as sophisticated, dynamic and well capitalized, and noted that it does not appear to be exposed to the weaknesses in the regional economies. However, they warned that the existing supervisory framework for nonbank financial institutions needs further strengthening and, in this context, welcomed ongoing moves to integrate the supervision of insurance companies and pension funds with that of commercial banks, under the authority of the central bank. Directors welcomed the authorities' planned participation in the financial sector assessment program.

Directors welcomed recent steps to reinvigorate structural reforms and encouraged the authorities to include pension reform in this agenda. In particular, the proposed restructuring of the sugar company, CARONI, is a positive step. Directors urged the authorities to maintain the momentum of the structural reform agenda, and to adhere to their announced divestment timetable. They also encouraged the government to consider eliminating overlapping benefits of the national insurance scheme with other public pension schemes. Efforts should focus on streamlining and harmonizing the system of old age benefits and pensions, as well as the public sector pension scheme. Directors welcomed the authorities' commitment to further trade liberalization, and their decision to participate in a pilot study to adopt transparency guidelines under the Extractive Industries Transparency Initiative.

Directors welcomed the considerable progress made in the past year in developing an improved methodology of compiling GDP and price data. They noted that in general, data are adequate for surveillance purposes, although continued improvements in public sector statistics would be needed. Directors encouraged Trinidad and Tobago to participate in the IMF's general data dissemination system.