IMF Executive Board Concludes 2008 Article IV Consultation with Trinidad and TobagoPublic Information Notice (PIN) No. 09/15
February 6, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On January 14, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Trinidad and Tobago.1
Supported by a booming energy sector, Trinidad and Tobago has achieved an impressive economic track record, with real GDP growth averaging 9 percent a year during 2002-07. Per capita income has doubled, and both the unemployment and public debt ratios were halved. Moreover, with official reserves covering close to 10 months of imports, the country has acquired one of the strongest credit ratings in the region. Low external vulnerability, together with a well-capitalized, liquid, and profitable banking system, have also limited direct spillovers from the international financial crisis, but falling energy prices and a more challenging external environment pose risks.
Faced with a prospective decline in energy resources, the government has embarked on an ambitious development and diversification strategy. Its Vision 2020 aims at attaining developed-country status by that year, relying on gradually declining energy revenues to support a diversified non-energy economy through subsidies and public investment in infrastructure.
The economy grew by 5½ percent in 2007 on the basis of sustained growth in the non-energy sector. Growth in the energy sector, which accounts for nearly half of GDP, fell below 2 percent. However, robust energy prices kept the current account surplus close to 25 percent of GDP.
Fiscal policy was expansionary. While the overall central government balance fluctuated considerably with volatile energy prices, the non-energy deficit remained at around 15 percent of GDP (28 percent of non-energy GDP) in recent years. This contributed to robust growth and record low unemployment, but also, together with sharply rising food prices, to rising inflation.
The fiscal expansion also complicated monetary policy, especially in the context of a de facto peg to the U.S. dollar. The large inflows and spending of energy revenues fueled money growth and excess liquidity in the banking system. The central bank responded with a successive tightening of policies, using its entire arsenal of instruments. While these measures have been effective recently in reducing private credit growth, they will take time to be reflected in lower inflation rates.
In the face of a deteriorating external environment, economic growth is projected to slow to 3½ percent in 2008 and 2 percent in 2009. This, together with falling international food prices, should also help dampen domestic price pressures, with inflation projected to decline to 7½ percent in 2009, down from 11¾ percent this year. At the same time, the current account surplus is projected to shrink to 12 percent of GDP in response to falling energy export earnings, while the central government balance would register a deficit of 1 percent of GDP under current energy price projections, despite recently announced expenditure cuts.
Executive Board Assessment
Executive Directors welcomed that Trinidad and Tobago has achieved an impressive improvement in economic performance in recent years, supported by a booming energy sector. But now the deteriorating external environment, marked by falling energy prices and a severe global slowdown, poses risks to the economy. Directors observed that Trinidad and Tobago seems better placed than many other countries to weather this adverse external environment, reflecting the high level of international reserves and the fundamentally sound banking system. Nonetheless, they advised the authorities to accelerate the preparation of contingency plans to preserve macroeconomic stability under more difficult circumstances.
Directors welcomed the recent passage of a new Financial Institutions Act, which will enhance the ability of the central bank to supervise the financial sector. Directors encouraged the authorities to adopt important follow-up legislation and to push ahead with identifying contingency measures in case of emerging liquidity pressures. They further stressed the importance of establishing a robust framework for the stress-testing of financial institutions and a crisis management plan on a regional basis.
Directors commended the authorities' decision to trim fiscal spending for 2008/09 in response to lower energy revenue. They were of the view that the envisaged cuts strike a reasonable balance between containing the fiscal deterioration and limiting a procyclical withdrawal, leaving room for automatic stabilizers to operate. Directors welcomed the authorities' intention not to tap the resources of the Heritage and Stabilization Fund.
Directors stressed that further fiscal adjustment will be needed over the coming years to reduce the non-energy deficit in the fiscal and current accounts to levels that are sustainable in the long run. Over the medium term, a further fiscal tightening would be advisable and feasible through better prioritizing and targeting of expenditure, without sacrificing development objectives.
Executive Directors concurred that the recent cycle of monetary policy tightening had been appropriate to stem inflationary pressures. At the same time, they underscored the need to remain vigilant in balancing the risks of inflation and slower economic activity. They considered that the central bank has scope to gradually loosen monetary policy, once concerns over second-round inflationary effects have abated.
Directors noted the staff's assessment that the real effective exchange rate of the Trinidad and Tobago dollar is broadly in line with current fundamentals. They agreed with the authorities that now is not the right time for a fundamental shift in exchange rate policies. Once global conditions have stabilized, however, some Directors encouraged the authorities to consider greater exchange rate flexibility under their managed float arrangement.
Directors commended the authorities for their Vision 2020 strategy to achieve developed-country status, and for their pro-active approach to addressing the country's development challenges in anticipation of diminishing energy resources. Going forward, they encouraged the authorities to shift the focus of policies further away from subsidies and direct government involvement and toward improving the business climate and providing high-quality public goods and services.