## cr17352 - 2017. Meanwhile, the current account deteriorated by 14 ½ percentage points to a deficit of 10.7 ## Source details **Canonical URL:** [cr17352 - 2017. Meanwhile, the current account deteriorated by 14 ½ percentage points to a deficit of 10.7](https://www.imf.org/-/media/files/publications/cr/2017/cr17352.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17352.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17352.pdf.json) --- ### Recent developments and macroeconomic overview - Current account deteriorated by 14 ½ percentage points to a deficit of 10.7 percent of GDP in 2016; deficit expected to be 8 ½ percent of GDP in 2017, driven by low energy export prices and volumes. - Gross reserves: US$9.9 billion (10¼ months of imports) in 2015 → US$9.5 billion (9½ months of imports) in 2016; projected fall by another US$1 billion (1 month of imports) in 2017 amid foreign exchange shortages. - Inflation: headline at end-2016 3 percent (y/y); core at end-2016 2 percent (y/y); period-average headline 3.1 percent y/y and core 2.2 percent in 2016 in alternate series. - Unemployment: ticked up to 4 percent (Q3 2016 reported as 4.0); another series reports 4.1 percent. - Real exchange rate: staff note substantial real exchange rate overvaluation persists despite a nominal depreciation of about 7 percent against the US dollar in the second half of 2016. - Banking sector: characterized as resilient and profitable; NPL ratio low at 3 percent as of April 2017; capital buffers at 22 percent of risk-weighted assets; Moody’s Ba1 and S&P BBB+ (April 2017, stable outlooks). ### Fiscal developments, budget and public debt - Government actions under way: reform energy tax regime; reduce fuel subsidies; boost non-energy revenues; engaged World Bank for a Public Expenditure Review (PER) to identify cost-savings in health, education, and social services. - Staff assessment of draft FY2017/18 budget: - Staff estimate draft budget would result in an overall deficit of 9.6 percent of GDP in FY 2017/18, an improvement of some 3 ½ percent of GDP relative to staff’s baseline. - Improvements attributed to: recurrent expenditure savings of 1½ percent of GDP; policy measures yielding 1½ percent of GDP; a rebasing of GDP improving outcomes by ½ percent of GDP. - Staff incorporated only near-term, enumerated measures; other proposed measures not incorporated due to uncertain timing/magnitude. - Key near-term measures (incorporated): - Oil and gas taxation: 12.5 percent royalty rate applicable on extraction of all gas, condensate, and oil; royalties expected to be 1 percent of GDP higher in FY 2017/18 than in the staff report. - Corporate taxation: corporate tax rate unified at 30 percent, except banks at 35 percent effective January 1, 2018 (0.2 percent of GDP). - Fuel subsidies: fuel price adjustments eliminating fuel subsidies will generate 0.3 percent of GDP in savings. - Key future measures (not incorporated in staff baseline): - New fiscal regime for the energy sector to be presented to Parliament by December 2017. - World Bank PER to identify cost-savings in health, education, and social services. - Legislation establishing a Revenue Authority (RA) to be presented by December 2017 and operationalized by March 2018; publication of a TADAT-based assessment intended. - Regulated Industries Commission rate determinations for water and electricity to be completed in 2018, expected to lead to cost-recovery pricing; special audits of state enterprises in 2018. - Gaming taxation reforms contingent on passage of legislation requiring a 3/5ths majority. - Debt and rebasing impacts: - Rebasing of GDP and fiscal measures reduce central government debt to 41.1 percent of GDP for FY 2016/17 (staff projection). - With fiscal adjustments, staff’s projected central government debt-to-GDP ratio falls to 58.1 percent at the end of the projection period versus 82.5 percent in the staff report baseline. ### External sector, reserves and exchange rate - Current account and trade indicators (percent of GDP, as reported): - Current account balance: 13.2 (2012), 20.4 (2013), 14.5 (2014), 3.8 (2015), -10.7 (2016), -8.5 (2017), -7.9 (2018). - Exports of goods: 63.7 (2012), 66.2 (2013), 55.0 (2014), 45.5 (2015), 36.8 (2016), 42.4 (2017), 42.2 (2018). - Imports of goods: 38.6 (2012), 37.6 (2013), 31.5 (2014), 35.2 (2015), 42.3 (2016), 45.8 (2017), 45.4 (2018). - Gross official reserves (US$ million): 9,371 (2012), 10,177 (2013), 11,493 (2014), 9,927 (2015), 9,466 (2016), 8,419 (2017), 7,766 (2018). - Reserves in months of imports: 9.4 (2012), 11.4 (2013), 12.7 (2014), 10.3 (2015), 9.5 (2016), 8.4 (2017), 7.4 (2018). - Directors’ view: external position weakened due to large terms of trade shock; 2016 external position weaker than fundamentals suggest though international reserves coverage still relatively strong. Urgent policy measures needed to address foreign exchange shortages; encouraged reduction and eventual elimination of imbalances and distortions, including an exchange rate adjustment as part of a broader package. ### Monetary policy and foreign exchange market - Policy stance: Central Bank stopped tightening at end-2015 and has held interest rates constant since; repo rate held at 4.75 percent since December 2015. - Exchange rate: nominal depreciation of about 7 percent in second half of 2016, then held steady; foreign exchange shortages widespread and distortionary. - Money and credit indicators (annual % changes): - Broad money (M3): 20.8 (2012), 3.2 (2013), 7.2 (2014), 1.1 (2015), 2.8 (2016), -2.0 (2017), -1.7 (2018). - Credit to the private sector: 2.7 (2012), 4.1 (2013), 6.7 (2014), 6.6 (2015), 3.6 (2016), -6.4 (2017), 0.7 (2018). - Staff view: monetary pause supported to balance growth support and capital flow management; eventual modest easing contingent on credible fiscal and exchange rate reforms. ### Financial sector and regulatory issues - System resilience: financial system assessed as resilient and profitable despite prolonged economic weakness. - Regulatory progress: CBTT advancing adoption of Basel II standards with a target of June 2018 for Pillar I; stress tests indicate banking system resilient. - Recommendations urged: - Pass long-awaited insurance legislation. - Address deficiencies in the AML/CFT framework and implement measures to comply with Global Forum tax transparency standards. - Strengthen supervision of non-bank financial institutions and bring credit union supervision under CBTT remit. ### Executive Board assessment and policy recommendations - Directors agreed with staff appraisal: low energy prices and weakened non-energy sector significantly worsened fiscal and external positions; risks tilted to the downside. - Policy guidance and priorities (selected): - Use buffers to smooth pace of adjustment given the severe shock. - Fiscal consolidation: draft FY2017/18 budget is a significant step, but additional consolidation required to restore macro stability and manage external imbalances. - Revenue and expenditure reforms: broaden VAT base; consider raising overall VAT rate to regional average; finalize oil and gas fiscal regime reforms; reduce transfers and subsidies with protection for vulnerable populations. - Exchange rate and external adjustment: pursue measures to address foreign exchange shortages, including an exchange rate adjustment as part of a broader fiscal and structural package. - Structural reforms: remove labor market distortions and public sector rigidities; improve business climate for the non-energy sector; raise efficiency of state-owned enterprises; improve procurement practices. - Data and institutions: support creation of the National Statistical Institute to address data shortcomings. - Staff recommendation: focus on high-impact consolidation measures increasing revenues and reducing current expenditures while maintaining public investment critical for sustainable growth. ### Key statistics and projections (selected, preserved exactly) - Real GDP (annual % change): 1.3 (2012), 1.0 (2013), -0.3 (2014), 1.5 (2015), -6.0 (2016), -3.2 (2017), 1.9 (2018). - Energy sector real GDP (annual % change): -2.8 (2012), 1.7 (2013), -1.7 (2014), -2.5 (2015), -11.1 (2016), -3.3 (2017), 7.7 (2018). - Non-energy real GDP (annual % change): 4.1 (2012), 1.5 (2013), 1.1 (2014), 2.6 (2015), -1.9 (2016), -3.1 (2017), -1.2 (2018). - Central government overall balance (percent of fiscal year GDP): -1.3 (2012), -2.9 (2013), -5.4 (2014), -8.3 (2015), -12.1 (2016), -11.0 (2017), -9.6 (2018). - Central government debt (percent of fiscal year GDP): 24.8 (2012), 25.3 (2013), 25.4 (2014), 27.9 (2015), 37.5 (2016), 41.1 (2017), 41.4 (2018). - Gross NFPS debt (percent of fiscal year GDP): 41.6 (2012), 41.8 (2013), 42.0 (2014), 47.7 (2015), 58.3 (2016), 61.2 (2017), 62.5 (2018). - Heritage and Stabilization Fund assets (percent of fiscal year GDP): 18.5 (2012), 19.6 (2013), 20.4 (2014), 22.8 (2015), 25.1 (2016), 25.6 (2017), 26.3 (2018). - Nominal GDP (in billions of TT$): 164.7 (2012), 171.2 (2013), 174.3 (2014), 155.6 (2015), 148.7 (2016), 147.2 (2017), 150.9 (2018). - Exchange rate (TT$/US$, end of period): 6.4 (2012), 6.47 (2013), 6.39 (2014), 6.45 (2015), 6.76 (2016). - Crude oil price (US$/barrel): 105.0 (2012), 104.1 (2013), 96.2 (2014), 50.8 (2015), 42.8 (2016), 50.3 (2017), 50.2 (2018). - Natural gas price (US$ per mmbtu): 10.4 (2012), 10.5 (2013), 10.7 (2014), 6.8 (2015), 5.0 (2016), 4.5 (2017), 4.3 (2018). ### 1. Reforming the Fiscal Regimes for Oil and Gas — overview and policy options - Recent developments (alternate series): - GDP contracted by an estimated 5.4 percent in 2016 after two years of ½ percent declines. - Energy sector contracted 10.1 percent in 2016; non-energy output contracted around 3.0 percent in 2016. - FY 2016 fiscal deficit rose sharply to almost 13 percent of GDP. - Energy-related revenues declined by 7 percentage points of GDP from FY 2015 due to falling prices, volumes and incentives. - Authorities benefited from “one-off” sources totaling 7.2 percent of GDP including “super dividends”, HSF drawdowns, and asset sales; government issued a US$1 billion Eurobond. - Central government debt rose from 26 percent at end-FY 2014 to about 40 percent of GDP at end-FY 2016; public debt increased to 61 percent of GDP and external debt to 15 percent of GDP. - REER (CPI-based) shows overvaluation of 28.5 percent at end-2016; IMF EBA models estimate overvaluation between 23.6 and 48.5 percent. - Reform objectives and proposals: - Simplify and modernize PSC and E&P systems; respect existing contracts. - Proposed E&P changes: replace SPT with a cash-flow tax under consideration; PPT to become more like a normal business income tax with lower rates and allowances. - Proposed PSC changes: transition to an R-factor (payback ratio) petroleum sharing scheme for new bidding rounds. ### Medium-term fiscal adjustment: magnitude, composition, and feasibility - Staff estimate: fiscal measures of about 6 ½ percent of GDP over the medium-term (through 2022) would be needed to put debt on a sustainable path. - Impact if implemented: would contain central government debt to around 55 percent of GDP, and public sector debt to around 80 percent of GDP, over the medium term. - Adjustment composition: staff advocated balancing revenue increases and current expenditure containment. - Staff estimate further expenditure reforms of at least 3½ percent of GDP are needed. - Recommended expenditure priorities and measures: - Transfers and subsidies: fuel subsidies fallen from 4.2 percent of GDP in FY 2014 to 0.6 percent in FY 2016; non-fuel transfers increased by 3 percentage points of GDP; total transfers about 19 percent of GDP in FY 2016. Recommendation: improve targeting and cost-efficiency guided by World Bank PER. - Public investment: public investment spending halved since FY 2015 (percent of GDP). Recommendation: increase growth-enhancing public investment and apply PIMA to find cost-savings and improve execution. - Public bodies (PBs): PBs doubled in size over the last decade; transfers to PBs 3.5 percent of GDP in FY 2016. Recommendation: far-reaching PB reforms, liberalize pricing to allow cost-recovery, redirect savings to the most vulnerable. - Tax reform priorities: - Tax administration: outstanding tax arrears 11 percent of GDP as of end-March 2017; Doing Business “paying taxes” rank: 145th; VAT refund delays harm compliance. Recommendation: establish a unified Revenue Authority and use TADAT to set reform priorities. - VAT reforms: 2016 reduction in zero-rated items and lower VAT rate resulted in net decrease in VAT collections; recommendation to widen VAT base and consider raising overall rate to regional average of 15-16 percent. - Oil and gas taxation: energy revenue accounted for 27 percent of total government revenue in FY 2015 versus around 55 percent during prior decade; regime unduly complex and depressing revenue. Staff advice: reform legal and fiscal framework to reduce obstacles for low-profit projects while ensuring minimum government payments. - Social insurance and SALM: - NIS actuarial review (2013): assets depleted by 2030 if no changes; worker-to-beneficiary ratio 3.7 in 2016 and projected to be 1.0 by 2060. 2016 policy: contribution rate increased from 12 percent to 13.2 percent and minimum pension frozen. Recommendation: raise contribution rate to at least breakeven and enforce effective retirement age. - SALM: HSF managed by CBTT; recommended develop SALM framework, link HSF rules to fiscal target, publish medium-term debt strategy. ### Balance of payments, FX market, and exchange rate guidance - Staff urged elimination of FX market imbalances and improved competitiveness; current bilateral exchange rate control combined with insufficient FX sales has produced perpetual excess demand. - Recommendation: a currency devaluation, if sufficiently large and introduced as part of a broader reform package, would help restore external balance and FX market functioning via expenditure switching, reduced FX hoarding, and raising local-currency revenue when combined with fiscal consolidation. - Staff caution: appropriate size of devaluation difficult to gauge given data insufficiencies and wide range of overvaluation estimates; advice not a call for a floating exchange rate — a nominal anchor required. - Complementary measures: exchange rate adjustment should be part of a broader fiscal and structural reform package with clear communications and measures to prevent wage-price spirals. - Authorities preferred a more gradual approach combining exchange rate, fiscal and monetary policies plus structural reforms. ### Risk assessment and stress-test highlights - Main risks identified: - Lower energy prices: Likelihood LOW/Short to Medium Term; Expected Impact HIGH. - Tighter global financial conditions (Fed normalization/ECB tapering): Likelihood HIGH/Short Term; Expected Impact MEDIUM. - Failure to address foreign exchange shortages: Likelihood HIGH/Short Term; Expected Impact HIGH. - Reduced correspondent banking services: Likelihood HIGH/Short to Medium Term; Expected Impact MEDIUM. - Debt sustainability and stress tests: - Under baseline, public (central government) debt projected to rise to about 83 percent of GDP and public debt to 109 percent of GDP by 2022 under no-fiscal-reform scenario (alternate table shows central government debt 82.5 percent by 2022 in staff baseline). - Staff estimate medium-term fiscal measures of about 6 ½ percent of GDP would contain central government debt to around 55 percent and public sector debt to around 80 percent of GDP. - Stress-test scenarios: - Primary balance shock can lead debt-to-GDP to peak at nearly 90 percent. - Contingent liabilities shock (double average cost, 6 percent of GDP over two years) would result in central government debt reaching 88 percent of GDP by 2022. - External-debt sensitivity: a half-standard-deviation current account shock each year from 2017 would make external debt peak at about 63 percent of GDP in 2022; a one-time real exchange rate depreciation of 30 percent in 2017 would make external debt peak at 49 percent of GDP in 2022. ### Data, statistics, and capacity building - National accounts and prices: - Revised production-side GDP compiled 2012–2015; preliminary 2016 estimates; expenditure-side GDP last available 2008 with updates expected during 2018. - Retail Price Index rebased to January 2015; new compilation methodology implemented mid-2016 to correct upward bias in food component. - PPI rebasing with 2012 weights expected by October 2017; Export and Import Price Indices expected late 2018 with TA from Statistics Canada. - GFS and MFS: - MoF uses GFSM 1986; treatment issues with one-off sources recorded as revenues rather than financing per GFSM 2014. - Monetary accounts cover CBTT and ODCs; gaps remain in coverage of mutual funds, NIB, UTC, HMB, and credit unions. - CBTT reports SRFs to STA and core FSIs; banking NPLs 3.4 percent in June 2017. - External sector statistics: - BOP data for 2011–2016 revised under IMF-CARTAC TA and transitioned to BPM6; CBTT estimates used for trade from 2011 onwards pending CSO reconciliation. - International reserves reported and IIP published for 2011–2016 in June 2017; errors and omissions remain large and further TA scheduled for 2018. - Data dissemination: participant in e-GDDS; various key indicators reported with specified dates and frequencies in staff tables. ### Authorities’ views and implementation status (selected) - Authorities agreed on need to reduce deficits but considered some staff recommendations ambitious and feasible only partially. - Implementation status highlights: - Excise tax hikes on alcohol and tobacco: Completed. - Reintroduce property tax: Mostly done (implementation final stages). - Phase out fuel subsidies: Mostly done (prices hiked further but not fully eliminated). - Establish independent National Statistical Institute: Partially done; expected late-2018 to early-2019. - Insurance legislation: No progress. - FATCA/TIEAA compliance: Completed (TIEAA enacted March 2017). - Revenue Authority: intended to come on stream in 2018 per authorities’ statements. - Authorities’ macro view (statement to Executive Board): - Expected improvement in H2 2017 due to Juniper gas field and other projects; FY2018 budget included 12.5 percent royalty, higher gambling taxes, and corporation tax increases; FY2018 overall fiscal deficit budgeted at 3.1 percent of GDP (non-IMF GFS basis). - Authorities aim for public sector debt guide of 60 percent of GDP over the medium-term and contest staff’s sharp medium-term debt rise as extreme. *International Monetary Fund. TRINIDAD AND TOBAGO: STAFF SUPPLEMENT FOR THE 2017 ARTICLE IV CONSULTATION — SUPPLEMENTARY INFORMATION (cr17352).* ### 2017. Meanwhile, the current account deteriorated by 14 ½ percentage points to a deficit of 10.7 ### cr17352 - 2017. Meanwhile, the current account deteriorated by 14 ½ percentage points to a deficit of 10.7 ### Recent developments and macroeconomic overview - Current account deteriorated by 14 ½ percentage points to a deficit of 10.7 percent of GDP in 2016; deficit expected to be 8 ½ percent of GDP in 2017, driven by low energy export prices and volumes. - Gross reserves fell from US$9.9 billion (10¼ months of imports) in 2015 to US$9.5 billion (9½ months of imports) in 2016; projected to fall by another US$1 billion (1 month of imports) in 2017 amid continued foreign exchange shortages. - Headline inflation at end-2016: 3 percent (y/y); core inflation at end-2016: 2 percent (y/y). - Unemployment ticked up to 4 percent (Q3 2016 reported as 4.0). - Real exchange rate: staff note a substantial real exchange rate overvaluation persists despite a nominal depreciation of about 7 percent against the US dollar in the second half of 2016. - Banking sector characterized as resilient and profitable. ### Fiscal developments, budget and public debt - Government actions to adjust fiscal imbalances: reform energy tax regime, reduce fuel subsidies, boost non-energy revenues; engaged World Bank to conduct a Public Expenditure Review to identify cost-savings in health, education, and social services. - Central findings from draft FY2017/18 budget and staff assessment: - Staff estimate draft budget would result in an overall deficit of 9.6 percent of GDP in FY 2017/18, an improvement of some 3 ½ percent of GDP relative to staff’s baseline. - Improvements attributed to: recurrent expenditure savings of 1½ percent of GDP, policy measures yielding 1½ percent of GDP, and a rebasing of GDP improving outcomes by ½ percent of GDP. - Staff incorporated only near-term, enumerated measures for FY 2017/18; other proposed measures not incorporated due to uncertain timing/magnitude. - Key Near-term Measures (incorporated in staff’s revised baseline): - Oil and gas taxation: a 12.5 percent royalty rate applicable on extraction of all gas, condensate, and oil; royalties expected to be 1 percent of GDP higher in FY 2017/18 than in the staff report. - Corporate taxation: corporate tax rate unified at 30 percent, except banks at 35 percent effective January 1, 2018 (0.2 percent of GDP). - Fuel subsidies: fuel price adjustments eliminating fuel subsidies will generate 0.3 percent of GDP in savings. - Key Future Measures (not incorporated in staff’s baseline): - New fiscal regime for the energy sector to be presented to Parliament by December 2017. - World Bank Public Expenditure Review to identify cost-savings in health, education, and social services. - Legislation establishing a Revenue Authority (RA) to be presented by December 2017 and operationalized by March 2018; publication of a TADAT-based tax administration assessment intended. - Regulated Industries Commission rate determination exercise for water and electricity to be completed in 2018, expected to lead to cost-recovery pricing; special audits of state enterprises in 2018. - Gaming taxation reforms contingent on passage of legislation requiring a 3/5ths majority. - Debt and rebasing impacts: - Rebasing of GDP and fiscal measures reduce central government debt to 41.1 percent of GDP for FY 2016/17 (staff projection contrast to earlier staff report figures). - With fiscal adjustments, staff’s projected central government debt-to-GDP ratio falls to 58.1 percent at the end of the projection period versus 82.5 percent in the staff report baseline. ### External sector, reserves and exchange rate - Current account (selected indicators): - Current account balance: 13.2 (2012), 20.4 (2013), 14.5 (2014), 3.8 (2015), -10.7 (2016), -8.5 (2017), -7.9 (2018) — all values in percent of GDP as reported in the table. - Exports of goods in percent of GDP: 63.7 (2012), 66.2 (2013), 55.0 (2014), 45.5 (2015), 36.8 (2016), 42.4 (2017), 42.2 (2018). - Imports of goods in percent of GDP: 38.6 (2012), 37.6 (2013), 31.5 (2014), 35.2 (2015), 42.3 (2016), 45.8 (2017), 45.4 (2018). - Gross official reserves (US$ million): 9,371 (2012), 10,177 (2013), 11,493 (2014), 9,927 (2015), 9,466 (2016), 8,419 (2017), 7,766 (2018). - Reserves in months of goods and NFS imports: 9.4 (2012), 11.4 (2013), 12.7 (2014), 10.3 (2015), 9.5 (2016), 8.4 (2017), 7.4 (2018). - Directors’ view: external position weakened due to large terms of trade shock; external position in 2016 weaker than fundamentals suggest though international reserves cover still relatively strong. Urgent policy measures needed to address foreign exchange shortages that undermine investor confidence and country risk perceptions. Directors encouraged reduction and eventual elimination of imbalances and distortions, including through an exchange rate adjustment as part of a broader package. ### Monetary policy and foreign exchange market - Central Bank stopped tightening at end-2015 due to economic downturn and has held interest rates constant since. - Nominal exchange rate allowed to depreciate by about 7 percent in second half of 2016, then held steady; foreign exchange shortages remain widespread and distortionary. - Monetary policy pause supported by Directors to balance supporting growth and managing capital flows. - Money and credit indicators (selected): - Broad money (M3) annual % changes: 20.8 (2012), 3.2 (2013), 7.2 (2014), 1.1 (2015), 2.8 (2016), -2.0 (2017), -1.7 (2018). - Credit to the private sector (annual % changes): 2.7 (2012), 4.1 (2013), 6.7 (2014), 6.6 (2015), 3.6 (2016), -6.4 (2017), 0.7 (2018). ### Financial sector and regulatory issues - Financial system assessed as resilient and profitable despite prolonged economic weakness. - Directors commended central bank efforts toward adoption of Basel II standards by June 2018. - Recommendations and actions urged: - Pass long-awaited insurance legislation. - Address deficiencies in the AML/CFT framework. - Comply with the Global Forum’s standards on tax transparency. ### Executive Board assessment and policy recommendations - Executive Directors agreed with staff appraisal: continued low energy prices and weakened non-energy sector have significantly worsened fiscal and external positions; risks are tilted to the downside. - Directors’ policy guidance and priorities: - Use buffers to smooth pace of adjustment given the severe shock. - Fiscal consolidation: draft FY2017/18 budget is a significant step, but additional fiscal consolidation required to restore macroeconomic stability and manage external imbalances. - Revenue and expenditure reforms: further broaden VAT base and consider raising overall VAT rate to regional average; finalize fiscal regime reforms for oil and gas; significantly reduce transfers and subsidies through better targeting while protecting vulnerable populations. - Exchange rate and external adjustment: pursue policy measures to deal with foreign exchange shortages including an exchange rate adjustment as part of broader fiscal and structural reform package. - Structural reforms: remove labor market distortions and public sector rigidities; improve business climate for non-energy sector; raise efficiency of state owned enterprises; improve procurement practices. - Data and institutions: support creation of the National Statistical Institute to address data shortcomings. - Staff recommended high-impact consolidation measures focused on increasing revenues and reducing current expenditures while maintaining public investment critical for sustainable growth. ### Key statistics and projections (selected, preserved exactly as reported) - Real GDP (annual % change): 1.3 (2012), 1.0 (2013), -0.3 (2014), 1.5 (2015), -6.0 (2016), -3.2 (2017), 1.9 (2018). - Energy sector real GDP (annual % change): -2.8 (2012), 1.7 (2013), -1.7 (2014), -2.5 (2015), -11.1 (2016), -3.3 (2017), 7.7 (2018). - Non-energy real GDP (annual % change): 4.1 (2012), 1.5 (2013), 1.1 (2014), 2.6 (2015), -1.9 (2016), -3.1 (2017), -1.2 (2018). - Central government overall balance (percent of fiscal year GDP): -1.3 (2012), -2.9 (2013), -5.4 (2014), -8.3 (2015), -12.1 (2016), -11.0 (2017), -9.6 (2018). - Central government debt (percent of fiscal year GDP): 24.8 (2012), 25.3 (2013), 25.4 (2014), 27.9 (2015), 37.5 (2016), 41.1 (2017), 41.4 (2018). - Gross NFPS debt (percent of fiscal year GDP): 41.6 (2012), 41.8 (2013), 42.0 (2014), 47.7 (2015), 58.3 (2016), 61.2 (2017), 62.5 (2018). - Heritage and Stabilization Fund assets (percent of fiscal year GDP): 18.5 (2012), 19.6 (2013), 20.4 (2014), 22.8 (2015), 25.1 (2016), 25.6 (2017), 26.3 (2018). - Nominal GDP (in billions of TT$): 164.7 (2012), 171.2 (2013), 174.3 (2014), 155.6 (2015), 148.7 (2016), 147.2 (2017), 150.9 (2018). - Exchange rate (TT$/US$, end of period): 6.4 (2012), 6.47 (2013), 6.39 (2014), 6.45 (2015), 6.76 (2016). - Crude oil price (US$/barrel): 105.0 (2012), 104.1 (2013), 96.2 (2014), 50.8 (2015), 42.8 (2016), 50.3 (2017), 50.2 (2018). - Natural gas price (US$ per mmbtu, average of Henry Hub and Asian LNG): 10.4 (2012), 10.5 (2013), 10.7 (2014), 6.8 (2015), 5.0 (2016), 4.5 (2017), 4.3 (2018). *International Monetary Fund. TRINIDAD AND TOBAGO: STAFF SUPPLEMENT FOR THE 2017 ARTICLE IV CONSULTATION — SUPPLEMENTARY INFORMATION (cr17352).* ### 1. Reforming the Fiscal Regimes for Oil and Gas _________________________________________________ 13 ### 1. Reforming the Fiscal Regimes for Oil and Gas ### Recent developments - GDP contracted by an estimated 5.4 percent in 2016 after two years of ½ percent declines. - Energy sector contracted 10.1 percent in 2016 amid maintenance shutdowns, oil field depletion, and gas shortages. - Non-energy output contracted around 3.0 percent in 2016; a fall in public investment led to a sharp drop in construction, and manufacturing was affected by the closure of a steel manufacturer. - Inflation (period average) remained low at 3.1 percent y/y (headline) and 2.2 percent (core). - Unemployment rate ticked up to 4.1 percent. - The FY 2016 fiscal deficit rose sharply to almost 13 percent of GDP. - Energy-related revenues declined by 7 percentage points of GDP from FY 2015 due to falling energy prices and volumes and energy sector fiscal incentives. - Government spending fell 2 percentage points of GDP, largely from decreased capital spending and fuel subsidies. - Authorities benefitted from “one-off” sources totaling 7.2 percent of GDP including “super dividends” from the National Gas Company, drawdowns from the Heritage and Stabilization Fund (HSF), and asset sales; the government issued a US$1 billion Eurobond. - Central government debt rose from 26 percent at end-FY 2014 to about 40 percent of GDP at end-FY 2016; public debt increased to 61 percent of GDP and external debt to 15 percent of GDP over the same period. - HSF amounted to 27 percent of GDP and sinking fund assets of 5 percent of GDP. - Net International Investment Position (NIIP) estimated at a positive US$ 5.8 billion at end-2016 (27.5 percent of GDP); the NIIP declined over the last two years. - REER (CPI-based) shows overvaluation of 28.5 percent at end-2016; IMF EBA models estimate overvaluation between 23.6 and 48.5 percent. - CBTT depreciated the TT dollar 7 percent against the US dollar in the second half of 2016. - Repo rate held constant at 4.75 percent since December 2015. - Private sector credit growth slowed in 2016 and into 2017; credit to enterprises ground to a virtual halt and household credit slowed. - NPL ratio remained low at 3 percent as of April 2017; capital buffers at 22 percent of risk-weighted assets. - Moody’s downgraded to Ba1 and S&P downgraded one notch to BBB+ in April 2017; both carry stable outlooks. ### Outlook and risks - Staff project GDP will contract by 3.2 percent in 2017 before turning positive in 2018 and then settling around 1.4 percent by 2022. - Energy sector projection: -3.3 percent (2017), then 7.7 percent (2018), 6.7 percent (2019), 1.9 percent (2020), 0.8 percent (2021), 0.8 percent (2022). - Non-energy projection: -3.1 percent (2017), -1.1 percent (2018), -0.3 percent (2019), 1.5 percent (2020), 1.7 percent (2021), 1.7 percent (2022). - Inflation (period average) projected to remain between 3.0-3.7 percent through 2022; staff projections table: 3.2 percent (2017), 3.2 percent (2018), 3.7 percent (2019), 3.3 percent (2020), 3.3 percent (2021), 3.2 percent (2022). - Current account deficit expected to persist, averaging 8 percent of GDP absent measures to address fiscal imbalance and structural reforms. - International reserves projected to fall to about 5 months of imports by the end of the projection period absent a rebound in energy prices and/or further expansion of energy production. - Staff estimate the fiscal deficit to increase to a peak of 13 percent of GDP in FY 2017 and stay high over the medium term, assuming no fiscal reforms. - Central government debt projected to rise to about 84 percent of GDP and public debt to 109 percent of GDP by 2022 under current policies. - Risks tilted to the downside: further disruptions to energy production, failure to adopt a comprehensive medium-term economic strategy (especially fiscal adjustment), persistent gas shortages, U.S. dollar appreciation absent exchange rate flexibility, continued f/x shortages; upside from significant new energy discoveries or a large rise in energy prices. ### Key quantitative projections and indicators (selected from staff table) - Real GDP growth (percent): 2014 -0.6; 2015 -0.6; 2016 -5.4; 2017 -3.2; 2018 1.9; 2019 2.2; 2020 1.6; 2021 1.4; 2022 1.4. - Central government revenue (percent of GDP): 2016 23.9; 2017 24.5; 2018 25.0; 2019 26.7; 2020 26.7; 2021 26.6; 2022 26.4. - Energy revenue (percent of GDP): 2014 17.6; 2015 13.7; 2016 6.6; 2017 7.8; 2018 8.0; 2019 9.4; 2020 9.4; 2021 9.2; 2022 9.1. - Expenditure (percent of GDP): 2016 36.6; 2017 37.5; 2018 38.0; 2019 38.4; 2020 38.5; 2021 38.6; 2022 38.8. - Overall fiscal balance (percent of GDP): 2014 -5.6; 2015 -8.6; 2016 -12.7; 2017 -13.0; 2018 -13.0; 2019 -11.7; 2020 -11.8; 2021 -12.0; 2022 -12.3. - Central government debt (percent of GDP): 2014 26.2; 2015 28.9; 2016 39.4; 2017 47.2; 2018 54.7; 2019 60.4; 2020 65.6; 2021 74.1; 2022 82.5. - Public sector debt (percent of GDP): 2014 43.2; 2015 49.5; 2016 61.2; 2017 71.2; 2018 79.6; 2019 85.6; 2020 91.1; 2021 100.1; 2022 107.9. - External current account balance (percent of GDP): 2016 -11.3; 2017 -9.0; 2018 -8.4; 2019 -7.8; 2020 -6.8; 2021 -7.3; 2022 -7.0. - Gross official reserves (US$ millions): 2016 9,466; 2017 8,433; 2018 7,814; 2019 7,236; 2020 6,803; 2021 6,334; 2022 5,888. - Reserves in months of imports: 2016 9.5; 2017 8.4; 2018 7.5; 2019 6.9; 2020 6.4; 2021 6.0; 2022 5.4. - Credit to private sector (12-month increase): 2016 3.6; 2017 -7.0; 2018 3.2; 2019 3.0; 2020 2.2; 2021 2.2; 2022 2.1. - One-off fiscal financing (percent of GDP): 2016 5.5; 2017 5.2; 2018 4.6; 2019 4.1; 2020 3.9; 2021 0.6; 2022 0.6. ### Fiscal policy recommendations and policy discussion - Adopt a comprehensive, multi-year consolidation package to achieve fiscal sustainability and help restore external balance. - Make medium-term fiscal goals and strategy public, including clearly enumerated revenue and expenditure measures. - Stabilize the trajectory of government debt and support broad-based and inclusive growth through structural reforms. - Consider adopting a more competitive exchange rate to improve external balance and competitiveness. - Monetary policy could be eased to support recovery, contingent on fiscal and exchange rate reforms. - A well-communicated reform package, if accompanied by structural reforms, would help restore confidence and incentivize private-sector investment to offset adverse demand effects of consolidation. *Source: cr17352 - 1. Reforming the Fiscal Regimes for Oil and Gas* ### 16. Staff estimated that fiscal measures of about 6 ½ percent of GDP would be needed ### 16. Staff estimated that fiscal measures of about 6 ½ percent of GDP would be needed ### Medium-term fiscal adjustment and outlook - Staff estimate: fiscal measures of about 6 ½ percent of GDP over the medium-term (through 2022) would be needed to put debt on a sustainable path. - Impact of adjustment: would contain central government debt to around 55 percent of GDP, and public sector debt to around 80 percent of GDP, over the medium term. - Adjustment composition: staff advocated that the adjustment should be balanced between revenue raising and current expenditure containment. - Historical context: expenditures increased by 10 percentage points of GDP over the last decade and can no longer be financed by sustainable “core” revenues (defined as revenue from taxation, royalties, and customs duties). - Asset sales in staff scenario: continued reliance on asset sales of 0.6 percent of GDP per year beyond 2020 to ease the adjustment and help contain the increase in public debt ratios. - Need for contingent measures: staff stressed the importance of developing additional contingent policy measures that could be deployed if necessary to achieve the needed adjustment. ### Revenue measures — assessment and limits of current initiatives - Recent initiatives: authorities have taken several revenue initiatives which staff welcomed, but yields are minimal. - Specific shortfalls and estimates: - Property taxes: unlikely to be collected in FY 2017 due to late introduction and legal challenges. - Excise taxes on online purchases: will only be half the amount budgeted. - Improving tax administration: estimated to generate around TT$ 100 million (less than 0.1 percent of GDP) in FY 2017. - Gaming tax: contingent on passing the Gaming and Betting Control Act by Parliament (requiring a 3/5th majority) and expected to yield only a small amount compared to the size of the gaming industry. - One-off financing note: outturn of a recent High Court case will allow liquidation of CL Financial assets to realize some TT$15 billion (11 percent of GDP) of additional financing over the coming years. ### Tax reform priorities and recommendations - General: tax reforms should be continued to promote efficient allocation of resources and support long-term growth. - Tax administration: - Outstanding principal amount of tax arrears: 11 percent of GDP as of end-March 2017. - Doing Business “paying taxes” rank: 145th. - VAT refund delays harm cash flow and compliance. - Recommendation: establish a unified Revenue Authority (RA) and use the Tax Administration Diagnostic Assessment Tool (TADAT) to set reform priorities. - Oil and gas taxation: - Energy revenue share: energy revenue accounted for only 27 percent of total government revenue in FY 2015, compared to around 55 percent during the preceding decade. - Issue: fiscal regime is unduly complex and a source of uncertainty; low oil prices and incentives have depressed energy revenue. - Staff advice: reform legal and fiscal framework for oil and gas; aim to reduce fiscal obstacles to low-profit projects while ensuring minimum payments to the government. - VAT reforms: - 2016 change: decreasing the number of zero-rated items while lowering the VAT rate resulted in a net decrease in VAT collections. - Recommendation: further widen the VAT base; consider raising the overall VAT rate to the regional average of 15-16 percent. - Budgeting practice: replace budgeting for gross VAT refunds with a system that remits only net VAT proceeds to the budget. - Transfer pricing: support for preparing transfer pricing legislation to reduce tax leakages from profit shifting. ### Box 1 — Reforming the Fiscal Regimes for Oil and Gas (summary) - Production trends: - Average daily oil production by 2016: 71,500 barrels per day (from around 143,500 in 2006). - Gas production: peaked at 4.3 billion scf per day in 2010, declined to 3.3 billion scf per day in 2016. - Two fiscal systems: - Exploration & Production (E&P): main fiscal imposts are royalties, petroleum profits tax (PPT), and supplementary petroleum tax (SPT). - Production sharing contracts (PSCs): raise revenues via profit-sharing arrangements. - Reform objectives: provide attractive terms for investment while securing a substantial share of value for the government; simplify and modernize PSC and E&P systems; respect existing contracts. - Proposed changes: - E&P: replace SPT with a cash-flow tax under consideration; PPT to become more like a normal business income tax with lower rates and allowances. - PSC: transition to an R-factor (payback ratio) petroleum sharing scheme for new bidding rounds. ### Expenditure measures and priorities - Staff estimate: further expenditure reforms of at least 3½ percent of GDP are needed. - Priority areas: - Transfers and subsidies: - Fuel subsidies: fallen from 4.2 percent of GDP in FY 2014 to 0.6 percent in FY 2016. - Non-fuel transfers: increased by 3 percentage points of GDP during the same period. - Total transfers: about 19 percent of GDP (and over 50 percent of total expenditure) in FY 2016. - Recommendation: make transfers to households and the public sector more cost-efficient based on the World Bank Public Expenditure Review (PER). - Public investment: - Public investment spending has fallen in half (in percent of GDP) since FY 2015. - Recommendation: increase growth-enhancing public investment and use Public Investment Management Assessment (PIMA) technical assistance to find cost-savings and improve execution. - Public bodies (PBs): - PBs have doubled in size over the last decade. - Transfers to PBs amounted to 3.5 percent of GDP in FY 2016. - Recommendation: undertake far-reaching PB reforms, liberalize pricing policies to allow for cost-recovery, and redirect some savings to the most vulnerable. ### Other fiscal structural reforms - Tax policy institutionalization: - Current practice: ad hoc committee from MoF divisions. - Planned reform: set up a Tax Policy Unit within the MoF before end-2017 (supported by IMF technical assistance) to lead tax-policy reforms, analyze revenue collection, and advise on international tax treaty negotiations. - Public procurement: - Plan: abolish the Central Tenders Board and establish procurement units within line ministries. - Recommendation: appoint the Procurement Regulator and the Board of Procurement Regulation and expedite establishment of procurement units, with UNDP assistance. ### Social insurance and sovereign asset/liability management - National Insurance System (NIS): - 2013 actuarial review: NIS assets would be depleted by 2030 if no changes made; net withdrawals could start as early as 2019. - Worker-to-beneficiary ratio: declined to 3.7 in 2016 and projected to be 1.0 by 2060. - 2016 policy: contribution rate increased from 12 percent to 13.2 percent and minimum pension frozen. - Recommendation: raise the contribution rate to at least a breakeven point and enforce the effective retirement age. - Sovereign asset and liability management (SALM): - Current governance: HSF managed by the CBTT; debt management by MoF (CBTT as fiscal agent). - Issue: rules on HSF inflows/outflows are not linked to fiscal indicators or long-term fiscal sustainability. - Recommendation: develop SALM framework, link HSF rules to a fiscal target, publish a medium-term debt strategy with quantitative cost-risk benchmarks. - Authorities have initiated review of the HSF Act. ### Authorities’ views on fiscal adjustment - Agreement: authorities agreed on need to reduce deficits to arrest adverse debt dynamics and restore confidence. - Differences: authorities considered staff recommendations somewhat ambitious. - Intended policy actions: reform energy taxation to incentivize investment while safeguarding revenue; improve tax policy and administration; rein in current expenditure (guided by World Bank PER); review utility tariffs aiming for eventual full cost-recovery pricing; continue to remove fuel subsidies; ramp up development expenditure for future growth. - Feasibility assessment: authorities felt only about half of the recommended 6 ½ percent fiscal adjustment was feasible without undermining the already subdued economic growth outlook. - Energy revenue outlook: authorities anticipate recovery in natural gas production will result in a rebound in energy revenues over the medium-term. - FY 2017 financing: acknowledged financing is behind schedule as asset sales delayed, but noted completion by early FY 2018. ### Balance of payments and foreign exchange (f/x) market - Market imbalance: staff urged steps to eliminate imbalance in the f/x market and improve competitiveness; current policy of directly controlling the bilateral exchange rate while failing to sell enough f/x has produced perpetual excess demand. - Recommendation: a currency devaluation, if sufficiently large and introduced as part of a broader reform package, would help restore balance in the external position and in the f/x market. - Mechanisms: expenditure switching, reduction in f/x hoarding, and raising revenues in local currency terms when combined with fiscal consolidation. - Caution: appropriate size of devaluation is difficult to gauge given insufficient data and wide range of overvaluation estimates. - Clarification: staff advice was not a call for a floating exchange rate; a nominal anchor would still be required. - Complementary measures: any exchange rate adjustment should be part of a broader fiscal and structural reform package, with clear communications and measures to prevent wage-price spirals. - Inflation pass-through: staff noted the impact on inflation of a devaluation could be subdued since the premium on black market transactions is reportedly already being passed through into prices. - Authorities’ view on f/x: recognized imbalance and favored a combination of exchange rate, fiscal, and monetary policies plus structural reforms; preferred a more gradual approach to avoid short-term adverse effects (higher costs of basic imports, offsetting wage increases, second-round inflation). *IMF staff report: "Trinidad and Tobago" (selected extracts).* ### 28. Staff acknowledged that monetary policy considerations are finely balanced. On the ### 28. Staff acknowledged that monetary policy considerations are finely balanced. ### Monetary policy assessment and guidance - Low inflation and falling demand suggest the CBTT could lower interest rates modestly, although limited transmission to the wider set of interest rates weakens the argument for doing so. - Falling interest rate differentials vis-à-vis the United States may have made it even more attractive to purchase U.S. assets, thus further exacerbating pressures on the f/x market, and would warrant policy rate hikes. - On balance, staff supported the CBTT’s policy of holding policy interest rates constant and avoiding signaling a bias in either direction. - Contingent on the adoption of the fiscal and exchange rate policies recommended by staff, and continued weak aggregate demand and low inflation, the CBTT could eventually support growth with some modest interest rate easing, which would probably work primarily through a signaling effect given the weak transmission of monetary policy. - The current monetary policy is appropriate, and in any case, room for maneuver is limited. - Modest interest rate easing could eventually support a recovery, but would be contingent on reestablishing policy credibility with a strong fiscal package, wide-ranging structural reforms, and restoring balance in the f/x market. ### Financial sector condition and recommendations - The banking sector remains resilient and profitable despite the prolonged recession. - Financial soundness indicators are sound and banks’ net interest margins and fee-based incomes have remained high enough to assure solid profits and double-digit ROEs. - The central bank continues to push forward on adopting Basel II with a target date of June 2018 for going live on Pillar I. - Staff urged the authorities to: - enact legislation to strengthen supervision of the non-bank financial sector and enhance tax transparency in line with international standards; - pass the long-delayed bill on modernizing insurance supervision; - restore momentum to efforts to bring credit union supervision under the remit of the CBTT; - review and modernize legislation for the monitoring and supervision of non-bank financial institutions identified by the CBTT as systemic; - prioritize and expedite the actions (including the passing of amended income tax legislation) necessary to comply with the Global Forum’s standards on tax transparency and cooperation. ### AML/CFT and tax transparency - Staff encouraged the authorities to continue progress in addressing key deficiencies outlined by the 2016 CFATF Mutual Evaluation Report (MER) on AML/CFT. - Authorities have taken steps in the areas of terrorism financing, the monitoring of money remitters, and verification processes for beneficial ownership. - The National Risk Assessment has been completed, with World Bank support. - Staff urged the authorities to move forward on remaining work, particularly to ensure the effectiveness of the AML/CFT regime. - Staff urged prioritization of measures to comply with the Global Forum’s standards on tax transparency and cooperation. ### Authorities’ views (financial sector, AML/CFT, tax transparency) - Authorities recognized the importance of meeting international standards on tax transparency and AML/CFT, and underscored their commitment to continuing progress in these areas. - Authorities agreed to give high priority to complying with the Global Forum’s standards on tax transparency, and have already laid the Mutual Administrative Assistance in Tax Matters Bill, 2017 in Parliament in April. - Authorities acknowledged that while substantial progress has been made to improve the AML/CFT framework, work must continue, particularly on strengthening judicial processes. - Authorities noted the financial sector has been resilient to the energy price and economic shocks, with the banking sector maintaining healthy balance sheets, while also remaining well capitalized and profitable. ### Structural reforms and tourism - Staff encouraged the authorities to pursue structural reforms to raise potential growth, including: - continued improvements in the domestic business climate; - reforms to government “make-work” programs that distort the labor market and foster dependency; - revamping procurement practices to improve governance and achieve greater efficiency and cost savings. - Government initiatives to increase economic diversification have had modest successes; the government is revamping efforts to promote tourism. - Box 2: Challenges and Recent Developments in Tourism (highlights) - Tobago has rich natural and cultural heritage and potential as a tourist destination; needs include more direct flights, a steady air and maritime bridge between Trinidad and Tobago, and improved mechanism for dialogue between the Tobago House of Assembly (THA) and the central government. - International luxury hotelier Sandals is exploring opening a major all-inclusive resort in Tobago, potentially a “game changer.” - Tourism declined after a peak in 2011; arrivals declined by some 5 percent in 2013 and 2014. - Factors limiting tourism market share: (i) travel measured in dollar per mile from major markets is more expensive than to neighboring islands, (ii) inadequate human capital, (iii) limited quality of hotel rooms, (iv) inadequate airport facilities; compounded by negative perception of tourism importance, low public expenditure per visitor on marketing, and in Tobago, competition for skilled labor by the THA which employs about 60 percent of the labor force. - Regulation and monitoring of the sector is weak; problems in Tobago with proving land title are an obstacle. - In March 2017, the government closed the Trinidad and Tobago Tourism Development Company and is creating three new entities: (i) the Tobago Tourism Agency, (ii) the Tourism Trinidad Destination Management Co. Limited, and (iii) the Trinidad and Tobago Tourism Regulatory and Licensing Agency. - The government expects these entities will catalyze sustained development of the tourism sector; engagement of the private sector and candid discussion of regulatory needs and burden-sharing will be critical. ### Public sector efficiency, labor rigidities, and statistics - Staff reiterated the need for reforms to increase public sector efficiency. - Labor rigidities in the public sector are pervasive and a serious impediment to government functioning. - The Public Services Commission Department and the Chief Personnel Officer are overwhelmed, causing lengthy delays in personnel decision-making and increased reliance on contract labor. - Staff urged the government to streamline bureaucratic requirements for hiring, promoting and firing personnel. - The removal of the Ouster Clause has subjected the Public Service Commissions to excessive litigation, tying up their resources. - The Commissions need institutional strengthening, including regarding electronic record-keeping. - Data shortcomings hinder policy-making and surveillance: - Problems with the quality and timeliness of key macro-economic indicators persist due to poor coordination among information-producing agencies and pervasive staffing issues. - Staff supported sustained efforts to build the country’s statistical capacity. - Transforming the Central Statistical Office (CSO) into an independent National Statistical Institute (NSI) is underway but has faced delays. - Pending the NSI’s creation, providing adequate staffing and resources for the CSO must remain a priority. - Staff urged the authorities to finalize and publish the 2014 Survey of Living Conditions on demographic and socio-economic trends. ### Staff appraisal — macroeconomic outlook and policy priorities - Energy sector is starting to recover, but authorities continue to grapple with the impact of sharp declines in energy prices and volumes. - Recovery of the non-energy sector is expected to lag the energy sector, with downside risks if fiscal sustainability is not restored or if access to f/x continues to be restricted. - While substantial financial buffers can smooth adjustment, fiscal adjustment is necessary given the size and likely persistence of imbalances. - Medium-term fiscal adjustments of 6 ½ percent of GDP are needed to stabilize the trajectory of government debt. - A less ambitious fiscal adjustment would not be able to contain debt sustainability risks. - Authorities should undertake further VAT reforms and press ahead with plans to reform the energy sector fiscal framework and strengthen tax administration. - Given the increase in current expenditure of 10 percentage points of GDP over the last decade, reining in such expenditure, guided by the findings of the World Bank’s PER, is critical. - Authorities should tackle losses in state-owned utilities by engaging in cost-recovery pricing. - Some expenditure savings can be used to increase capital investment to set the stage for a lasting recovery in growth. - Staff assess the 2016 external position as substantially weaker than suggested by fundamentals and desirable policy settings. - After 17 years of current account surpluses, the balance is estimated to have turned into a deficit of 11 percent of GDP in 2016. - Much of the deterioration is due to the large terms of trade shock, but falling energy production has also been important. - External cushions are still relatively strong but policy measures are needed to deal with newly emerged external imbalances and reverse the rapidly deteriorating trend. - The NIIP has declined over the last two years and will continue to deteriorate sharply under the baseline. - Shortages of f/x have impaired trade and investment, damaged businesses’ relationships with suppliers, and undermined confidence. - Reducing and eventually eliminating the imbalances and the consequent distortions in the f/x market is critically important. - Staff encouraged authorities to undertake strong policy actions while there is still room for maneuver, requiring a comprehensive package including fiscal adjustment to reduce domestic demand, structural reforms to encourage investment in export goods and services, and most likely, an exchange rate adjustment to encourage both locals and foreigners to switch expenditures from foreign to domestic goods. - There has been measurable progress on structural reforms, but more reforms are needed, including: - procurement reforms, forming a tax policy unit, modernizing insurance regulation, easing the costs of doing business, and removing pervasive labor rigidities in the public sector. - Moving forward with AML/CFT and tax transparency reforms to comply with international standards is important. - The poor quality of statistics is an obstacle to informed policy making; improvement will require sustained attention. - Authorities’ commitment to improving and reforming statistical infrastructure, especially through putting the statistical authority on an independent and adequately funded footing, is welcome. *Source: cr17352 - 28. Staff acknowledged that monetary policy considerations are finely balanced.* ### 46. Staff recommends that the next Article IV consultation with Trinidad and Tobago be ### 46. Staff recommends that the next Article IV consultation with Trinidad and Tobago be ### Key economic developments and growth - A weakening non-energy sector and declining energy production have held back growth. - Real GDP contributions show energy and non-energy sectors moving differently; Non-energy sector in percent of GDP: 58.6, 62.8, 65.8, 75.2, 79.9, 80.1, 79.5 (years as shown in source). - Labor market: - Unemployment rate (Q3 2016): 4.0 - Unemployment recently began to climb, while labor force growth has continued to slide. - Inflation: - Consumer prices (headline) period average: 9.3, 5.2, 5.7, 4.7, 3.1, 3.2, 3.2 (years as shown in source). - Consumer prices (core) end-of-period: 2.5, 2.4, 2.0, 1.8, 2.2, 2.2, 2.1 (years as shown in source). - Core inflation is well contained; the volatile food price index has been subject to methodological errors. - Private sector credit growth has recently trended down. ### External sector developments - The current account balance was in deficit in 2016, for first time in 15 years. - Current account balance (in percent of GDP, memorandum): 13.1, 20.5, 15.1, 3.9, -11.3, -9.0, -8.4, -7.8, -6.8, -7.3, -7.0 (years as shown in source). - Exports and imports: - Exports of goods (percent of GDP): 63.5, 66.5, 57.2, 47.2, 38.9, 44.7, 44.5, 45.5, 43.7, 42.1, 41.4 (years as shown in source). - Imports of goods (percent of GDP): 38.5, 37.8, 32.7, 36.5, 44.6, 48.4, 48.0, 48.8, 46.3, 45.5, 44.7 (years as shown in source). - Exports are estimated to have dropped on the fall in energy prices and sluggish energy sector production. - Imports are estimated to have increased across the board for the energy and non-energy sectors. - Reserves and external debt: - Gross official reserves (in US$ million): 9,371; 10,177; 11,493; 9,927; 9,466; 8,433; 7,814 (years as shown). - NIR in months of imports: 9.4, 11.4, 12.7, 10.3, 9.5, 8.4, 7.5 (years as shown). - External debt increased; external public sector debt (percent of GDP) 8.2, 7.0, 9.0, 10.6, 16.7, 20.0, 23.8 (years as shown). - Capital and financial account: - The financial account became positive in 2016, but not enough to compensate the current account deficit. - Capital and financial account (net, percent of GDP) -15.5, -17.5, -10.0, -10.6, 9.1, 4.0 (years as shown). ### Monetary and financial sector - Central bank actions and liquidity: - After tightening in 2015, the central bank has kept the repo rate unchanged since early 2016. - Excess reserves averaged T$3.5 bn since H2 2016; excess reserves have remained fairly stable. - Official reserves continue to decline in 2016, albeit from a high level. - Banking system health: - Banks are well capitalized, and profitability rebounded significantly in 2016. - Despite three years of recession, NPLs remain low at 3 percent, and provisions remain sufficient. - Capital adequacy and profitability indicators (latest values shown): - Regulatory capital to risk-weighted assets: 24.6, 23.1, 22.5, 22.1, 21.9, 21.4 (years as shown). - Return on equity: 17.9, 15.4, 13.4, 11.9, 16.3, 18.6 (years as shown). - Nonperforming loans-to-gross loans: 5.3, 4.2, 4.1, 3.4, 3.1, 3.4 (years as shown). - Money and credit: - Credit to the private sector (annual percent change): 2.7, 4.1, 6.7, 6.6, 3.6, -7.0, 3.2 (years as shown). - Broad money (M3) growth: 20.8, 3.2, 7.2, 1.1, 2.8, -7.1, -1.7 (years as shown). ### Fiscal sector developments and public debt - Fiscal balances and revenues: - Central government overall balance (in percent of fiscal year GDP): -1.3, -2.9, -5.6, -8.6, -12.7, -13.0, -13.0 (years as shown). - Non-energy balance (in percent of GDP): -18.1, -18.8, -23.2, -22.3, -19.3, -20.8, -21.0 (years as shown). - Budgetary revenue (percent of GDP): 29.9, 31.2, 31.2, 30.2, 23.9, 24.5, 25.0 (years as shown). - Budgetary expenditure (percent of GDP): 31.3, 34.1, 36.8, 38.8, 36.6, 37.5, 38.0 (years as shown). - Revenue declined as energy revenue weakened; expenditures are dominated by subsidies and transfers. - Public debt and the Heritage and Stabilization Fund (HSF): - Central government debt (percent of GDP): 24.7, 25.3, 26.2, 28.9, 39.4, 47.2, 54.7 (years as shown). - Gross NFPS debt (percent of GDP): 41.5, 42.0, 43.2, 49.5, 61.2, 71.2, 79.6 (years as shown). - Heritage and Stabilization Fund assets (percent of GDP): 18.4, 19.7, 21.0, 23.6, 26.3, 27.0, 27.8 (years as shown). - The public sector's fiscal position has worsened in recent years; public debt is trending up. - Central government operations (selected figures, in TT$ millions and percent of GDP as shown in source): - Revenue (TT$ millions): 52,760; 52,483; 46,646; 34,206; 34,276; 35,494; 39,238; 40,830; 42,406; 44,068 (years as shown). - Expenditure (TT$ millions): 57,669; 61,920; 59,944; 52,390; 52,391; 54,008; 56,397; 58,908; 61,576; 64,641 (years as shown). - Interest payments (TT$ millions): 2,809; 3,123; 3,438; 3,038; 3,845; 4,782; 5,297; 5,798; 6,343; 7,186 (years as shown). - Transfers and subsidies (TT$ millions): 30,068; 33,781; 30,702; 28,024; 27,833; 28,734; 29,844; 31,002; 32,221; 33,495 (years as shown). ### Selected economic and social indicators (from Table 1) - GDP per capita (U.S. dollars, 2015): $17,261 - Population (millions, 2015): 1.35 - Adult literacy rate (2015): 99 - Life expectancy at birth (years, 2015): 70.6 - Gini index (2010): 40.3 - Human Development Index (2015): 65 - Under 5 mortality rate (per thousand, 2012): 22.2 ### Projections and outlook (selected) - Real GDP growth (annual percent change, selected series): 1.3, 2.7, -0.6, -0.6, -5.4, -3.2, 1.9 (years as shown). - Energy sector growth (annual percent change, selected): -2.8, 1.3, -2.5, -4.0, -10.1, -3.3, 7.7 (years as shown). - Current account balance (in US$ millions, Table 3): 3,373; 5,419; 3,947; 923; -2,395; -1,835; -1,747; -1,677; -1,526; -1,717; -1,719 (years as shown). - Gross international reserves (in US$ millions) projections: 9,466; 8,433; 7,814; 7,236; 6,803; 6,334; 5,888 (years as shown). *International Monetary Fund, staff report content as provided in the source PDF.* ### Annex I. Implementation of Key Recommendations from 2016 ### Annex I. Implementation of Key Recommendations from 2016 ### Fiscal policy: recommendations and implementation status - Formulate and announce a comprehensive multi-year adjustment package. - Status: Limited progress. Fiscal policy formulation continues to be done in an ad-hoc fashion, one year at a time. Formation of a tax policy unit (see below) would facilitate progress. - Undertake a review of expenditure programs. - Status: Limited progress. A request for the World Bank assistance for a Public Expenditure Review sent in April 2016, and now expected by end-2017. - Raise excise taxes on alcohol and tobacco. - Status: Completed. - Reintroduce property tax. - Status: Mostly done. Implementation is in the final stages. - Review the VAT with a view to base-broadening. - Status: No progress. Staff advocated base-broadening. Technical assistance may be required. - Review "make-work" programs and assistance for tertiary education. - Status: Ongoing. The government announced their intention to begin such a review. - Phase out fuel subsidies. - Status: Mostly done. Fuel prices were hiked further, but not yet enough to eliminate fuel subsidies. - Reduce transfers to SOEs and Statutory Authorities. - Status: Ongoing. Some small public bodies have been eliminated, but the large ones that contribute the bulk of losses have not undergone reforms. The government recently commissioned a study of the state-owned oil company, Petrotrin, with a view towards reforms. - Pursue fiscal structural reforms. - Status: Partially done. The authorities have received technical assistance on macro-fiscal and tax policy units. The former is in operation but not the latter. The authorities intend to establish a unified Revenue Authority. ### Monetary and exchange rate recommendations - Continue the pause in monetary policy tightening. - Status: Completed. - Pursue a substantial depreciation and allow the exchange rate to fluctuate within a band. - Status: No progress. The authorities do not agree that a significant exchange rate adjustment is appropriate. ### Structural recommendations - Establish an independent National Statistical Institute. - Status: Partially done. Progress has been made but legislative processes and implementation are still required. Expected late-2018 to early-2019. - Pass insurance legislation. - Status: No progress. Passage continues to face repeated delays. - Pass legislation to comply with FATCA. - Status: Completed. Passed in early 2017. - Take steps to reform the public service. - Status: No progress. --- ### Annex II. External Stability Assessment ### Context and recent developments - Energy dependence: - Exports of oil, gas, and petrochemicals account for more than 70 percent of exports of goods and services. - Energy sector surplus (annual average of 23 percent of GDP) contributed to current account surpluses up to 2015. - Non-energy sector has been in permanent deficit of around 7 percent of GDP in the same period. - Problems in supply to downstream industry led to substantial reduction in exports of petrochemicals and gas, accompanied by higher imports. - Balance of payments and financial account: - During 2001-2015, capital outflows were equivalent to 13 percent of GDP on an annual basis. - Buildup of the Heritage and Stabilization Fund accounted for only 1.7 percent of GDP of outflows in the same period. - Portfolio net outflows accounted for more than 4.3 percent of GDP. - In 2016, the financial account became positive. - Data note: - BOP data for 2011-2016 was extensively revised in early 2017 by the Central Bank of Trinidad and Tobago (CBTT) under IMF-CARTAC technical assistance, causing a structural break since data prior to 2011 was not revised. Authorities have provided IIP data for 2011-2016 and transitioned to the BPM6. ### External assessment and REER/valuation - Net International Investment Position (NIIP): - NIIP equivalent to 27.1 percent of GDP. - Maintaining the net IIP at the same level would require a current account norm of 1.1 percent of GDP. - Under the Staff baseline scenario, CA deficits are expected to be 7.7 percent of GDP on average during the projection period. - Scenario notes: - If NIIP benchmark assumed at 20 percent of GDP (scenario 2) and allowed to be reached in 10 years (scenario 3), the current account norm would have to be a positive balance between 0.3 and 1.1 percent of GDP. - Under the current account norm of -2.3 percent of GDP (scenario 4), the NIIP would go to zero by 2028. - Model-based estimates: - EBA-lite regression approaches point to an overvalued currency; estimates range between 23.6 and 48.5 percent. - CPI-based REER approach suggests the exchange rate was overvalued by 28 percent by end-2016. - Staff assess the REER to be overvalued by around 25 to 30 percent in 2016 (results to be interpreted with caution given recent change in the CPI methodology). - Recent exchange rate movements: - By end-2016, the Nominal Effective Exchange Rate (NEER) had depreciated by about 2.9 percent from end-2015. - REER depreciated by 3.44 percent in the same period. ### Current account outlook and policy implications - 2016 current account: - Estimated current account deficit of 11.3 percent of GDP in 2016 (first deficit after 17 years of sustained surpluses). - Staff assessment: - A no-policy change scenario would lead to further deterioration of the external position, could undermine business confidence and potentially contribute to capital outflows. - Fiscal consolidation alongside structural reforms to improve competitiveness and diversification would be primary tools to avoid further deterioration and to protect international reserves. - Current Account and Real Exchange Rate Assessment (selected figures shown): - Actual Current Account (CA): -11.3% - Cyclically adjusted CA: -12.7% - CA-Norm: -3.1% - Cyclically adjusted CA Norm: -4.4% - CA-Gap: -8.3% - o/w Policy gap: 2.2% - Residual: -10.5% - Elasticity: -0.35 - REER Gap: 23.6% and 48.5% (model range) ### Reserve adequacy - International reserves: - US$ 8.7 billion by end-June 2017 (8.7 months of import cover). - This equals more than 200 percent of the IMF’s composite reserve adequacy (ARA) EM metric, well above the 100-150 percent adequacy range. - Official gross foreign reserves exceed typical benchmarks (3 months of imports, 20 percent of broad money, and short-term debt falling due within one year). - Projections under baseline (no-policy changes) with lower oil and gas prices: - Staff projects a continuation of current account deficits and a sustained decline in reserves down to 5.6 months of import cover by 2022. --- ### Annex III. Risk Assessment Matrix — selected risks, likelihoods, impacts, and policy responses - Lower energy prices driven by stronger-than-expected U.S. shale and/or recovery of oil production in the African continent. - Likelihood/Time Horizon: LOW/Short to Medium Term - Expected Impact: HIGH - Key points: - Continued low energy prices would have a serious impact on fiscal and external prospects. - Employment impacts likely limited given capital-intensity of energy production. - Short-term cushions: official foreign reserves and assets under the Heritage and Stabilization Fund (HSF). - Policy response: - Diversify non-energy economic base by public investment and structural reforms. - Implement tax reforms to reduce dependence on energy revenues. - Conduct expenditure reforms to contain public consumption. - Tap the HSF only cautiously as a bridge solution to more durable fiscal adjustments. - Tighter global financial conditions (Fed normalization and ECB tapering). - Likelihood/Time Horizon: HIGH/Short Term - Expected Impact: MEDIUM - Key points: - If currency remains tightly tied to the U.S. dollar, additional losses of competitiveness vis-à-vis non-U.S. dollar peggers. - Rises in U.S. interest rates could increase capital outflows and raise cost of external financing. - Policy response: - Consider a devaluation to address loss of competitiveness. - Monetary policy may need to be tightened to keep interest rate differentials from narrowing vis-à-vis the U.S. - Fiscal consolidation would reduce risks of higher external financing costs. - Failure to address foreign exchange shortages. - Likelihood/Time Horizon: HIGH/Short Term - Expected Impact: HIGH - Key points: - Shortages consist of FX sales that are not made; businesses are damaging supplier relations which will harm trade and growth. - Rationing of foreign exchange by non-price means leads to distortions and precautionary FX demand that exacerbates capital outflows. - Policy response: - Operate the FX market more liberally, via further currency devaluation, greater sales to the market, or some combination. - Reduced financial services by correspondent banks. - Likelihood/Time Horizon: HIGH/Short to Medium Term - Expected Impact: Medium - Key points: - Impact on commercial banks limited so far in volume and value. - Reduction in commercial banks’ exposure to casinos and money remitters following correspondent bank concerns. - Policy response: - Press forward with actions needed to address concerns raised by the OECD and the CFATF. - Implement already approved legislation to this effect. --- ### Annex IV. Debt Sustainability Analysis (DSA) — key findings and scenarios ### Overall assessment and risks - Public debt (central government) sustainability risks: significant in the context of a growing debt burden and large gross financing needs. - Contingent liabilities: - Government guarantees are substantial at 20 percent of GDP at end-2016. - Baseline projections: - Under the baseline scenario, public debt is projected to rise to about 83 percent of GDP while gross financing needs are forecast to be about 15 percent of GDP in 2022. - Projected path remains vulnerable to slower growth, worsened primary balance, and a real interest rate shock. - External debt is at low levels but projected to increase over the medium term and remains very sensitive to exchange rate shocks. ### Definitions and debt profile - DSA scope: - Applies to central government (CG) debt, excluding short-term debt issued for open market monetary policy purposes (these instruments were equivalent to about 20 percent of GDP at end of the 2016 fiscal year and matched by corresponding “frozen” government deposits in the domestic banking system). - CG debt concept is narrower than public (NFPS) debt; NFPS includes contingent liabilities from statutory authorities and state-owned enterprises. - Developments: - Central government debt increased substantially in 2016 due to only modest fiscal tightening and worsening energy revenues. - Issuance of a US$ 1 billion bond on the Eurobond market in July 2016 raised external debt from 8.9 percent of GDP at end FY 2015 to 15.2 percent at end of FY 2015/16. - Debt profile dominated by medium and long-term maturities and a moderate foreign currency share of outstanding debt. ### Baseline macro-fiscal assumptions and buffers - Using of “one-off” financing measures in the current and next fiscal years is assumed in the debt accumulation path. - Authorities’ asset buffers: - Heritage and Stabilization Fund (HSF) assets of 27 percent of GDP are sizable but would be reduced by fiscal deficits projected to remain on average about 12 percent of GDP during 2017-2022. ### Heat map and credit rating context - Heat map flags high risk to debt sustainability on the debt level and gross financing needs where Trinidad and Tobago breaches high-risk DSA benchmarks. - Debt profile aspect not breached under baseline, despite assuming foreign debt accounts for one-third of financing going forward. - Credit rating developments: - Downgrade to sub-investment grade by Moody’s (April 2017) and a parallel move by Standard & Poor’s underscore need for comprehensive consolidation. ### Realism of projections - Projected fiscal adjustment: - A 3-year adjustment in the cyclically-adjusted primary balance (CAPB) is within average at the 23rd percentile among surveillance countries. - The 3-year average level of CAPB is at the top percentile of primary deficits, deteriorating by more than 4 percent. ### Stress tests and shock scenarios - Growth shock: - A 1 standard deviation shock to real GDP growth for 2 consecutive years would increase central government debt over the medium term. - Under this scenario, central government debt to GDP would increase from 40.1 percent in 2016 to 92 percent by 2022. *Source: cr17352 - Annex I. Implementation of Key Recommendations from 2016* ### 7. Primary balance and real interest rate shocks. The primary balance shock led the debt-to- ### 7. Primary balance and real interest rate shocks. The primary balance shock led the debt-to- ### Primary balance and real interest rate shocks - The primary balance shock led the debt-to-GDP ratio to peak at nearly 90 percent. - The primary shock is equal to half of the 10-year historical standard deviation. - Debt projections are quite sensitive to real interest rate shocks due to the sensitivity of the GDP deflator, and hence the real interest rate, to volatile energy prices. - The GDP deflator exhibited volatility tied to energy prices: increasing by 21.3 percent in 2008, followed by a 16.6 percent decline in 2009 (contributing to a 38 percent real effective interest rate in that year). ### Combined macro-fiscal shock - The macro-fiscal shock combines: - the growth and interest rates shock, - a primary balance shock as in the standard examples above, - and the exchange rate shock. - The effect of these shocks on central government debt and gross financing needs reaches about 165 percent and 50 percent of GDP, respectively. ### Contingent liabilities shock - Trinidad and Tobago’s debt is substantially exposed to contingent liabilities arising from government guarantees. - Contingent liabilities to the government stem from borrowing by public bodies (PBs, i.e., state-owned enterprises and statutory bodies), where Government guarantees are initially issued to PBs in the form of a letter of comfort and are eventually replaced by formal guarantees. - During 2006-2016, guaranteed debt accounted for around 40 percent of public debt. - As of end-December 2016, guaranteed debt, which is denominated primarily in domestic currency, reached about 22 percent of GDP (TT$ 31 billion). - Although these contingent government liabilities have not been called in the last few years, current pressures resulting from lower energy prices and recent credit rating downgrades to state-owned enterprises may eventually lead to a need for government support. - Given that TTO’s guaranteed debt is larger than average in a cross-country sample and assuming a shock that is double the average cost in the cross-country sample (i.e., 6 percent of GDP) that is distributed over two years (through higher transfers to PBs), this will result in central government debt reaching 88 percent of GDP by 2022. - The government has potentially large contingent liabilities arising from guaranteed pensions from the national pension scheme, which would fall outside the projection period and so are not included in the analysis. - In FY 2016, debt service of public utilities comprised about 40 percent of total capital transfers from the central government. - Based on Bova et al. 2016, the average and maximum fiscal costs were 3 percent and 15 percent of GDP, respectively. ### External debt sustainability analysis - Trinidad and Tobago’s external debt-to-GDP ratio has increased in recent years but remains at a low level. - External debt was 15.5 percent of GDP at end-March 2017, up from 8.9 percent at end 2015. - The main reason for the increase has been a rise in general government borrowing through internationally issued bonds. - Under the baseline, external debt is projected to continue rising steadily to about 34 percent of GDP. - External debt may increase above the current baseline if the government increases reliance on external financing (including multilateral loans) to help fund infrastructure projects. *Source: IMF staff estimates and Ministry of Finance as presented in the provided chapter excerpt.* ### 12. Stress tests confirm that external debt sustainability is particularly sensitive to current ### 12. Stress tests confirm that external debt sustainability is particularly sensitive to current ### Key findings from stress tests - Stress tests confirm that external debt sustainability is particularly sensitive to current account and exchange rate shocks. - An increase in the current account excluding interest payments by half a standard deviation in each year from 2017 onwards would make external debt peak at about 63 percent of GDP in 2022. - A one-time real exchange rate depreciation of 30 percent in 2017 would make external debt peak at 49 percent of GDP in 2022. - Baseline external debt level shown in figures: Baseline: 34 (external debt in percent of GDP, as presented in Figure A4.6). ### Baseline projections and selected macro-fiscal indicators (as presented) - Nominal gross public debt (in percent of GDP): 2015: 21.3; 2016: 28.9; 2017: 39.4; 2018: 47.3; 2019: 54.9; 2020: 60.6; 2021: 65.9; 2022: 74.4; (figure shows 82.8 as later value). - Public gross financing needs (in percent of GDP): 2015: 1.8; 2016: 10.7; 2017: 14.9; 2018: 16.4; 2019: 16.6; 2020: 14.4; 2021: 15.7; 2022: 14.7; 201? (figure shows 15.3). - Real GDP growth (in percent): 2015: 2.8; 2016: -0.6; 2017: -4.2; 2018: -3.7; 2019: 0.6; 2020: 2.1; 2021: 1.8; 2022: 1.4; 2022 (another series) 1.4. - Inflation (GDP deflator, in percent): 2015: 4.1; 2016: -7.6; 2017: -3.3; 2018: 1.4; 2019: 1.0; 2020: 1.2; 2021: 2.4; 2022: 2.9; 2022 (another) 3.0. - Nominal GDP growth (in percent): 2015: 7.2; 2016: -8.2; 2017: -7.3; 2018: -2.4; 2019: 1.6; 2020: 3.4; 2021: 4.2; 2022: 4.4; 2022 (another) 4.4. - Effective interest rate (in percent): 2015: 11.1; 2016: 7.8; 2017: 6.8; 2018: 6.8; 2019: 6.9; 2020: 6.5; 2021: 6.3; 2022: 6.0; 2022 (another) 5.8. ### Contributors to change in gross public sector debt (cumulative and annual highlights) - Cumulative change in gross public sector debt (2015–2022): cumulative shown as 43.4. - Identified debt-creating flows (cumulative): 42.9. - Primary deficit (annual values shown): 2015: -1.5; 2016: 6.4; 2017: 10.6; 2018: 10.2; 2019: 9.7; 2020: 8.1; 2021: 8.0; 2022: 8.1; cumulative 52.1. - Primary (noninterest) revenue and grants (in percent of GDP): 2015: 31.3; 2016: 30.1; 2017: 23.9; 2018: 24.5; 2019: 25.0; 2020: 26.7; 2021: 26.7; 2022: 26.5; cumulative 155.8. - Primary (noninterest) expenditure (in percent of GDP): 2015: 29.8; 2016: 36.5; 2017: 34.4; 2018: 34.7; 2019: 34.6; 2020: 34.8; 2021: 34.7; 2022: 34.6; cumulative 207.9. - Automatic debt dynamics (contribution, derived): yearly values include 0.9, 4.6, 4.9, 3.7, 2.5, 1.7, 1.2, 1.0, 1.0; cumulative 11.0. - Interest rate/growth differential (contribution): 0.9, 4.6, 4.4, 3.7, 2.5, 1.7, 1.2, 1.0, 1.0; cumulative 11.0. - Of which: real interest rate: 1.3, 4.4, 3.1, 2.1, 2.8, 2.8, 2.2, 1.9, 2.0; cumulative 13.8. - Of which: real GDP growth contribution: -0.5, 0.2, 1.3, 1.5, -0.3, -1.1, -1.0, -0.9, -1.0; cumulative -2.8. - Exchange rate depreciation contribution (annual values): 0.0, 0.1, 0.5, ... (no further values shown). - Other identified debt-creating flows (annual values): -0.4, -6.8, -7.2, -6.4, -4.6, -4.1, -3.9, -0.6, -0.6; cumulative -20.3. - Residual, including asset changes (annual values): 1.7, -1.4, 2.2, 0.5, 0.0, 0.0, 0.0, 0.0, 0.0; cumulative 0.5. - One-off measures (negative): 0.4 (listed as one-off measures (negative) 0.4). ### Alternative scenarios and selected stress-test assumptions (from figures) - Historical scenario baseline real GDP growth path example: Historical Scenario real GDP growth: 2017: -3.7; 2018: 0.9; 2019: 0.9; 2020: 0.9; 2021: 0.9; 2022: 0.9. - Constant Primary Balance Scenario: Primary Balance held at -10.2 for 2017–2022; Effective interest rate path example: 6.7, 6.9, 7.3, 7.7, 8.0, 8.5. - Stress test scenarios summarized (Figure A4.4): - Primary Balance Shock: Primary balance path example: -10.2, -12.3, -10.7, -8.0, -8.1, -8.0. - Real GDP Growth Shock: Real GDP growth under shock: 2017: -3.7; 2018: -2.5; 2019: -0.9; 2020: 1.8; 2021: 1.4; 2022: 1.4. - Real Interest Rate Shock: Effective interest rate examples under shock: 6.7, 6.9, 13.9, 19.7, 25.2, 29.4. - Real Exchange Rate Shock: Inflation and effective interest rate example under exchange rate shock: Inflation 2017: 1.4; 2018: 7.7; 2019: 1.2; 2020: 2.4; 2021: 2.9; 2022: 3.0. Effective interest rate: 6.7, 7.4, 6.3, 6.1, 5.8, 5.7. - Combined Shock: Real GDP growth: -3.7, -2.5, -0.9, 1.8, 1.4, 1.4. Primary balance: -10.2, -12.7, -12.6, -8.0, -8.1, -8.0. Effective interest rate: 6.7, 7.4, 14.4, 20.8, 26.0, 29.9. ### External debt bound-test highlights (Figure A4.6) - Baseline external debt (percent of GDP): 34 (baseline indicated). - Current account (non-interest) shock (half standard deviation each year from 2017) leads to external debt peaking at about 63 percent of GDP in 2022 (labeled "CA shock 63"). - One-time real depreciation of 30 percent in 2017 leads to external debt peaking at 49 percent of GDP in 2022 (labeled "30% depreciation 49"). - Combined shock (details): combined shock scenario shows external debt peaking at 50 percent of GDP in the projection horizon (labeled "Combined shock 50"). - Growth shock example: Growth shock (in percent per year) baseline/Scenario/Historical entries shown: Baseline: 4.5; Scenario: 5.2; Historical: 5.0. Another line shows Baseline: 1.7; Scenario: 0.0; Historical: 0.4. Non-interest current account shock baseline/scenario/historical: Baseline: -6.4; Scenario: -12.2; Historical: 14.3. ### Risk assessment indicators (selected) - EMBIG (bp, average last 3 months 08-Jun-17 through 07-Sep-17): 271 (basis points shown). - External financing requirement benchmarks used in heat map: 5 and 15 percent of GDP. - Gross financing needs benchmark: 15 percent. - Public debt held by non-residents (in percent of total): 38% (listed). - Annual change in short-term public debt benchmarks: 0.5 and 1 (percent). - Public debt in foreign currency benchmarks: 20 and 60 percent (used for risk assessment). ### Implications emphasized by the analysis - External debt dynamics respond strongly to shocks to the current account (excluding interest) and to large exchange rate depreciations: a persistent current account deterioration (half standard deviation annually) materially raises external debt-to-GDP (peak about 63 percent in 2022); a large one-off real depreciation (30 percent in 2017) materially raises external debt-to-GDP (peak about 49 percent in 2022). - Combined macro-fiscal shocks and shocks to interest rates and growth can further elevate gross nominal public debt and public gross financing needs (examples shown in stress-test charts). *Source: IMF staff (figures and tables from the Trinidad and Tobago Public Debt Sustainability Analysis and stress-test annex).* ### 2015. The GDP estimates have been improved and rebased from 2000 to 2012. Revised real and nominal production- ### cr17352 - 2015. The GDP estimates have been improved and rebased from 2000 to 2012. Revised real and nominal production- ### National accounts and GDP data compilation - Revised real and nominal production-side GDP estimates have been compiled from 2012 to 2015, with preliminary estimates produced for 2016. - Expenditure-side GDP data: last available data is for 2008; the CSO expects to compile updated expenditure-side GDP estimates during 2018. - Quarterly production-side GDP estimates are being developed and their release is subject to availability of source data (especially monthly unit-record VAT turnover data from the Board of Inland Revenue) and resources to ensure appropriate staffing. - The CSO has reduced lags in publication of its quarterly labor force bulletin to about two quarters (from one year) since the end of 2014. ### Price statistics - Retail Price Index (RPI): - A new compilation methodology implemented in mid-2016 corrects a significant upward bias, primarily in the food component. - The RPI basket has been rebased to January 2015, with new weights drawn from the 2008/09 household budgetary survey. - The CSO has recompiled and published the RPI for January 2015 to July 2017. - The CSO is planning to release the revised RPI to key data users such as the Ministry of Planning and Development, Ministry of Finance, CBTT and the Fund. - Production Price Index (PPI): - Current PPI uses weights that are 40 years old. - The CSO is rebasing and improving coverage; the rebased index, with 2012 weights covering manufacturing and utilities, is expected to be released by October 2017. - Export and Import Price Indices: - The CSO is receiving TA from Statistics Canada on developing the Export and Import Price Indices; new indices expected to be released in late 2018. ### Government finance statistics (GFS) - Ministry of Finance (MoF) compiles fiscal data using a national classification system and follows the Government Finance Statistics Manual (GFSM) 1986. - Treatment issues: - Government accounts for one-off sources (such as asset sales and super-dividends) as revenues; according to GFSM 2014 these should be accounted for as financing sources. - Data coverage: - Public enterprises and statutory bodies data are compiled and published once a year. - Limited data on debt outside of the central government. - Migration of debt recording: - Data with comprehensive coverage of external loans and domestic debt of the entire public sector, as well as publicly guaranteed debt, has been migrated to the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) used by the MoF and the CBTT. - Reporting to STA: - Authorities reported annual GFS data last in 2015, covering fiscal year 2011-12; no GFS data reported since then. ### Monetary and financial statistics (MFS) and financial sector surveillance - Monetary accounts coverage: - Monthly monetary accounts currently cover the CBTT and other depository corporations (ODCs) (commercial banks and nonbank financial institutions: finance houses, merchant banks, trusts, and mortgage companies). - No data are reported by income funds (which act like money market funds and should be included as part of the ODCs sector). - Mutual funds are not regulated by the CBTT; an agreement with the Securities and Exchange Commission of Trinidad and Tobago is needed to obtain their data regularly. - Standardized Report Forms (SRFs): - Following two MFS missions in 2012, Trinidad and Tobago migrated to SRFs for submission of CBTT and ODCs data to STA; these broader data are now used in the monetary sector accounts in this staff report. - In May 2014, an MFS mission supported the CBTT in developing SRFs for the other financial corporations (OFCs) sector covering insurance corporations, pension funds, the Heritage and Stabilization Fund (HSF), the Agricultural Development Bank (ADB), and the Mortgage Finance Company (TTMF). - CBTT needs to expand coverage to at least the National Insurance Board (NIB), the Unit Trust Corporation (UTC), the Home Mortgage Bank (HMB), and the credit unions. - Financial Soundness Indicators (FSIs): - The CBTT reports FSIs covering commercial banks on a regular quarterly basis. - Banking system indicators in 2017: ratio of non-performing loans (NPLs) to gross loans stood at 3.4 percent in June 2017. - CBTT stress tests indicate the banking system is resilient in aggregate to various macroeconomic shocks. - Available FSIs for the insurance industry show healthy capital positions and a fair degree of profitability. - Reporting to STA: - Since mid-2013, the CBTT reports monetary data to STA using the SRFs. - Trinidad and Tobago reports to STA all core and some encouraged FSIs. ### External sector statistics and balance of payments - CBTT is responsible for compilation and dissemination of balance of payments statistics; quarterly and annual BOP data are disseminated by the CBTT in its national publications, although with some lag. - Trade data: - Trade data is normally taken from the CSO; due to consistency issues in the energy sector, trade data from 2011 onwards are CBTT estimates using trade partner data. - CBTT’s estimates should be replaced by official CSO data once a conciliation and consistency process is concluded. - The CSO is reviewing and auditing recently compiled trade data covering 2012 to December 2016. - Recent improvements and TA: - Authorities revised goods and services account data to address under-coverage and misclassifications, particularly in valuation of imports at c.i.f., missing insurance services provided to nonresidents, and services provided by nonresident companies to local oil and gas corporations. - TA missions assisted with compilation of data on external assets and liabilities of mutual funds, compilation of the International Investment Position (IIP), classification of dividend flows by energy sector companies, improvements for subscription to the SDDS, and implementation of the Balance of Payments and International Investment Position Manual, sixth edition. - Authorities made an official release of revised BOP data from 2011 to 2016, as well as IIP data for the same period in June 2017. - Despite progress, errors and omissions remain relatively large; additional technical assistance is scheduled for 2018 to address remaining issues. - External sector data migrated to CS-DRMS for public sector debt coverage. - Reporting to STA: - External sector statistics are sent to STA, although with considerable delay. ### Data standards, dissemination, and quality - Participant in the enhanced General Data Dissemination System (e-GDDS). - No data ROSC is available. - Table of Common Indicators Required for Surveillance (As of September 13, 2017) — selected entries (date of latest observation / date received / frequency of data / frequency of reporting / frequency of publication): - Exchange Rates: Aug 2017 / Aug 2017 / D / D / D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: June 2017 / June 2017 / M / M / M - Reserve/Base Money: June 2017 / Aug 2017 / M / M / M - Broad Money: June 2017 / Aug 2017 / M / M / M - Central Bank Balance Sheet: June 2017 / Aug 2017 / M / M / M - Consolidated Balance Sheet of the Banking System: June 2017 / Aug 2017 / M / M / M - Interest Rates: August 2017 / August 2017 / M / M / M - Consumer Price Index: May 2017 / August 2017 / M / M / M - Revenue, Expenditure, Balance and Composition of Financing – Central Government: June 2017 / July 2017 / Q / I / A - Stocks of Central Government and Central Government-Guaranteed Debt: March 2017 / April 2017 / Q / I / Q - External Current Account Balance: 2016Q4 / July 2017 / Q / Q / Q - Exports and Imports of Goods and Services: 2015Q3 / March 2016 / Q / Q / Q (Central Bank data estimates pending finalization of conciliation of trade data with CSO) - GDP/GNP: 2015 / August 2016 / A / A / A - Gross External Debt: September 2015 / March 2016 / A / A / A - International Investment Position: 2016 Q4 / July 2017 / A / A / A ### Authorities’ assessment, outlook and policy actions (Statement by Mr. Tombini and Mr. Cheong — Executive Board Meeting October 23, 2017) - Economic environment and outlook: - Recent shocks: fall in international energy prices and domestic production. - Improvement expected in second half of 2017 due in part to Juniper gas field coming on stream in August and bpTT’s Trinidad Onshore Compression Project initiated in mid-2017. - Preliminary estimates: current account recorded a small surplus of about 1.4 percent of GDP in the first quarter of 2017. - Net official reserves: 9.8 months of import cover (or US$8.5 billion) at the end of September. - Inflation: 1.3 percent (year-on-year) in August (first eight months of 2017). - Unemployment rate: 4.5 percent at end-March. - Medium-term prospects: additional energy projects and downstream capacity (methanol and dimethyl ether plant expected in 2018 or early 2019) should support rebound in 2018 and modest steady growth over the medium-term. - Fiscal developments and policy: - Expenditure was cut by roughly 20 percent between FY2014 and FY2017: from around 55 percent (TT$62.8 billion, revised) of non-energy GDP to an estimated 43 percent (TT$50.5 billion) of non-energy GDP. - FY2018 national budget (presented October 2nd 2017): continuation of adjustment efforts including further reduction in fuel subsidies, increase in corporation taxes, introduction of a 12.5 percent royalty rate for companies involved in extraction of oil, condensate and natural gas, higher taxes for the gambling industry, and ongoing review of social programs with greater reliance on means testing. - FY2018 overall fiscal deficit is budgeted at 3.1 percent of GDP (on a non-IMF GFS basis). - Structural fiscal reforms: - Establishment of a new Revenue Authority (RA) to bring together the Board of Inland Revenue and the Customs and Excise Division; RA expected to come on stream in 2018. - Work, with Fund support, on a new tax regime for the energy sector. - Engagement of the World Bank to conduct a Public Expenditure Review covering health, education and social services. - Debt and financing: - Authorities aim to balance the fiscal position by the end of the forecast horizon through expenditure management and revenue mobilization. - Public sector debt guide: 60 percent of GDP over the medium-term. - Government has recoverable investments of about 10 percent of GDP from CL Financial; asset sales and recoverable investments are cited among financing options. - Authorities contest staff’s projection of a sharp medium-term rise in expenditure and consider projected increase in debt in the DSA as extreme. - Monetary policy and foreign exchange market: - CBTT maintained main policy rate at 4.75 percent for the year thus far — unchanged since end-2015. - CBTT sold US$1.4 billion to the market in the first nine months of 2017 compared with US$1.2 billion in the same period last year. - International reserves do not include assets held in the HSF. - CBTT strategy: maintain orderly and stable FX market, increase predictability and transparency of interventions. - Financial sector policies and regulatory developments: - Banking system: well capitalized and profitable; NPLs to gross loans at 3.4 percent in June 2017. - Progress toward Basel II/III standards. - Strengthening AML/CFT framework following National Risk Assessment and CFATF Mutual Evaluation Report; measures include enhancements to investigative and prosecutorial processes, targeted sanctions, legislative amendments for beneficial ownership identification, and revision of AML/CFT guideline with focus on risk-based supervision and sector-specific guidance. - Tax transparency: - Tax Information Exchange Agreements Act (TIEAA) with the United States enacted in March 2017 (FATCA compliance). - Trinidad and Tobago was found non-compliant with the Global Forum’s Common Reporting Standards; Mutual Administrative Assistance in Tax Matters Bill, 2017 was laid in Parliament in April and authorities expect to meet Global Forum requirements in the next review cycle. - Structural reforms and diversification: - Reform agenda driven by Vision 2030 national development plan. - Initiatives: encourage private sector participation, modernize trade legislation (with IDB support), expand trade arrangements with Central American countries, develop ICT hubs, special economic zones and industrial parks, renewed focus on maritime industry, promotion as an International Financial Center, development of BPO prospects, tourism boost from planned luxury resorts in Tobago. - SOE and public utility reforms: - Review operations of SOEs and public utilities; FY2018 budget signaled plans to review pricing structure of national electricity and water providers to better align prices to costs. - High-level review of Petrotrin completed in 2017; authorities plan to establish an implementation team to execute recommendations. - Conclusion: - Authorities view prospects as brighter going forward, remain committed to sound macroeconomic policies and continuing adjustment, and look forward to continued engagement with the Fund. *Document: cr17352 - 2015. The GDP estimates have been improved and rebased from 2000 to 2012. Revised real and nominal production-* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17352.pdf_