## _cr16204 ## Source details **Canonical URL:** [_cr16204](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16204.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16204.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16204.pdf.json) --- ### Recent developments and macroeconomic outcomes - Real GDP declined an estimated 2.1 percent in 2015; energy output was estimated 4.7 percent lower (yoy) as of September 2015. - Core inflation remained anchored at 2.0 percent yoy in 2015; headline inflation fell to 1.5 percent (yoy). - Unemployment: 3.6 percent in September 2015 (3.4 percent cited elsewhere for September 2015). - Current account: turned from a surplus to a deficit of 5.4 percent of GDP in 2015. - Exports: US$11.8 billion in 2014 to US$9.1 billion in 2015. - Gross official reserves: declined from US$11.3 billion to US$9.8 billion during 2015 (table: 11,317 to 9,788 in US$ million). - Heritage and Stabilization Fund (HSF) assets: increased by $212 million over the prior 12 months to US$5.8 billion in June 2015. - Real effective exchange rate gap (EBA-lite): 23 percent (Current Account model) and 50 percent (REER model). - Nominal exchange rate: managed around TT$6.35/US$1 since late 2009; depreciation of 3 ½ percent through early April 2016 from November 2015. - CBTT FX injections: US$500 million at end-October 2015 and averaged US$86 million per month (Nov–Mar). - Government bilateral rate rule: not allowed to depreciate more than 7 percent from September 2015 level (implying room for another 3.3 percent depreciation from that date). - Participation rate: declined from 62.0 to 60.3 percent from Q3 2014 to Q3 2015. - Banking sector: banks remain strong; progress on statistical shortcomings noted. ### Fiscal developments and outlook - FY 2014/15 (October–September) overall deficit: widened to 4.7 percent of GDP; projected to 10.9 percent of GDP in FY 2015/16 once full-year impact is felt. - Energy-based revenues: fell short of FY 2014/15 budget by 4.4 percentage points of budgeted GDP (budget assumed oil US$80/barrel and gas US$2.75/mmBtu). - Fuel subsidy reduction: partly offset revenue shortfalls by ¾ of a percentage point of GDP. - One-off revenues/asset sales: TT$4.8 billion (3 percent of GDP) from asset sales and early SOE loan repayment financed nearly two-thirds of requirements. - Stock of arrears (VAT refunds): estimated at TT$5 billion per the 2016 budget statement. - Central government debt: increased by 2.0 percentage points of GDP; external debt fell in nominal terms to US$2.1 billion (8.4 percent of GDP). Key fiscal table excerpts (percent of GDP unless otherwise noted): - Budgetary revenue: 2012 29.7; 2013 31.2; 2014 33.0; 2015 31.9; 2016 (Proj.) 28.0; 2017 (Proj.) 25.4 - Budgetary expenditure: 2012 30.8; 2013 34.0; 2014 35.1; 2015 36.5; 2016 (Proj.) 38.8; 2017 (Proj.) 38.8 - Overall balance: 2012 -1.1; 2013 -2.9; 2014 -2.1; 2015 -4.7; 2016 (Proj.) -10.9; 2017 (Proj.) -13.4 - Overall non-energy balance: 2012 -17.8; 2013 -18.8; 2014 -19.2; 2015 -17.6; 2016 (Proj.) -17.5; 2017 (Proj.) -20.5 - Overall nonfinancial public sector balance: 2012 -0.3; 2013 -2.1; 2014 -4.0; 2015 -6.9; 2016 (Proj.) -11.5; 2017 (Proj.) -15.4 - Public sector debt: 2012 41.4; 2013 41.0; 2014 41.9; 2015 47.2; 2016 (Proj.) 48.4; 2017 (Proj.) 58.5 ### Balance of payments and external sector - Current account balance (percent of GDP): 2012 3.2; 2013 7.3; 2014 4.6; 2015 -5.4; 2016 (Proj.) -7.0; 2017 (Proj.) -5.7. - Exports (percent of GDP): 2012 50.5; 2013 48.3; 2014 43.3; 2015 36.9; 2016 (Proj.) 29.2; 2017 (Proj.) 32.2. - Imports (percent of GDP): 2012 35.3; 2013 33.5; 2014 30.8; 2015 36.2; 2016 (Proj.) 30.7; 2017 (Proj.) 31.9. - Gross official reserves (US$ million): 2012 9,515; 2013 10,411; 2014 11,317; 2015 9,788; 2016 (Proj.) 9,194; 2017 (Proj.) 8,347. - External public sector debt (percent of GDP): 2012 6.2; 2013 5.9; 2014 7.4; 2015 8.9; 2016 (Proj.) 11.4; 2017 (Proj.) 15.4. ### Monetary and financial sector - Monetary indicators (percent changes in beginning-of-period broad money): - Net foreign assets: 2012 -1.1; 2013 5.4; 2014 6.4; 2015 -6.4; 2016 (Proj.) -3.7; 2017 (Proj.) -5.4 - Net domestic assets: 2012 22.2; 2013 -2.5; 2014 0.7; 2015 7.3; 2016 (Proj.) 3.6; 2017 (Proj.) 13.2 - Private sector credit: 2012 1.6; 2013 2.1; 2014 3.5; 2015 3.4; 2016 (Proj.) 0.7; 2017 (Proj.) -0.3 - Broad money (M3): 2012 20.8; 2013 3.2; 2014 7.2; 2015 1.1; 2016 (Proj.) -0.1; 2017 (Proj.) 7.8 - CBTT monetary stance: began tightening late 2014 (repo raised 200 basis points over eight meetings to 4.75 percent), paused January 2016. - FX market: reports of FX shortages for current transactions; CBTT injections and limits on nominal depreciation used to manage pressures. - Banking indicators (end-December 2015): - NPLs below 3½ percent, - ROA 2.5 percent, - ROE 18.2 percent, - Specific provisions-to-impaired assets ratio 42.1 percent. - Commercial banks’ excess reserves: TT$7.2 billion average in December 2014 to TT$3.4 billion in December 2015. - Legislative reforms: insurance legislation, Occupational Pensions Plan Act, Credit Union Bill, and Basel II implementation in progress. ### Executive Board assessment and policy guidance - Directors: sharp decline in energy prices poses major challenges; welcomed government efforts. - Fiscal policy guidance: - Need for a strong medium-term fiscal plan and comprehensive fiscal framework. - Priorities: broadening the revenue base with comprehensive VAT reform, improving tax administration, phasing out fuel subsidies, improving targeted social protection, and conducting a comprehensive expenditure review. - Monetary and exchange rate guidance: - Supported pause in monetary tightening given growth challenges. - Immediate priority: maintain external balance and address FX shortages on current transactions. - Well-communicated move to greater exchange rate flexibility as part of a demand-management package recommended; careful adjustment urged to mitigate volatility. - Structural reforms urged: - Energy sector taxation reforms, address public service inefficiencies, strengthen financial sector supervision (especially non-bank financial regulation), strengthen AML/CFT framework, labor market reform, improve business climate, establish a tax policy unit, and create a National Statistical Institute. ### Key issues, risks, and staff analysis - Baseline scenario: fiscal deficits exceed 10 percent of GDP through the medium-term; unsustainable government debt rise. - Staff estimate: multi-year fiscal adjustment of around 8 ½ percent of GDP needed to keep debt manageable. - Revenue and spending scope: - Potential to raise revenues (e.g., comprehensive VAT reform) and rationalize spending via expenditure review. - Exchange rate and external adjustment: - Further depreciation could help restore external balance; larger depreciation as part of broader package could stabilize expectations, raise fiscal revenues, and offset contractionary fiscal impacts. - Balance of payments pressures: exacerbated by capital outflows driven by precautionary demand and currency speculation. - REER gap drivers: structural impediments, policy gaps, and US dollar appreciation vis-à-vis the TT dollar (60 percent of trade). ### Fiscal impact and near-term measures (budget and MYBR) - Initial budget: assumed US$45/barrel oil; budget deficit target 7.5 percent of GDP on GFS basis (1.7 percent of GDP using authorities’ accounting). - Planned budget adjustments totaling over 3 percent of GDP: tight expenditure control; lower fuel subsidies; revenue measures including base broadening of VAT with rate reduction from 15 to 12½ percent (expected net 2½ percentage points of GDP). - Reliance on above-average SOE dividends and planned use of US$1 billion of HSF assets. - Authorities counted asset sales totaling some 6 percentage points of GDP as revenues. - MYBR revisions (with oil US$35/barrel and gas US$2.00/mmBtu): mid-year cuts of 7 percent of budgeted expenditure; hikes in tobacco and alcohol excises and on excises and duties on large-engine automobiles; further fuel price increases; introduction (FY 2016/17) of a tax on internet purchases. - Staff estimate: even with MYBR measures, deficit could total almost 11 percent of GDP on a GFS basis. ### Medium-term outlook, scenarios, and key projections (selected) Baseline (staff projections and scenarios include Active Scenario and Medium-Term Framework excerpts): Selected real GDP growth (percent): - 2012 1.3; 2013 2.3; 2014 -1.0; 2015 -2.1; 2016 (Proj.) -2.7; 2017 (Proj.) 2.3; 2018 (Proj.) 3.6; 2019 (Proj.) 3.2; 2020 (Proj.) 1.2; 2021 (Proj.) 1.2 Energy growth (percent): - 2012 -2.8; 2013 1.3; 2014 -2.4; 2015 -4.9; 2016 (Proj.) -7.1; 2017 (Proj.) 6.5; 2018 (Proj.) 6.1; 2019 (Proj.) 5.7; 2020 (Proj.) 0.3; 2021 (Proj.) 0.3 Inflation (end of period): - 2012 7.2; 2013 5.7; 2014 8.5; 2015 1.5; 2016 (Proj.) 4.6; 2017 (Proj.) 4.7 Fiscal trajectory (percent of GDP, baseline excerpts): - Revenue: 2013 29.8; 2014 29.7; 2015 31.2; 2016 33.0; 2017 31.9; 2018 28.0; 2019 25.4; 2020 25.5; 2021 25.4 - Expenditure: 2013 30.0; 2014 30.8; 2015 34.1; 2016 35.1; 2017 36.5; 2018 38.8; 2019 38.8; 2020 37.9; 2021 39.1 - Overall fiscal balance: 2013 -0.2; 2014 -1.1; 2015 -2.9; 2016 -4.7; 2017 -10.9; 2018 -13.4; 2019 -12.4; 2020 -12.8; 2021 -13.6 - Central government debt (percent of GDP): 2013 14.9; 2014 24.7; 2015 24.4; 2016 25.4; 2017 27.4; 2018 28.6; 2019 38.7; 2020 48.5; 2021 58.2 (alternate entries for 2021: 68.1; 78.1) External and reserves projections: - Gross official reserves (US$ millions): 2011 10,233; 2012 9,515; 2013 10,411; 2014 11,317; 2015 9,788; 2016 (Proj.) 9,194; 2017 (Proj.) 8,347 - Reserves in months of imports: 2011 12.6; 2012 11.9; 2013 13.7; 2014 12.8; 2015 13.4; 2016 11.8; 2017 10.3; 2018 8.2; 2019 6.5; 2020 4.9; 2021 3.3 Staff risk and baseline summary: - Baseline: fiscal deficits rise to 12½–13½ percent of GDP over medium term; central government debt rises to nearly 80 percent of GDP by 2021; broader NFPS debt near 100 percent of GDP by 2021. - Staff DSA: Heat Map flashes red for level of debt and gross financing needs in baseline and under shocks. - Petrotrin downgrade: Moody’s downgraded Petrotrin from Ba1 to Ba3 in April 2016; Moody’s estimated SOE support could increase central government debt by 2 to 4.5 percent of GDP in 2016. ### Fiscal adjustment strategy, sequencing, and Active Scenario (measures and phasing) - Staff recommended: formulate and announce a comprehensive multi-year adjustment package; measured pace of implementation to spread negative multipliers. - Staff estimate: adjustments totaling 8 ½ percent of GDP (in addition to measures included in FY2016 budget and MYBR totaling some 3 ½ percentage points of GDP) would keep central government (NFPS) debt/GDP at 48 (68) percent by 2021. - Revenue measures welcomed/announced: - Increases in business levies; narrowing VAT zero-rated bracket and reducing rate from 15 to 12½ percent; intention to re-introduce property taxation; Gaming and Betting Control Act (potential ½ percent of GDP). - Improved tax administration, information sharing between BIR and CED. - Staff advocacy: - Comprehensive VAT review, increase excises on cigarettes/alcohol/soft drinks, enhance property taxation. - Phasing of measures — Active Scenario (percent of GDP) by fiscal years 2016/17–2020/21: - Total Measures: 3.00, 5.00, 7.00, 7.75, 8.50 - Revenues: 3.00, 4.25, 5.75, 5.75, 5.75 - Excises: 0.25, 0.25, 0.25, 0.25, 0.25 - Property taxes: 1.00, 1.00, 2.00, 2.00, 2.00 - New top PIT rate: 1.00, 1.00, 1.00, 1.00, 1.00 - Gaming tax: 0.13, 0.25, 0.25, 0.25, 0.25 - Other unidentified 1/: 0.63, 1.75, 2.25, 2.25, 2.25 - Expenditures: 0.00, 0.75, 1.25, 2.00, 2.75 - Other current expenditure reductions 2/: 0.00, 1.50, 2.25, 3.00, 3.75 - Expand infrastructure investment: 0.00, -0.75, -1.00, -1.00, -1.00 - Note 1/: Includes improved public revenue administration and further VAT reforms, as needed. - Note 2/: To be identified in public expenditure review; can include lower transfers via increased public utility tariffs. ### Expenditure reforms and savings - Announced spending cuts: TT$4 billion (2.5 percent of GDP) welcomed; comprehensive expenditure review urged. - Recommended focus: - Review “make-work” programs (CEPEP and URP) with social safeguards. - Make GATE more cost-efficient via means-testing and tighter eligibility. - Phase out fuel subsidies and use savings for social protection. - Reduce transfers to SOEs where pricing allows greater cost-recovery. - Clear expenditure arrears (likely via domestic financing). ### Impacts of fuel subsidies (Box 1) — fiscal, distributional, environmental - Fuel subsidies: established 1974; cumulative 2006–15 amounted to TT$31 billion (average ~2 percent of GDP per annum). - Subsidies: rose to 2.3 percent of GDP (2009–2014 trend); 2015 subsidies: 1.4 percent of GDP. - PPL covers <20 percent of total subsidy costs during past five years. - Counterfactual: if resources spent since 2008 had been contributed to HSF, Fund would be worth an additional US$3.6 billion (62 percent higher). - Distributional evidence: - Low income earners (50 percent of population in 2014) gained 27 percent of total fuel subsidies; richest 15 percent gained 36 percent. - Average monthly subsidy for richest households was 95 and 68 percent higher than for low and middle income households, respectively. - Post-tax subsidies composition (2015, US$ billions and shares): - Global warming: 2.12 - Pre-tax subsidies: 0.8 - Vehicle externalities total: 0.6 (congestion 0.16, accidents 0.4, road damage 0.03) - Local air pollution: 0.25 - Foregone consumption tax revenue: 0.23 (0.9 percent of GDP) - Staff: global warming accounted for >50 percent of post-tax subsidies (~US$2.1 billion) in 2015. - Traffic externalities: total cost US$598 million in 2015; annual per capita traffic externality cost US$441 in 2015. ### Exchange rate, FX market functioning, and Fund considerations - FX market conditions: long queues reported; wait times over four weeks for many requests; external payment arrears emerged. - CBTT interventions: regulates max market sell/buy rates; provides ~one-third of total market FX supply via discretionary allocations. - CBTT increased intervention frequency (approx. every two weeks) without increasing total FX supply; limited sales to “trade-related” demand. - Staff view: pause in monetary tightening supported; immediate priority to address FX shortages and restore confidence. - Exchange rate options: - Move to greater exchange rate flexibility as part of broader fiscal/structural package. - If depreciation insufficient, pursue substantial depreciation then allow currency to fluctuate within a fairly wide band. - Exchange regime issues: current practices create an exchange restriction and multiple currency practices; staff does not recommend Executive Board approval for retention of these measures absent clear elimination plan. ### Structural reforms and diversification - Structural priorities: improve business climate, diversify away from energy, remove barriers (regulations, land titles, trade facilitation), reform “make-work” programs, improve public service efficiency. - Financial and fiscal structural reforms: unify revenue authority, form tax policy unit (with Fund TA), improve debt monitoring. - AML/CFT: address CFATF-identified shortcomings; publish national risk assessment. - Data/statistics: establish independent NSI; reduce data backlogs; produce quarterly GDP and update PPI. ### External stability, reserves, and debt sustainability (Annex findings) - External position 2015: substantially weaker than level consistent with fundamentals; much deterioration due to terms of trade shock. - Energy: accounts for ~45 percent of GDP, 55 percent of government revenues, 82 percent of merchandise exports. - EBA-lite cyclically-adjusted current account gap 2015: -5.6 to -7.6 percent of GDP. - REER assessments: CA regression overvaluation ~21.3 percent; Index REER gap ~50 percent; CPI-based suggests overvaluation of 30 percent by end-2015. - Reserve adequacy: net official foreign reserves US$9.79 billion (13.6 months import cover); exceed standard benchmarks. - Reserve projection (no-policy change): decline to 3.3 months of imports by 2021. - Debt outlook (Annex II): - HSF assets in excess of 20 percent of GDP and “frozen” government deposits ~20 percent of GDP are buffers but will be exhausted by projected deficits >10 percent of GDP. - One-off financing ~13 percent of GDP in FY2016-17 included in projections. - Central government debt: 27.4 percent of GDP end-FY2015; set to rise to 78 percent of GDP by 2021 under baseline. - External debt: 12.2 percent of GDP at end-2015; projected to 22.8 percent at end-2020 under baseline. - Stress tests and sensitivity: - A 30 percent real depreciation in 2017 would almost double external debt-to-GDP to about 24½ percent in 2017, peaking at 34½ percent in 2019 before subsiding. - A ½ standard deviation current account shock could push external debt to 56 percent by 2021. - Macro-fiscal stress tests show large increases in gross nominal public debt and gross financing needs under adverse scenarios. ### Diversification diagnostics and policy implications - Historical export diversification: TTO exported 165 new products between 1983 and 1999 (product lines rose from 276 to 419). - Since 2000, diversification stalled; LNG expansion raised energy export share from 36 percent in 1998 to 60 percent in 2010. - Labor force shift since 1988: manufacturing employment share 10 percent → 8 percent; agricultural share 13 percent → 4 percent; low-productivity services share rose from 35 percent to >40 percent. - Economic complexity trending down; priority to widen extensive margin (new products) and raise value-added in non-energy exports. - Policy priorities: improve business environment, human capital, attract FDI to raise technology/know-how, remove structural impediments (e.g., land title issues). ### Key risks, likelihood, impact, and policy responses (Risk Assessment Matrix highlights) - Persistently lower energy prices - Likelihood: MEDIUM. Impact: VERY HIGH. - Policy: diversify non-energy base, fiscal consolidation, limit/specified HSF drawdowns. - Surge in the U.S. dollar - Likelihood: HIGH. Impact: MEDIUM. - Policy: consider substantial depreciation to unwind overvaluation, widen exchange band, front-load fiscal adjustment. - Failure to address FX shortages - Likelihood: MEDIUM. Impact: HIGH. - Policy: liberalize FX market operations (greater sales, depreciation, or combination), restore credibility to reduce precautionary demand. ### Authorities’ views and planned actions - Authorities agree multi-year adjustment required; intend to implement property and gaming taxes, consider raising excises, improve revenue administration, revisit energy taxes, phase out fuel subsidies, reform CEPEP and URP, and enhance transparency/consultation (National Tripartite Advisory Council). - Data/statistics: legislation to establish NSI expected; CSO transformation underway. - Financial sector legislation: Insurance Bill, Credit Union Bill, and other reforms prioritized; AML/CFT remediation planned. - Structural initiatives: international financial services expansion, new port/maritime complex, Special Economic Zones, tourism strategies, PPPs for infrastructure. *IMF staff report for the 2016 Article IV consultation on Trinidad and Tobago (mission visited Port of Spain March 3–15, 2016).* ### 2016. The lower energy prices and weaker growth have contributed to a steep fall in fiscal revenues, ### 2016. The lower energy prices and weaker growth have contributed to a steep fall in fiscal revenues, ### Recent developments and macroeconomic outcomes - Real GDP declined an estimated 2.1 percent in 2015; energy output was estimated 4.7 percent lower (yoy) as of September 2015. - Core inflation remained anchored at 2.0 percent yoy in 2015; headline inflation fell to 1.5 percent (yoy). - Unemployment remained low: 3.6 percent in September 2015 (3.4 percent cited elsewhere for September 2015). - Current account turned from a long-standing surplus to a deficit of 5.4 percent of GDP in 2015. - Exports fell from US$11.8 billion in 2014 to US$9.1 billion in 2015, reflecting a roughly 40 percent decline in energy prices during 2015. - Gross official reserves declined from US$11.3 billion to US$9.8 billion during 2015 (table: 11,317 to 9,788 in US$ million). - Heritage and Stabilization Fund (HSF) assets increased by $212 million over the prior 12 months to US$5.8 billion in June 2015. - The real effective exchange rate gap was estimated at 23 percent (Current Account model) and 50 percent (REER model) under the EBA-lite framework; staff notes measurement uncertainty. - The nominal exchange rate had been managed around TT$6.35/US$1 since late 2009, with a depreciation of 3 ½ percent through early April 2016 from November 2015; CBTT injected US$500 million at end-October 2015 and averaged US$86 million per month (Nov–Mar) thereafter. - The government announced the bilateral rate would not be allowed to depreciate more than 7 percent from its September 2015 level, implying room for another 3.3 percent depreciation from that date. - Participation rate declined from 62.0 to 60.3 percent from Q3 2014 to Q3 2015. - Banks remain strong; some progress made on addressing statistical shortcomings. ### Fiscal developments and outlook - FY 2014/15 (October–September) deficit widened to 4.7 percent of GDP; projected to 10.9 percent of GDP in FY 2015/16 once full-year impact is felt. - Energy-based revenues fell short of the FY 2014/15 budget by 4.4 percentage points of budgeted GDP (budget assumed oil US$80/barrel and gas US$2.75/mmBtu). - Fuel subsidy reduction partly offset revenue shortfalls by ¾ of a percentage point of GDP. - One-off revenues and asset sales were used to limit borrowing: TT$4.8 billion (3 percent of GDP) from asset sales and early SOE loan repayment financed nearly two-thirds of requirements. - Stock of arrears (especially VAT refunds) estimated at TT$5 billion per the 2016 budget statement. - Central government debt increased by 2.0 percentage points of GDP; external debt fell in nominal terms to US$2.1 billion (8.4 percent of GDP). - Table excerpts (fiscal year basis, unless otherwise indicated): - Budgetary revenue: 2012 29.7; 2013 31.2; 2014 33.0; 2015 31.9; 2016 (Proj.) 28.0; 2017 (Proj.) 25.4 - Budgetary expenditure: 2012 30.8; 2013 34.0; 2014 35.1; 2015 36.5; 2016 (Proj.) 38.8; 2017 (Proj.) 38.8 - Overall balance: 2012 -1.1; 2013 -2.9; 2014 -2.1; 2015 -4.7; 2016 (Proj.) -10.9; 2017 (Proj.) -13.4 - Overall non-energy balance: 2012 -17.8; 2013 -18.8; 2014 -19.2; 2015 -17.6; 2016 (Proj.) -17.5; 2017 (Proj.) -20.5 - Overall nonfinancial public sector balance: 2012 -0.3; 2013 -2.1; 2014 -4.0; 2015 -6.9; 2016 (Proj.) -11.5; 2017 (Proj.) -15.4 - Public sector debt: 2012 41.4; 2013 41.0; 2014 41.9; 2015 47.2; 2016 (Proj.) 48.4; 2017 (Proj.) 58.5 ### Balance of payments and external sector - Current account balance: 2012 3.2; 2013 7.3; 2014 4.6; 2015 -5.4; 2016 (Proj.) -7.0; 2017 (Proj.) -5.7 (in percent of GDP). - Exports as percent of GDP: 2012 50.5; 2013 48.3; 2014 43.3; 2015 36.9; 2016 (Proj.) 29.2; 2017 (Proj.) 32.2. - Imports as percent of GDP: 2012 35.3; 2013 33.5; 2014 30.8; 2015 36.2; 2016 (Proj.) 30.7; 2017 (Proj.) 31.9. - Gross official reserves (in US$ million): 2012 9,515; 2013 10,411; 2014 11,317; 2015 9,788; 2016 (Proj.) 9,194; 2017 (Proj.) 8,347. - External public sector debt: 2012 6.2; 2013 5.9; 2014 7.4; 2015 8.9; 2016 (Proj.) 11.4; 2017 (Proj.) 15.4 (in percent of GDP). ### Monetary and financial sector - Monetary indicators (changes in percent of beginning-of-period broad money, various years): - Net foreign assets: 2012 -1.1; 2013 5.4; 2014 6.4; 2015 -6.4; 2016 (Proj.) -3.7; 2017 (Proj.) -5.4 - Net domestic assets: 2012 22.2; 2013 -2.5; 2014 0.7; 2015 7.3; 2016 (Proj.) 3.6; 2017 (Proj.) 13.2 - Private sector credit: 2012 1.6; 2013 2.1; 2014 3.5; 2015 3.4; 2016 (Proj.) 0.7; 2017 (Proj.) -0.3 - Broad money (M3): 2012 20.8; 2013 3.2; 2014 7.2; 2015 1.1; 2016 (Proj.) -0.1; 2017 (Proj.) 7.8 - The Central Bank began tightening monetary policy to mitigate capital outflows beginning in late 2014, then paused in January 2016. - Reports of foreign exchange shortages persist, including for current transactions; FX injections by CBTT and limits on nominal depreciation were used to manage pressures. - Banks are assessed as strong; legislative action is needed to strengthen the non-bank financial regulatory framework. ### Executive Board assessment and policy guidance - Directors highlighted that the sharp decline in energy prices poses major challenges and welcomed government efforts to date. - Fiscal policy: - A strong medium-term fiscal plan is needed to re-establish a sustainable fiscal path and ensure debt sustainability. - Directors encouraged a comprehensive fiscal framework to guide multi-year adjustment. - Priorities: broadening the revenue base with comprehensive VAT reform, improving tax administration, phasing out fuel subsidies, improving targeted social protection, and conducting a comprehensive expenditure review. - Monetary and exchange rate policy: - Directors supported the pause in monetary tightening given growth challenges. - Immediate priority: maintain external balance and address foreign exchange shortages on current transactions. - A well-communicated move to greater exchange rate flexibility, as part of a comprehensive demand-management package, would help strengthen the FX market and support macroeconomic adjustment; some Directors urged careful adjustment to mitigate volatility. - Structural reforms: - Strong comprehensive structural reforms needed to achieve sustained and inclusive medium-term growth. - Emphasized actions: energy sector taxation reforms, address inefficiencies in the public service, strengthen financial sector supervision and regulation (especially non-bank financial regulation), strengthen AML/CFT framework, reform labor markets, improve the business climate, establish a tax policy unit, and create the National Statistical Institute to remedy statistical shortcomings. ### Key issues, risks, and staff analysis - Baseline scenario: fiscal deficits exceed 10 percent of GDP through the medium-term, with an unsustainable increase in government debt. - Staff estimate: a substantial multi-year fiscal adjustment of around 8 ½ percent of GDP will be needed to keep the debt burden manageable. - There is scope to raise revenues (e.g., comprehensive VAT reform) and to rationalize spending via a broad expenditure review. - With current account deficits for the foreseeable future, further depreciation could help restore external balance; a larger depreciation as part of a broader adjustment package could quell speculation, stabilize the exchange rate at a lower level, raise fiscal revenues, and help offset the contractionary impact of fiscal adjustment. - Balance of payments pressures are reportedly exacerbated by capital outflows driven by precautionary demand and currency speculation. - Structural impediments and policy gaps, and the appreciation of the US and US dollar pegged currencies (60 percent of trade) vis-à-vis the TT dollar, are dominant contributors to the REER gap. ### Selected economic indicators (highlights from tables) - Real GDP growth: 2012 1.3; 2013 2.3; 2014 -1.0; 2015 -2.1; 2016 (Proj.) -2.7; 2017 (Proj.) 2.3 (annual percentage changes). - Energy GDP: 2012 -2.8; 2013 1.3; 2014 -2.4; 2015 -4.9; 2016 (Proj.) -7.1; 2017 (Proj.) 6.5. - Consumer prices (end of period): 2012 7.2; 2013 5.7; 2014 8.5; 2015 1.5; 2016 (Proj.) 4.6; 2017 (Proj.) 4.7. - Nominal GDP (in billions TT$): 2012 165.2; 2013 170.4; 2014 174.8; 2015 156.9; 2016 (Proj.) 155.3; 2017 (Proj.) 165.2. - Exchange rate (TT$/US$, end of period): 2012 6.4; 2013 6.5; 2014 6.4; 2015 6.4 (further depreciation noted in late 2015–early 2016). *IMF staff report for the 2016 Article IV consultation on Trinidad and Tobago (mission visited Port of Spain March 3–15, 2016).* ### 8. The sharp fall in energy prices since the new government’s initial introduction of the ### _cr16204 - 8. The sharp fall in energy prices since the new government’s initial introduction of the ### Fiscal impact and near-term measures - With a seemingly conservative US$45/barrel oil price assumption, the budget deficit was initially targeted at 7.5 percent of GDP on a GFS basis (1.7 percent of GDP using the authorities’ accounting convention). - Budget adjustments totaling over 3 percent of GDP were planned, including: - tight expenditure control, - lower fuel subsidies (in part through hikes in fuel prices), - revenue measures, including base broadening of the value-added tax (VAT) combined with a rate reduction from 15 to 12½ percent, expected to yield a net 2½ percentage points of GDP. - The budget relied on above-average SOE dividends and planned use of US$1 billion of HSF assets for deficit financing. - Authorities counted asset sales totaling some 6 percentage points of GDP as revenues, instead of “below-the-line” financing. - As energy prices fell further and VAT revenues fell short, the April Mid-Year Budget Review (MYBR) revised energy price assumptions to US$35 per barrel for oil and US$2.00 per mmBtu for natural gas and introduced additional measures: - mid-year cuts of 7 percent of budgeted expenditure, - hikes in tobacco and alcohol excises and on excises and duties on large-engine automobiles, - further fuel subsidy savings from additional fuel price increases, - with effect from FY 2016/17, introduction of a tax on internet purchases. - Even with MYBR measures, staff estimates the deficit could total almost 11 percent of GDP on a GFS basis. ### Monetary policy and banking sector soundness - The CBTT raised the repo rate 200 basis points over eight successive meetings, to 4.75 percent, before pausing in January 2016. - Effects on markets: - pushed lending rates higher, - deposit rates remain low due to still ample, albeit significantly declining, system liquidity, resulting in improved lending margins for banks. - Mortgage market: The Mortgage Market Reference Rate (MMRR) increased by 75 basis points to 3 percent over the year (to end-March 2016). As of January 2016, banks’ real estate mortgage loan rates were 7.5 percent, unchanged since November 2012. - Bank indicators (end-December, 2015): - non-performing loans (NPLs) below 3½ percent, - ROA at 2.5 percent, - ROE at 18.2 percent, - specific provisions-to-impaired assets ratio at 42.1 percent (increasing, but well below the 79.2 percent five-year average prior to the global financial crisis (2003–2007)). - Commercial banks’ excess reserves dropped from an average of TT$7.2 billion in December 2014 to TT$3.4 billion in December 2015. - CBTT stress tests include single factor tests on interest rate risk (+/- 100/700 basis points), foreign exchange risk (40 percent depreciation in TT$/US$), and credit risk (20 percent GDP decline, 30 percent property price decline), and scenario tests (energy price shock of 50 percent decline with and without policy responses, and a regional natural disaster). - Financial reforms progress: - Insurance legislation passed in the Senate but lapsed in the lower house (expected reintroduction in 2016). - Occupational Pensions Plan Act, Credit Union Bill and amendments to the Co-operative Credit Societies Bill await drafting or reintroduction. - Implementation of banking regulations to conform with Basel II is proceeding, along with the National Financial Crisis Management Plan and the SIFI oversight project. ### FX market functioning and interventions - FX market conditions: - Long queues reported, with wait times for most requests of over four weeks (and sometimes considerably longer). - External payment arrears to creditors have emerged; some foreign suppliers reportedly cut off credit lines to local importers. - CBTT intervention mechanism: - manages the TT$ exchange rate mainly through regulation of maximum market sell and buy rates and through FX provision, - accounts for approximately one-third of the total market FX supply via discretionary, non-competitive allocations to licensed authorized dealers. - CBTT actions and limitations: - increased frequency of interventions to approximately every two weeks without increasing total FX supply, - limits sales of FX intervention funds to meeting only “trade-related” demand and has encouraged authorized dealers to similarly prioritize trade-related sales, - CBTT’s FX supply has been insufficient to satisfy bona fide demand for current international transactions at the set exchange rate. ### Windup of CL Financial Group and business climate improvements - CL Financial Group (CLF) windup: - Final resolution plan for CLICO and British American Insurance Company (Trinidad) Limited announced March 2015 (phased payments to CLICO’s policyholders and creditors from monetization of CLICO’s assets). - Government announced in April 2016 that CLICO’s shareholdings in MIHL, Angostura, Home Construction, and CL World Brands and its traditional portfolio of insurance policies and other assets would be sold or disposed of in 2016 to repay creditors and policyholders in full. - CLICO’s holdings in Republic Bank to be disposed of in 2017. A plan to monetize assets held directly by CLF is to be announced in due course. - Business climate reforms: - New bankruptcy and insolvency law adopted, significantly shortened time to start a business, streamlined trade clearance procedures, simplified property registration. - Public procurement law adopted (new government plans further reform). - Ongoing efforts to improve insolvency framework, trade facilitation, access to credit, and streamline company registration procedures. - Government efforts to transition individuals from “make-work” programs to the private sector have largely failed; 2016 MYBR announced plans to reform these programs to reduce financial support and make them more cost-effective. ### Data and statistical improvements - Data shortcomings constrained surveillance; government has begun efforts to improve data timeliness and quality. - New government launched a process to transform the Central Statistical Office (CSO) into an independent National Statistical Institute, to be launched at the beginning of 2017 (Informational Annex). ### Medium-term outlook and risks - Growth and sectoral outlook: - The economy is expected to shrink for a third year in 2016. - Energy output will decline as natural gas and oil fields continue to be depleted; petrochemical sector constrained by plant closures and gas shortages. - New gas fields should boost energy production in 2017-2018. - Non-energy growth is projected to decline in 2016 due to spillovers from job losses in the energy sector and fiscal consolidation; non-energy growth rebounds fully in 2018 in staff projections. - Inflation should remain subdued on weak activity. - External position and reserves: - In staff’s baseline projections, with unchanged fiscal policies and current energy price forecasts, the current account remains in deficit through the medium-term. - Exports recover gradually but remain well below 2014 levels even by 2021. - Drawdown of the HSF and increased official financing are insufficient to address the country’s financing requirement; overall external position steadily deteriorates to 3.3 months of imports by 2021. - Fiscal trajectory and debt sustainability: - Under the baseline, the fiscal deficit rises to a range of 12½ to 13½ percent of GDP over the medium term. - Central government debt to GDP ratio rises to nearly 80 percent of GDP by 2021. - Broader nonfinancial public sector (NFPS) debt ratio rises to almost 100 percent of GDP by 2021. - The Debt Sustainability Analysis’ (DSA) “Heat Map” flashes red regarding the level of debt and gross financing needs, both in the baseline and under various shocks. - Authorities’ ambitious target for revenue collection based on improvements to revenue administration may prove difficult to achieve, though there appears to be ample scope for gains. - Petrotrin downgrade: Moody’s downgraded Petrotrin from Ba1 to Ba3 in April 2016; Moody’s estimated that support to state-owned enterprises could increase central government debt by 2 to 4.5 percent of GDP in 2016 (4.5 percent in the unlikely event the government would need to guarantee all of Petrotrin’s financing needs). - Risks: - Risks to growth are tilted to the downside. - Monetary tightening impact on the non-energy economy likely subdued given still ample bank liquidity, but may be lagged. - Absent sufficient exchange rate flexibility, renewed US dollar appreciation against trading partners’ currencies would inhibit export diversification. - Failing to address FX shortages would restrain activity as businesses are unable to make critical imports or pay suppliers timely. - Expected erosion in the reserves position could be exacerbated if currency speculation or precautionary demand for U.S. dollars pick up. - Future energy investment depends on expected energy prices and whether the investment regime is appropriate to the new environment. - Maintaining medium-term fiscal sustainability is critical to preserve consumer and business confidence; “De-risking” concerns are emerging for institutions with perceived high risk profiles, including private members clubs and money remitters. ### Projections and key statistics (excerpt from Medium-Term Macroeconomic Framework, Baseline Scenario) - Real GDP growth (in percent), select years: - 2013: 2.3 - 2014: -1.0 - 2015: -2.1 - 2016: -2.7 - 2017: 2.3 - 2018: 3.6 - 2019: 3.2 - 2020: 1.2 - 2021: 1.2 - Energy growth (in percent), select years: - 2013: 1.3 - 2014: -2.4 - 2015: -4.9 - 2016: -7.1 - 2017: 6.5 - 2018: 6.1 - 2019: 5.7 - 2020: 0.3 - 2021: 0.3 - Non-energy growth (in percent), select years: - 2013: 2.8 - 2014: -0.2 - 2015: -0.6 - 2016: -0.4 - 2017: 0.1 - 2018: 2.3 - 2019: 1.8 - 2020: 1.8 - 2021: 1.8 - Inflation (end of period), select years: - 2013: 5.2 - 2014: 7.2 - 2015: 5.7 - 2016: 8.5 - 2017: 1.5 - 2018: 4.6 - 2019: 4.7 - 2020: 5.0 - 2021: 4.4 - Revenue (central government, percent of GDP), select years: - 2013: 29.8 - 2014: 29.7 - 2015: 31.2 - 2016: 33.0 - 2017: 31.9 - 2018: 28.0 - 2019: 25.4 - 2020: 25.5 - 2021: 25.4 - Energy revenue (percent of GDP), select years: - 2013: 17.6 - 2014: 16.7 - 2015: 15.9 - 2016: 17.0 - 2017: 13.0 - 2018: 6.6 - 2019: 7.1 - 2020: 7.2 - 2021: 7.3 - Expenditure (percent of GDP), select years: - 2013: 30.0 - 2014: 30.8 - 2015: 34.1 - 2016: 35.1 - 2017: 36.5 - 2018: 38.8 - 2019: 38.8 - 2020: 37.9 - 2021: 39.1 - Overall fiscal balance (percent of GDP), select years: - 2013: -0.2 - 2014: -1.1 - 2015: -2.9 - 2016: -4.7 - 2017: -10.9 - 2018: -13.4 - 2019: -12.4 - 2020: -12.8 - 2021: -13.6 - Overall fiscal non-energy balance (percent of GDP), select years: - 2013: -17.8 - 2014: -17.8 - 2015: -18.8 - 2016: -19.2 - 2017: -17.6 - 2018: -17.5 - 2019: -20.5 - 2020: -19.7 - 2021: -20.1 - Primary balance (percent of GDP), select years: - 2013: 1.6 - 2014: 0.5 - 2015: -1.2 - 2016: -0.8 - 2017: -2.8 - 2018: -9.0 - 2019: -11.0 - 2020: -9.7 - 2021: -9.7 - External current account balance (percent of GDP), select years: - 2013: 11.4 - 2014: 3.2 - 2015: 7.3 - 2016: 4.6 - 2017: -5.4 - 2018: -7.0 - 2019: -5.7 - 2020: -4.4 - 2021: -3.4 - Central government debt (percent of GDP), select years: - 2013: 14.9 - 2014: 24.7 - 2015: 24.4 - 2016: 25.4 - 2017: 27.4 - 2018: 28.6 - 2019: 38.7 - 2020: 48.5 - 2021: 58.2 - 2021 (alternate entry): 68.1 - 2021 (alternate entry): 78.1 - Public sector debt (percent of GDP), select years: - 2013: 30.9 - 2014: 41.4 - 2015: 41.0 - 2016: 41.9 - 2017: 47.2 - 2018: 48.4 - 2019: 58.5 - 2020: 68.2 - 2021: 77.9 - 2021 (alternate entry): 87.9 - 2021 (alternate entry): 97.9 - Net of HSF deposits (percent of GDP), select years: - 2013: 14.2 - 2014: 23.0 - 2015: 21.4 - 2016: 21.9 - 2017: 24.2 - 2018: 27.6 - 2019: 39.8 - 2020: 50.1 - 2021: 60.1 - 2021 (alternate entry): 70.3 - 2021 (alternate entry): 80.5 - Gross official reserves (US$ millions), select years: - 2011: 10,233 - 2012: 9,515 - 2013: 10,411 - 2014: 11,317 - 2015: 9,788 - 2016: 9,194 - 2017: 8,347 - 2018: 7,007 - 2019: 5,756 - 2020: 4,464 - 2021: 3,019 - Reserves in months of imports, select years: - 2011: 12.6 - 2012: 11.9 - 2013: 13.7 - 2014: 12.8 - 2015: 13.4 - 2016: 11.8 - 2017: 10.3 - 2018: 8.2 - 2019: 6.5 - 2020: 4.9 - 2021: 3.3 *Source: IMF staff report content provided in the content unit.* ### 22. Given the need for sizable and sustained fiscal adjustment, staff encouraged the ### 22. Given the need for sizable and sustained fiscal adjustment, staff encouraged the ### Fiscal adjustment strategy and targets - Staff encouraged the authorities to formulate and announce early on a comprehensive multi-year adjustment package to signal commitment to fiscal sustainability. - A measured pace of implementation was recommended to allow time for rational policy formulation while spreading out negative multiplier effects from contractionary policies. - Staff estimated that, in addition to measures included in the FY2016 budget plus the MYBR (which together total some 3 ½ percentage points of GDP), adjustments totaling 8 ½ percent of GDP would keep the central government (NFPS) debt/GDP ratio at 48 (68) percent by 2021. ### Revenue measures (announced and recommended) - Staff welcomed initial non-energy revenue measures in the new budget: - Increases in business levies. - Narrowing of the VAT’s zero-rated bracket, while reducing the rate from 15 to 12½ percent. - Government intention to re-introduce property taxation. - Intention to fast-track a Gaming and Betting Control Act, with potential to raise some ½ percent of GDP in revenues. - Intention to reap sizable revenues from improved tax administration, including improved information sharing between the Board of Inland Revenue (BIR) and the Customs and Excise Division (CED). - Staff advocated: - A more comprehensive VAT review to assess scope for further base-broadening and increased collection efficiency. - Increasing excises on cigarettes, alcohol and soft drinks. - Further enhancement of property taxation as a relatively non-distortionary revenue source. - Phasing of measures — Active Scenario (percent of GDP) by fiscal years 2016/17–2020/21: - Total Measures: 3.00, 5.00, 7.00, 7.75, 8.50 - Revenues: 3.00, 4.25, 5.75, 5.75, 5.75 - Excises: 0.25, 0.25, 0.25, 0.25, 0.25 - Property taxes: 1.00, 1.00, 2.00, 2.00, 2.00 - New top PIT rate: 1.00, 1.00, 1.00, 1.00, 1.00 - Gaming tax: 0.13, 0.25, 0.25, 0.25, 0.25 - Other unidentified 1/: 0.63, 1.75, 2.25, 2.25, 2.25 - Expenditures: 0.00, 0.75, 1.25, 2.00, 2.75 - Other current expenditure reductions 2/: 0.00, 1.50, 2.25, 3.00, 3.75 - Expand infrastructure investment: 0.00, -0.75, -1.00, -1.00, -1.00 - Source: IMF staff calculations. - Note 1/: Includes improved public revenue administration and further VAT reforms, as needed. - Note 2/: To be identified in public expenditure review. This can also include lower transfers to be achieved by increased public utility tariffs. ### Expenditure reforms and savings - Staff welcomed announced spending cuts of TT$ 4 billion (2.5 percent of GDP) but urged a comprehensive review of expenditure programs to achieve government economic and social policy goals within tightened financial constraints. - Staff recommended focusing on: - Reviewing “make-work” programs (the CEPEP and URP) given concerns they undermine incentives in the private labor market, while giving due regard to social concerns. - Making the government’s free tertiary tuition program (GATE) more cost-efficient, including by means-testing and tightening eligibility requirements. - Phasing out fuel subsidies due to inefficiencies, deleterious side effects (pollution and congestion) and inequitable benefits (see Box 1). - Reducing transfers to state-owned enterprises and statutory authorities if commercial enterprises were run on a more profitable basis, including through pricing policies that allow for greater cost-recovery. - Ensuring revenue increases and cuts to current expenditure are large enough to allow for an increase in growth-enhancing public investment. - Staff noted the need to clear expenditure arrears, which will likely require recourse to domestic financing. ### Medium-term macroeconomic projections (Active Scenario) — select indicators and exact values - Real GDP growth (in percent), 2011–2021: -0.3, 1.3, 2.3, -1.0, -2.1, -2.7, 1.7, 2.8, 2.8, 1.5, 2.0 - Energy growth, 2011–2021: -3.9, -2.8, 1.3, -2.4, -4.9, -7.1, 6.5, 6.1, 5.7, 0.3, 0.3 - Non-energy growth 1/, 2011–2021: 2.1, 3.9, 2.8, -0.2, -0.6, -0.4, -0.7, 1.0, 1.1, 2.2, 3.0 - Inflation (end of period), 2011–2021: 5.2, 7.2, 5.7, 8.5, 1.5, 4.6, 3.9, 3.7, 3.7, 5.0, 5.8 - Revenue 2/ (percent of GDP), 2011–2021: 29.8, 29.7, 31.2, 33.0, 31.9, 28.0, 28.4, 29.7, 31.3, 31.3, 31.2 - Energy revenue, 2011–2021: 17.6, 16.7, 15.9, 17.0, 13.0, 6.6, 7.2, 7.4, 7.5, 7.4, 7.1 - Non-energy revenue, 2011–2021: 12.2, 13.0, 15.3, 15.9, 18.9, 21.3, 21.3, 22.4, 23.7, 23.9, 24.1 - Expenditure (percent of GDP), 2011–2021: 30.0, 30.8, 34.1, 35.1, 36.5, 38.8, 38.9, 37.1, 36.8, 36.1, 35.4 - Current, 2011–2021: 25.9, 26.6, 29.1, 30.7, 32.1, 34.6, 34.6, 32.1, 31.5, 30.9, 30.1 - Capital expenditures and net lending, 2011–2021: 4.1, 4.1, 5.0, 4.5, 4.5, 4.3, 4.3, 5.0, 5.3, 5.3, 5.3 - Overall fiscal balance (percent of GDP), 2011–2021: -0.2, -1.1, -2.9, -2.1, -4.7, -10.9, -10.4, -7.4, -5.5, -4.9, -4.1 - Primary balance, 2011–2021: 1.6, 0.5, -1.2, -0.8, -2.8, -9.0, -8.0, -4.7, -2.7, -2.0, -1.2 - Overall fiscal non-energy balance, 2011–2021: -17.8, -17.8, -18.8, -19.2, -17.6, -17.5, -17.6, -14.8, -13.1, -12.3, -11.3 - External current account balance (percent of GDP), 2011–2021: 11.4, 3.2, 7.3, 4.6, -5.4, -6.8, -5.0, -3.3, -1.4, -1.0, -0.8 - Central government debt 3/ (percent of GDP), 2011–2021: 14.9, 24.7, 24.4, 25.4, 27.4, 28.6, 35.9, 41.4, 44.7, 47.0, 48.1 - Public sector debt 3/ (percent of GDP), 2011–2021: 30.9, 41.4, 41.0, 41.9, 47.2, 48.4, 55.7, 61.1, 64.4, 66.8, 67.8 - Net of HSF deposits 4/ (percent of GDP), 2011–2021: 14.2, 23.0, 21.4, 21.9, 24.2, 27.6, 36.9, 42.5, 46.0, 48.6, 50.1 - Gross official reserves (US$ millions), 2011–2021: 10,233, 9,515, 10,411, 11,317, 9,788, 9,046, 8,100, 6,853, 6,000, 5,332, 4,806 - In months of imports, 2011–2021: 12.6, 11.9, 13.7, 12.8, 13.4, 11.9, 10.3, 8.5, 7.4, 6.4, 5.8 - Sources: Ministry of Finance; Central Statistics Office; and Fund staff estimates and projections. - Note 1/: Includes VAT and Financial Intermediation Services Indirectly Measured (FISIM). - Note 2/: Fiscal data is central government unless otherwise specified and refers to the fiscal year ending in September. - Note 3/: Excluding debt issued for sterilization. - Note 4/: Starting in 2013, assumes no additional contributions to the HSF. ### Impacts of fuel subsidies (Box 1) — fiscal, distributional, and environmental - Energy subsidies were established in 1974 and rose with global crude oil prices. - From 2006-15, cumulative fuel subsidies amounted to TT$31 billion, or an average of around 2 percent of GDP per annum. - As oil prices trended up between 2009 and 2014, fuel subsidies rose to 2.3 percent of GDP; in 2015 subsidies dropped to 1.4 percent of GDP. - The Petroleum Production Levy (PPL) covers less than 20 percent of total subsidy costs during the past five years, after legislative constraints and exemptions reduced its role. - If resources spent on fuel subsidies since 2008 had been contributed to the HSF instead, the Fund would now be worth an additional US$3.6 billion, 62 percent higher than where it currently stands. - Distributional evidence: - Low income earners (accounting for 50 percent of the population in 2014) gained only 27 percent of total fuel subsidies compared to 36 percent for the richest 15 percent of households. - The average monthly subsidy for the richest households was 95 and 68 percent higher than for low and middle income households, respectively. - Post-tax subsidies composition (2015, US$ billions and shares): - Global warming: 2.12 - Pre-tax subsidies: 0.8 - Vehicle externalities (congestion, accidents, road damage): 0.6 total across components (congestion 0.16, accidents 0.4, road damage 0.03 noted elsewhere) - Local air pollution: 0.25 - Foregone consumption tax revenue: 0.23 (0.9 percent of GDP) - Staff calculation: global warming accounted for more than 50 percent of post-tax subsidies, or around US$2.1 billion, in 2015. - Traffic externalities: - Total cost of traffic externality amounted to US$598 million in 2015. - Annual per capita traffic externality cost of US$441 in 2015. ### Fiscal rule recommendation (Box 2) - Staff presented the case for adopting a countercyclical fiscal rule but cautioned there is no fiscal space for such a rule now given projected deficits under the baseline; a multi-year adjustment is required first. - Once adjusted, a fiscal rule could help ensure fiscal policy supports debt sustainability while playing a stabilizing, countercyclical role. - Given high revenue volatility and limited forecasting capacity, a suggested rule for Trinidad and Tobago: - Target the non-energy primary balance, supplemented by a rule covering nominal primary expenditure. - Rationale: simplicity, transparency, appropriateness to institutional capacity; would help ensure convergence of the debt ratio and insulate expenditures from volatile energy revenues while building buffers in good times. - Four types of fiscal rules discussed: budget balance rules, debt rules, expenditure rules, and revenue rules; trade-offs between effectiveness for debt sustainability and economic stabilization versus implementation complexity were highlighted. ### Authorities’ views and planned actions - Authorities concurred that the required adjustment would require a substantial multi-year effort. - Government intentions and actions: - Implement property and gaming taxes. - Give serious consideration to raising excise taxes to bring rates more in line with regional levels; increased excises on alcohol and tobacco were announced in the MYBR. - Emphasize improved revenue administration via greater information sharing among revenue agencies, tightening transfer pricing rules, and increasing resources for tax enforcement. - Revisit energy taxes in light of lower energy prices to balance investment incentives and safeguard public revenues. - Reins in expenditures, especially transfers and subsidies, and seek a comprehensive review of social expenditures from the World Bank to reduce costs and improve program efficiency while protecting the most vulnerable. - Remove fuel subsidies in a phased manner (announced in the MYBR) and use savings to improve the social safety net and reduce transportation costs for low-income groups. - Propose a new pricing mechanism to pass through world oil price changes to local fuel prices for public discussion. - Review specific programs (CEPEP and URP) for cost efficiencies. - Emphasize enhancing transparency and consulting the private sector to build buy-in for fiscal consolidation, e.g., inaugurating a National Tripartite Advisory Council. - Commence a national discussion on energy subsidies and start discussions with the energy industry on reforming energy taxes. *International Monetary Fund staff report excerpt.* ### 29. Staff supported the pause in monetary policy tightening as appropriate given the ### Staff supported the pause in monetary policy tightening as appropriate given the ### Monetary policy stance and recommendations - Staff supported the pause in monetary policy tightening to assess lagged impacts of prior tightening and to gain clarity on the pace of the U.S. hiking cycle. - The CBTT is not currently in a position to ease policy until confidence is restored in the FX market; if FX pressures increase or inflation expectations rise, the CBTT may need to resume policy tightening. - The CBTT must carefully monitor and manage excess liquidity, which has declined significantly due to sterilization operations. - Conditional pathways to more accommodative policy: - Contingent on a credible fiscal consolidation, a restoration of confidence in the FX market, and sufficient exchange rate flexibility, more accommodative monetary policy could be implemented to support economic activity, provided inflation and inflation-expectations remain “well-behaved”. - As financial system liquidity is unwound, the CBTT could consider reducing bank reserve requirements, which are comparatively high, at 17 percent. - Staff recommended that the authorities clarify the CBTT’s priorities among its multiple mandated objectives. ### FX market pressures: causes and dynamics - Staff identified multiple drivers of FX pressures: - The fall in energy prices sharply diminished FX supply. - Expansionary fiscal policies and growth in consumer credit contributed to FX demand. - Expectations amplified FX demand through: - Precautionary hoarding due to ongoing shortages when FX becomes available. - Lack of flexibility in the nominal exchange rate (vis-à-vis the US dollar) increasing expectations of further depreciation and prompting speculative outflows. - Policy communication noted in the MYBR: - The Finance Minister announced the exchange rate would not deviate “at this time” by more than 7 percent from the rate that prevailed in September 2015, implying a floor set at a further 3.3 percent depreciation from the April 8, 2016 rate (the date of the MYBR). ### Exchange rate policy options and Fund considerations - Recent depreciation is welcome if it helps switch expenditure toward domestic goods, but its sufficiency depends on the degree of estimated currency overvaluation. - If depreciation to the new floor is insufficient, one option is: - Pursue a substantial depreciation to balance FX demand and supply, then allow the currency to fluctuate within a fairly wide band to provide market signals, help expectations coalesce, and introduce two-way market risk to minimize one-way speculative bets. - Authorities have a range of options given high external buffers, including FX reserves and a still substantial HSF. - Preconditions and complementary policies for any exchange rate change: - Introduce as part of a broader fiscal and structural reform package. - Implement a firmly-implemented incomes policy and monetary policy vigilant to second-round inflation effects to keep benefits from a weaker currency from being eroded. - Provide clear communications to restore market confidence and clarify future FX regime “rules of the game”. - Fiscal benefits of depreciation: converting foreign-exchange revenues to larger local-currency revenues could allow for a smaller active fiscal adjustment. ### Exchange regime, restrictions, and Fund approval issues - Staff noted persistent FX queues for current international transactions despite official reserves equivalent to over 13 months of imports. - The current exchange rate regime gives rise to: - An exchange restriction: fixing the exchange rate and prohibiting banks from trading at any rate depreciated from this fixed rate while not providing enough FX to meet demand for current transactions, causing undue delays and external payment arrears. - Two multiple currency practices: absence of a mechanism to prevent more than a two percent deviation among several multiple effective rates for spot exchange transactions regulated by authorities. - Staff does not recommend Executive Board approval of retention of these measures (paragraph 35) due to lack of clear plan and timetable to eliminate them and because they are not maintained for balance of payments reasons. - Balance-sheet considerations: CBTT stress tests indicate the banking system’s capital positions would easily withstand an illustrative 40 percent depreciation in the TT dollar (data on balance-sheet impacts are limited). ### Authorities’ views (monetary and exchange rate policies) - Authorities’ priorities: - CBTT: monetary policy primarily aimed at controlling inflation; concerns about interest rate differentials vis à vis the United States influenced hikes. - Domestic rates raised to a sufficiently high level to allow holding rates to avoid disincentives for investment. - Exchange rate framework: - CBTT aims to minimize volatility and presumes the terms of trade shock is permanent. - Official intervention via biweekly auctions; rate and volume decisions informed by anticipated FX inflows and outflows. - Central bank will not try to equilibrate the market at each point in time to avoid large reserve losses or high volatility. ### Structural policies and reform priorities - Business climate and diversification: - Staff welcomed efforts to improve the business climate and urged sustaining them to achieve long overdue economic diversification; diversification stalled since 2000 after earlier progress during 1983–1999. - Cumbersome regulations, administrative procedures, and land scarcity are key barriers to starting businesses; proving land title is a particular obstacle in Tobago. - Reform of government “make-work” programs would raise labor productivity and social welfare; staff welcomed the reduction in the number of government ministries. - Fiscal structural reforms: - A unified revenue authority could improve information flow between the BIR and CED. - Deliver advance tax rulings promptly to reduce investment-holding delays; formation of a tax policy unit (with Fund technical assistance) would facilitate this. - Improvements in debt monitoring recommended to enhance debt management. - Financial-sector legislation and AML/CFT: - Urged movement on long-pending Insurance Bill, legislation to improve supervision of credit unions, occupational pension reform, and addressing CFATF-identified AML/CFT shortcomings (including robust AML/CFT supervision and publication of the national risk assessment). - Resolution of CL Financial issues would provide market clarity and remove residual uncertainty about government finances. - Data and statistics: - Staff strongly endorses establishing an independent and autonomous National Statistical Institute (NSI); task force has made significant headway and legislation is intended this year. - CSO progress: reduced data backlogs, particularly in trade statistics; plans to produce quarterly GDP statistics and update the Producer Price Index (PPI), timeline dependent on staff resources per CARTAC suggestions. ### Staff appraisal: outlook and policy priorities - Fiscal and external context: - Trinidad and Tobago has under-saved and under-invested given past energy windfalls, leaving no scope to pursue countercyclical policy; current low debt levels and substantial cushions are insufficient to withstand the terms of trade shock. - If imbalances are ignored (barring an unexpected sharp rebound of energy prices), the country could reach uncomfortable debt and external cushion levels in a few short years, necessitating rapid adjustment with severe dislocations and deflationary consequences. - Fiscal policy assessment: - The new government has introduced revenue measures in the FY 2015/16 budget and further adjustments mid-year; staff emphasizes the need for a strong medium-term framework to guide a multi-year adjustment effort. - Government should work towards broad medium-term fiscal goals with quantified estimates where feasible, and pursue a comprehensive expenditure review, review of government “make-work” programs, and review of the GATE program. - Development of medium-term macroeconomic programming capacity and a tax policy unit (with Fund TA) is welcomed; a fiscal rule could help avoid pro-cyclicality once fiscal path is back on track. - Monetary and exchange rate policy role: - These policies can support economic activity once confidence in the government’s medium-term strategy is established; for now they must be primarily oriented toward external balance and restoring confidence that FX will be available on demand for legitimate current transactions. - Restoring underlying supply-demand balance for FX and confidence-building measures are both required. - A depreciation that switches expenditures toward domestic activity and reduces one-way expectations could stabilize the market, but must be introduced as part of a comprehensive package of demand management and growth-enhancing reforms with clear communications. - Structural reform priorities and sequencing: - Early successes on insurance supervision and the NSI, and progress on a tax policy unit, could form an initial package of structural reforms. - Early design of reforms to government “make-work” programs, GATE, and diagnosis of public sector inefficiencies would demonstrate reformist intent. *International Monetary Fund staff report excerpt.* ### 48. It is proposed that the next Article IV consultation take place on the standard 12- ### It is proposed that the next Article IV consultation take place on the standard 12- ### Key economic developments and growth - A weakening non-energy sector and declining energy production have held back growth. - Unemployment remains low due to make-work programs, while labor force growth has started to slide. - Core inflation stays well contained; the volatile food price index may remain subject to methodological errors. - Real GDP (selected years): 2010: 3.3; 2011: -0.3; 2012: 1.3; 2013: 2.3; 2014: -1.0; 2015: -2.1; 2016 (proj.): -2.7; 2017 (proj.): 2.3. - Energy sector growth (selected years): 2010: 2.4; 2011: -3.9; 2012: -2.8; 2013: 1.3; 2014: -2.4; 2015: -4.9; 2016 (proj.): -7.1; 2017 (proj.): 6.5. - Non-energy sector growth (selected years): 2010: 4.0; 2011: 2.1; 2012: 3.9; 2013: 2.8; 2014: -0.2; 2015: -0.6; 2016 (proj.): -0.4; 2017 (proj.): 0.1. ### External sector: exports, current account, reserves, and capital flows - The sharp decline in energy prices has negatively impacted the current account and net international reserves. - With the fall in energy prices, the current account surplus is estimated to have deteriorated to a deficit in 2015. - Exports are estimated to have dropped sharply on the fall in energy prices, as well as sluggish energy sector production. - Imports are estimated to have increased as non-energy imports offset the decline in energy imports. - Other private capital outflows continue. - Selected external figures: - Current account balance (in percent of GDP): 2010: 11.4; 2011: 3.2; 2012: 7.3; 2013: 4.6; 2014: -5.4; 2015: -7.0; 2016 (proj.): -5.7. - Gross official reserves (in US$ million, selected): 2010: 10,233; 2011: 9,515; 2012: 10,411; 2013: 11,317; 2014: 9,788; 2015: 9,194; 2016 (proj.): 8,347. - NIR in months of imports (selected): 2010: 12.6; 2011: 11.9; 2012: 13.7; 2013: 12.8; 2014: 13.4; 2015: 11.8; 2016 (proj.): 10.3. - External public sector debt (in percent of GDP, selected): 2010: 6.3; 2011: 6.0; 2012: 6.2; 2013: 5.9; 2014: 7.4; 2015: 8.9; 2016 (proj.): 11.4; 2017 (proj.): 15.4. - Exports of goods (percent of GDP, selected): 2010: 58.8; 2011: 50.5; 2012: 48.3; 2013: 43.3; 2014: 36.9; 2015: 29.2; 2016 (proj.): 32.2. ### Monetary and financial sector developments - Reserve money declined in 2015. - Excess reserves have fallen sharply, though banks still remain very liquid. - Overall, private sector credit growth remains positive but turned down in 2015. - Banks are well capitalized, and profitability rebounded in 2015. - NPLs remain above pre-global crisis peaks but are manageable. - In response to central bank tightening that started in Q3 2014, lending rates have increased. - Selected monetary/financial indicators: - NPLs to total loans (percent): 2007–2015 ranged from 3.4 to 6.3; specific 2015 value: 3.4. - Capital adequacy ratio (percent): 2007–2015 ranged around 22.1 to 24.6; recent values: 23.1; 22.5; 22.1. - Return on equity (percent): recent values: 14.7; 13.2; 18.2. - Credit to private sector (12-month increase): 2011: 5.2; 2012: 2.7; 2013: 4.1; 2014: 6.7; 2015: 6.6; 2016 (proj.): 1.4. - Liquid assets-to-total assets (percent): 2009–2014 ranged approximately 23.8–27.5; latest reported: 23.8. ### Fiscal sector: revenue, expenditure, balances, and debt - The public sector's fiscal position has worsened in recent years. - Energy revenue weakened while expenditures are increasingly driven by rising subsidies and transfers. - As a result, public debt is trending up. - Selected fiscal figures (central government and NFPS, percent of GDP unless noted): - Budgetary revenue (percent of GDP): 2010: 32.2; 2011: 29.8; 2012: 29.7; 2013: 31.2; 2014: 33.0; 2015: 31.9; 2016 (proj.): 27.1; 2017 (proj.): 28.0; 2018 (proj.): 25.4. - Energy revenue (percent of GDP): 2010: 17.6; 2011: 16.7; 2012: 15.9; 2013: 17.0; 2014: 15.6; 2015: 13.0; 2016 (proj.): 9.1; 2017 (proj.): 6.4. - Non-energy balance (percent of GDP): 2010: -17.8; 2011: -17.8; 2012: -18.8; 2013: -19.2; 2014: -18.7; 2015: -17.6; 2016 (proj.): -16.5; 2017 (proj.): -15.0; 2018 (proj.): -17.5; 2019 (proj.): -20.5. - Overall NFPS balance (percent of GDP): 2010: -3.6; 2011: -0.1; 2012: -0.3; 2013: -2.1; 2014: -4.0; 2015: -6.9; 2016 (proj.): -11.5; 2017 (proj.): -15.4. - Central government debt (percent of GDP): 2010: 17.0; 2011: 14.9; 2012: 24.7; 2013: 24.4; 2014: 25.4; 2015: 27.4; 2016 (proj.): 28.6; 2017 (proj.): 38.7. - Gross NFPS debt (percent of GDP): 2010: 33.8; 2011: 30.9; 2012: 41.4; 2013: 41.0; 2014: 41.9; 2015: 47.2; 2016 (proj.): 48.4; 2017 (proj.): 58.5. - Heritage and Stabilization Fund assets (percent of GDP): 2010: 17.0; 2011: 16.7; 2012: 18.4; 2013: 19.6; 2014: 20.0; 2015: 22.9; 2016 (proj.): 20.7; 2017 (proj.): 18.7. - Central government operations (selected TT$ millions and percent of GDP): - Revenue (TT$ millions, selected): 2010/11: 46,972; 2011/12: 48,918; 2012/13: 52,760; 2013/14: 57,267; 2014/15: 58,813; 2015/16 (Staff est.): 51,414. - Energy revenue (TT$ millions, selected): 2010/11: 27,688; 2011/12: 27,445; 2012/13: 26,939; 2013/14: 29,593; 2014/15: 29,230; 2015/16 (Staff est.): 20,952. - Non-energy balance (TT$ millions): 2010/11: (27,962); 2011/12: (29,227); 2012/13: (31,847); 2013/14: (33,322); 2014/15: (35,043); 2015/16 (Staff est.): (28,468). - Overall balance (TT$ millions): 2010/11: (273); 2011/12: (1,782); 2012/13: (4,908); 2013/14: (3,729); 2014/15: (5,813); 2015/16 (Staff est.): (7,517); 2016/17 (Staff proj.): (12,118); 2017/18 (Staff proj.): (14,588); 2018/19 (Staff proj.): (16,913); 2019/20 (Staff proj.): (21,821). ### Balance of payments and projections - Current account and trade: - Current account balance (US$ millions, selected): 2012: 824; 2013: 1,920; 2014: 1,266; 2015: -1,329; 2016 (proj.): -1,627; 2017 (proj.): -1,375; 2018 (proj.): -1,141. - Exports (US$ millions, selected): 2012: 12,983; 2013: 12,770; 2014: 11,806; 2015: 9,074; 2016 (proj.): 6,824; 2017 (proj.): 7,790. - Imports (US$ millions, selected): 2012: 9,065; 2013: 8,871; 2014: 8,386; 2015: 8,915; 2016 (proj.): 7,169; 2017 (proj.): 7,715. - Capital and financial account: - Capital and financial account (net, US$ millions, selected): 2012: -1,446; 2013: -1,134; 2014: 64; 2015: -200; 2016 (proj.): 1,033; 2017 (proj.): 528. - Other private sector capital (net, US$ millions): 2012: -1,029; 2013: -1,078; 2014: -1,357; 2015: -1,133; 2016 (proj.): -1,092; 2017 (proj.): -1,246. ### Selected indicators of external and financial vulnerability - Current account balance (percent of GDP, series): 2010: 8.5; 2011: 18.9; 2012: 11.4; 2013: 3.2; 2014: 7.3; 2015: 4.6; latest: -5.4. - Gross official reserves (US$ millions): 2009: 8,741; 2010: 9,213; 2011: 10,233; 2012: 9,515; 2013: 10,411; 2014: 11,317; 2015: 9,788. - REER appreciation CPI-based (percent change, selected): 2009: 9.0; 2010: 5.6; 2011: -1.0; 2012: 8.1; 2013: 3.8; 2014: 5.3; 2015: 10.6. - Credit and banking sector metrics (selected): - Regulatory capital to risk-weighted assets: 20.5; 24.2; 25.1; 24.6; 23.1; 22.5; 22.1. - Nonperforming loans-to-gross loans (percent): 5.0; 6.2; 6.3; 5.4; 4.2; 4.1; 3.4. - Return on equity (percent): 20.2; 17.2; 17.2; 18.1; 14.7; 13.2; 18.2. - Liquid assets-to-total assets (percent): 25.1; 24.3; 27.7; 25.2; 27.5; 25.3; 23.8. ### Projections, risks, and structural outcomes highlighted in tables and charts - Growth and inflation projections included in the summarized tables: - GDP deflator and consumer prices (headline and core) projections and recent values are provided (e.g., GDP deflator 2015: -8.3; 2016 (proj.): 1.8; 2017 (proj.): 4.0). - Unemployment rate series: 2010: 5.9; 2011: 5.1; 2012: 4.9; 2013: 4.3; 2014: 3.7; 2015: 3.3; Q2 2015 unemployment rate: 3.2. - Key commodity price benchmarks and budget assumptions: - Crude oil price (US$/barrel, historical and budget): historical values include 2010: 79.0; 2011: 104.0; 2012: 105.0; budget oil price used: 65.0 (budget year unspecified in excerpt), and later budget values listed: 75.0; 80.0; 80.0; 80.0; 80.0; 45.0; 40.0. - Natural gas price (US$ per mmbtu, historical): 2010: 6.9; 2011: 9.8; 2012: 10.4; 2013: 10.5; 2014: 10.7; 2015: 6.7; 2016 (proj.): 6.1; 2017 (proj.): 6.3. *TRINIDAD AND TOBAGO INTERNATIONAL MONETARY FUND* ### Annex I. External Stability Assessment ### Annex I. External Stability Assessment ### External position—summary assessment - Trinidad and Tobago’s external position in 2015 is assessed to be substantially weaker than the level consistent with medium-term fundamentals and desirable policy settings. - Much of the deterioration is due to the large terms of trade shock from the decline in energy prices. - Policy responses have been insufficient to address the scale of the shock. - Recommended desirable policy changes over the medium term: - A more flexible exchange rate. - Fiscal consolidation. - Structural reforms to improve competitiveness and prospects for export diversification. - Reserves are assessed to be adequate and sufficient to absorb most shocks. ### External sector structure and 2015 outcomes - Energy sector dependence: - Energy output accounts for about 45 percent of GDP. - Energy contributes 55 percent of government revenues. - Energy contributes 82 percent of merchandise exports. - Current account: - Current account moved to a deficit of 5.4 percent of GDP in 2015 from a 4.6 percent of GDP surplus in 2014. - Given the forecast for continued low oil prices, the REER appreciation and a no-policy change scenario, the current account would remain in a deficit position in the medium term. - Without policy change, staff estimates the external position would weaken over the medium term and growth would remain sub-optimal. - Policy prescriptions reiterated: - More flexible exchange rate to adjust to the terms of trade shock, smooth market volatility, and improve price competitiveness. - Fiscal consolidation aiming for a small primary deficit over the medium term while providing space for infrastructure spending to ease supply bottlenecks. - Supportive structural reforms to boost productivity, improve competitiveness and prospects for export diversification away from the energy sector. ### Current account diagnostics (EBA-lite) - Cyclically-adjusted current account gap in 2015: -5.6 to -7.6 percent of GDP away from the level consistent with medium-term fundamentals and desirable policy settings. - Macroeconomic policies contributed -2.3 percent of GDP to the gap. - Policy gap decomposition (percent of GDP): - Fiscal Policy: -2.7 - Private Credit: 0.3 - Change in Reserves: 0.1 - Cyclically Adjusted Current Account Norm: 1.9 - Cyclically Adjusted Current Account: -3.7 to -5.7 - EBA REER Index and level gaps: 21.3 and 50 ### Real and nominal exchange rate developments - 2015 movements: - Nominal Effective Exchange Rate (NEER) appreciated by about 4.4 percent compared to the 2014 average. - Real Effective Exchange Rate (REER) appreciated by 12.4 percent. - CPI-based assessment: - This CPI-based approach suggests that the exchange rate was overvalued by 30 percent by end-2015. - EBA-Lite REER assessments: - CA regression estimates an overvaluation of about 21.3 percent. - Index REER regression shows an increasing REER gap beginning in 2008 that exceeds the fitted value by some 50 percent. - Drivers of implied overvaluation include a marked appreciation in the U.S. dollar given the tightly managed bilateral TT$/US$ exchange rate and higher domestic inflation. ### Reserve adequacy and projections - Reserve levels: - Net official foreign reserves: US$9.79 billion (13.6 months import cover). - Reserve adequacy relative to benchmarks: - Reserves exceed benchmarks such as 3 months of imports of goods and services, 20 percent of broad money, and short-term debt falling due within one year. - Reserve level exceeds the IMF’s composite reserve adequacy (ARA) metric for fixed exchange rate regimes and the metric for small-island developing states (SIDs). - Projection under baseline (lower oil and gas prices, no-policy changes): - Staff project a shift from current account surpluses to modest deficits and higher capital outflows in coming years. - Foreign exchange reserve levels are expected to decline to 3.3 months of import cover by 2021. - The rate of decline in reserves would be faster should speculative demand for foreign currency exacerbate outflows. ### Policy recommendations (reiterated) - A more flexible exchange rate policy to allow adjustment to the terms of trade shock, smooth volatility, and improve price competitiveness and export diversification prospects. - Fiscal consolidation supported by structural reforms to improve the external position and address economic imbalances over the medium term. ### Annex II—Debt Sustainability: central government debt outlook - Under current policies and projected energy prices, central government debt is set to rise unsustainably. - Available buffers: - Heritage and Stabilization (HSF) sovereign wealth assets in excess of 20 percent of GDP. - “Frozen” government deposits totaling an additional 20 percent of GDP. - These buffers would soon be exhausted by deficits projected to remain in excess of 10 percent of GDP under the baseline scenario. - One-off financing and residuals: - “One-off” financing sources totaling almost 13 percent of GDP in fiscal years 2016-17 (including privatization revenues, collection of “above average” dividends and early loan repayments by SOEs, and a partial rundown in HSF assets). - Residual financing totaling 10.7 percent of GDP in FY2016 and 2.1 percent in FY2017 (including liquidating US$1 billion of HSF assets in the current fiscal year and potentially US$500 million in the next fiscal year, and privatization revenues totaling 6.4 percent of GDP in the current fiscal year). - Debt trajectory under baseline: - Central government debt totaled 27.4 percent of GDP at the end of FY2015. - Debt ratio is set to almost triple, to 78 percent of GDP by 2021 under the baseline assessment. - The debt profile aspect is not breached under the baseline assessment due to the assumed 1/3 foreign debt financing assumption keeping total debt held by nonresidents at a moderate share of GDP. - Risks and sensitivity: - The April 15 downgrade by Moody’s to Baa3 leaves the country one notch above sub-investment grade with a negative outlook; a downgrade to sub-investment grade would likely adversely impact sovereign bond spreads. - Stress tests show negative shocks to growth and the primary balance worsen the debt outlook. - Debt projections are sensitive to interest rate shocks given nominal growth and interest rates are initially rather close; the sensitivity is amplified by volatility in the GDP deflator from the energy sector. - Required adjustment: - The needed fiscal adjustment is on the order of an additional 8 ½ percentage points of GDP on top of the 3.6 percent of measures already adopted in the current fiscal year. ### External debt outlook - Historical and projected levels: - External debt-to-GDP ratio was 12.2 percent at end-2015, up from about 8.9 percent at end-2011. - Under the baseline, external debt would continue to rise to 22.8 percent of GDP at end-2020 before stabilizing as government financing needs abate. - Risks: - 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: Fund staff estimates.* ### 8. External sustainability is robust to interest rate and GDP shocks, but is more sensitive to ### 8. External sustainability is robust to interest rate and GDP shocks, but is more sensitive to current account and exchange rate shocks ### External debt sensitivity and stress-test findings - A 30 percent real depreciation in 2017 would almost double the external debt to GDP ratio to about 24½ percent in 2017 and it would peak at 34½ percent in 2019 before subsiding. - A further deterioration in the current account balance from the current level would have the largest impact: - A ½ standard deviation shock would introduce debt dynamics such that the external debt to GDP ratio reaches 56 percent by 2021 and increases beyond the 5-year projection period. - The text notes that an adverse shock of this size would almost certainly require a significant (in U.S. dollar terms) drop in energy prices from their already current low levels. ### External debt-bound tests (Figure A2.6) — scenario averages and comparisons - Baseline external debt (average projection shown): 22 (percent of GDP). - Non-interest current account shock scenario outcome: 56 (percent of GDP) by 2021. - Combined shock scenario outcome: 40 (percent of GDP). - Real depreciation (30 percent) scenario outcome: 33 (percent of GDP) (box figure shows 33 with baseline 22). - Growth shock scenario outcome: 24 (percent of GDP). - Historical and baseline comparisons are shown for 2011–2021 with shaded historical data and five-year ahead projections; individual shocks are permanent one-half standard deviation shocks (with combined and other specified permanent 1/4 standard deviation shocks for certain variables). ### Public DSA baseline projections and debt dynamics (selected figures) - Nominal gross public debt (percent of GDP): 17.4 (2014), 25.4 (2015), 27.4 (2016), 28.6 (2017), 38.6 (2018), 48.5 (2019), 58.3 (2020), 68.4 (2021), 78.7 (cumulative/projection column unclear in table layout). - Public gross financing needs (in percent of GDP): -0.9 (2014), 2.8 (2015), 3.5 (2016), 13.0 (2017), 15.4 (2018), 14.3 (2019), 14.6 (2020), 15.9 (2021), 15.6 (cumulative/projection column). - Real GDP growth (in percent): 3.4 (2014), -0.2 (2015), -1.9 (2016), -2.6 (2017), 1.0 (2018), 3.3 (2019), 3.3 (2020), 1.7 (2021), 1.2 (cumulative/projection column). - Inflation (GDP deflator, in percent): 5.6 (2014), 2.9 (2015), -5.3 (2016), -0.9 (2017), 3.5 (2018), 4.0 (2019), 3.5 (2020), 4.1 (2021), 4.3 (cumulative/projection column). - Nominal GDP growth (in percent): 9.4 (2014), 2.7 (2015), -7.1 (2016), -3.5 (2017), 4.5 (2018), 7.4 (2019), 6.9 (2020), 5.9 (2021), 5.6 (cumulative/projection column). - Effective interest rate (in percent): 13.6 (2014), 7.0 (2015), 6.7 (2016), 6.8 (2017), 8.9 (2018), 7.8 (2019), 7.1 (2020), 6.6 (2021), 6.3 (cumulative/projection column). - Change in gross public sector debt (percent of GDP): -0.2 (2014), 1.0 (2015), 2.1 (2016), 1.1 (2017), 10.1 (2018), 9.8 (2019), 9.8 (2020), 10.2 (2021), 10.2 (cumulative/projection column), 51.2 (final cumulative column). - Identified debt-creating flows (percent of GDP): -3.0 (2014), 1.8 (2015), 5.9 (2016), 11.9 (2017), 11.2 (2018), 9.8 (2019), 9.8 (2020), 10.2 (2021), 10.2 (cumulative/projection column), 64.1 (final cumulative column). - Primary deficit (percent of GDP): -3.7 (2014), 0.5 (2015), 2.8 (2016), 9.0 (2017), 11.0 (2018), 9.7 (2019), 9.7 (2020), 9.8 (2021), 9.8 (cumulative/projection column), 58.8 (final cumulative column). - Primary (noninterest) revenue and grant (percent of GDP): 31.3 (2014), 33.0 (2015), 31.9 (2016), 28.0 (2017), 25.4 (2018), 25.5 (2019), 25.5 (2020), 25.5 (2021), 25.4 (cumulative/projection column), 155.3 (final cumulative column). - Primary (noninterest) expenditure (percent of GDP): 27.6 (2014), 33.5 (2015), 34.7 (2016), 36.9 (2017), 36.4 (2018), 35.2 (2019), 35.2 (2020), 35.2 (2021), 35.2 (cumulative/projection column), 214.1 (final cumulative column). - Automatic debt dynamics (percent of GDP contribution): 0.6 (2014), 1.3 (2015), 3.0 (2016), 2.9 (2017), 1.2 (2018), 0.1 (2019), 0.1 (2020), 0.4 (2021), 0.5 (cumulative/projection column), 5.2 (final cumulative column). - Of which: real interest rate contributions: 1.2 (2014), 1.3 (2015), 2.5 (2016), 2.2 (2017), 1.5 (2018), 1.3 (2019), 1.6 (2020), 1.4 (2021), 1.3 (cumulative/projection column), 9.2 (final cumulative column). - Of which: real GDP growth contributions: -0.6 (2014), 0.0 (2015), 0.0 (2016), 0.5 (2017), 0.7 (2018), -0.3 (2019), -1.2 (2020), -1.5 (2021), -0.9 (cumulative/projection column), -0.8 (final cumulative column), -4.0 (final listed value). - Exchange rate depreciation contribution (percent of GDP): 0.0 (2014), -0.1 (2015), 0.1 (2016), 0.5 (2017), 0.0 (2018), 0.0 (2019), 0.0 (2020), 0.0 (2021), 0.0 (cumulative/projection column), 0.5 (final cumulative column). - Residual, including asset changes (percent of GDP): 2.9 (2014), -0.8 (2015), -3.8 (2016), -10.7 (2017), -2.1 (2018), 0.0 (2019), 0.0 (2020), 0.0 (2021), 0.0 (cumulative/projection column), -12.8 (final cumulative column). - The baseline assumes key variables remain at the level of the last projection year. ### Macro-fiscal stress tests (Figure A2.5) — scenarios and effects on gross nominal public debt and financing needs - Macro-fiscal stress tests include: Baseline, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock. - Example scenario parameter snapshots: - Primary Balance Shock scenario (selected years): Real GDP growth -2.6 (2016), 1.0 (2017), 3.3 (2018), 3.3 (2019), 1.7 (2020), 1.2 (2021). Primary balance -9.0 (2016), -13.2 (2017), -12.0 (2018), -9.7 (2019), -9.7 (2020), -9.8 (2021). Effective interest rate 6.8 (2016), 8.9 (2017), 7.8 (2018), 7.2 (2019), 6.8 (2020), 6.5 (2021). - Real Interest Rate Shock scenario effective interest rates escalate in the projection (examples shown include 6.8, 8.9, 21.0, 29.8, 35.3, 39.0 in a row). - Combined Shock effective interest rate example sequence: 6.8, 9.5, 21.0, 30.0, 35.1, 38.8. - Figures show gross nominal public debt and public gross financing needs under these shocks across 2016–2021 in percent of GDP and percent of revenue. ### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses - Persistently lower energy prices - Likelihood of realization: MEDIUM. - Expected impact if realized: VERY HIGH. - Key points: - Before price declines, energy sector output accounted for about 45 percent of GDP, contributed 55 percent of government revenues and 82 percent of merchandise exports. - Short-term financial cushions include 13 months of import cover in external reserves (end-2015) plus the Heritage and Stabilization Fund’s (HSF) net assets, equivalent to nearly 25 percent of GDP. - The authorities intend to draw on the HSF for US$1-$1.5 billion in fiscal financing; while acceptable as a bridge if used for durable fiscal adjustments, such drawdowns reduce remaining fiscal cushions and should be explicit, strictly limited in size and duration. - Policy recommendations: - Focus on diversifying the non-energy economic base via public investment and structural reforms. - Implement tax reforms to reduce dependence on energy sector revenues and expenditure reform to contain public consumption. - Limit and specify objectives of HSF drawdowns. - Surge in the U.S. dollar - Likelihood of realization: HIGH. - Expected impact if realized: MEDIUM. - Key points: - Persistent dollar strength, combined with only modest depreciation allowed by authorities, would work against diversification efforts by perpetuating currency overvaluation. - Over the medium term, sluggish growth would complicate debt sustainability and social outcomes. - Policy recommendations: - Consider a more substantial depreciation to unwind currency overvaluation. - Widen the exchange rate band and consider adopting an alternative monetary framework to anchor on price stability. - Front-load fiscal adjustment and pursue structural reforms to foster non-energy investment. - Failure to address foreign exchange (FX) shortages - Likelihood of realization: MEDIUM. - Expected impact if realized: HIGH. - Key points: - FX shortages are a disequilibrium phenomenon; they impede imports and timely supplier payments, damaging business relationships and access to external trade credit. - A durable end to FX shortages requires the market to be shown to clear over a sustained period to limit precautionary FX demand. - Policy recommendations: - Operate the FX market more liberally via greater sales to the market, further currency depreciation, or a combination. - Restore credibility in FX management to reduce precautionary demand. ### Diversification case study — summary findings and implications - Trinidad and Tobago remains highly dependent on the energy sector; historically: - Per-capita income rose from US$640 in 1962 to US$15,760 in 2013. - Prior to recent energy price declines, energy accounted for about 45 percent of GDP, 55 percent of government revenues and 82 percent of merchandise exports. - Definitions and approaches: - Diversification includes both domestic output diversification (sector shares and labor productivity) and export diversification (new markets/products, export structure indices). - Export diversification decomposed into horizontal diversification (increase in number or evenness of export product lines) and vertical diversification (upgrading product quality along a quality ladder). - Economic complexity relates to a country’s ability to produce knowledge-intensive products; higher complexity is associated with higher expected growth. - Historical experience: - Diversification indices (Theil, Herfindahl, Gini) show TTO achieved diversification during 1983–1999, mainly through the increase of new export products (extensive margin). - Policy implication highlighted: - Cross-country experience suggests supporting “horizontal” export diversification and continuing improvements in the business climate. *Source: Fund staff estimates; figures and text as presented in the IMF country staff report excerpt.* ### conclusion is reinforced by counting the ### _cr16204 - conclusion is reinforced by counting the ### Export diversification trends - TTO was able to export 165 new export products between 1983 and 1999. - The total number of export product lines increased from 276 to 419 in this period. - Export diversification stalled since 2000: - Led by the export of liquefied natural gas (LNG) from 1999, the export share of energy products increased from 36 percent in 1998 to 60 percent in 2010. - Major non-energy exports such as chemicals (excluding fertilizers) maintained their export share, but other manufactured exports saw export shares and export growth rates decline significantly. - Almost all FDI between 1998 and 2005 was concentrated in the energy sector, and domestic private investment in agriculture declined sharply. - Example of revealed comparative advantage: - TTO exported US$2.9 billion of petroleum oils (18 percent of its total exports) while the world’s exports of petroleum oil were 5.2 percent of world exports. ### Measures and margins of diversification - All three diversification indices cited (Gini coefficient, Herfindahl Index, Theil Index) are calculated based on export shares from 1962 to 2010; lower values indicate higher diversification. - The Theil index can be decomposed into: - The extensive margin (focuses on the number of new export products). - The intensive margin (captures relative export values in different categories, with more evenly distributed values representing more diversification within that product line). - Definition used for new products (Cadot et al (2011)): - New products are those that have not been exported in at least the two previous years, but have been exported in the two following years. ### Domestic output, employment, and productivity shifts - Since 1988, the labor force shifted away from agriculture and manufacturing toward services, where productivity growth has been negative. - Employment share changes since 1988: - Manufacturing’s employment share dropped from 10 percent to 8 percent. - Agricultural employment share fell from 13 percent to 4 percent. - Share of employment in the low productivity service sector rose from 35 percent in 1988 to over 40 percent. - Conclusion: domestic output diversification has made no progress and appears constrained. ### Historical drivers of diversification and sectoral composition - The main driving force for export diversification was the government’s development of an export-oriented petrochemical sector following the two oil booms in the 1970s. - After completing petrochemical projects by around 1982, petrochemical exports became the third largest export product category after LNG and oil. - By 2010, petrochemicals’ share of total exports had grown to about 30 percent. - Crisis-driven reforms in the late 1980s contributed to diversification: - Measures included divestment of loss-making state-owned enterprises, devaluation of the TT dollar, and incentives to attract investment. - Example outcome: the share of machinery and transport equipment in total exports doubled from 1.2 percent in 1987 to 2.5 percent in 1998. - Development of the LNG industry appeared to crowd out development of the non-energy sector. ### Quality, complexity, and scope for further diversification - TTO has a high degree of vertical diversification with current export products positioned close to the top in the quality ladder. - Implication: less room for vertical diversification without improving horizontal diversification. - Trending down economic complexity index suggests lack of complex (high value-added) products is a key barrier to diversification and raising potential growth. - Policy implication: priority should be to widen the array of export products (improve the extensive margin) and raise value-added in current non-energy export lines (improve the intensive margin). ### Lessons from comparators and policy recommendations - Lessons from comparator countries indicate that improving business environments, developing human capital, and focusing on high value-added industries can spur diversification. - Negative lessons from some GCC countries: high transfers and subsidies, large public employment, and high public sector salaries can discourage private investment in non-oil tradables and reduce private sector labor supply. - Policy priorities suggested for TTO: - Support horizontal export diversification (introduce new product lines). - Continue to improve the business environment to enable private sector-led innovation and growth. - Improve the quality of human capital. - Reduce structural impediments to investment to attract FDI that can improve technology and know-how and increase value-added of TTO’s products. - Analytical note referenced: - Hausmann, Hidalgo, et al. suggest increasing horizontal diversification is best achieved by developing products close in knowledge requirements to current production (e.g., from milk to ice cream), allowing knowledge accumulation and subsequent spread of product lines. *Italicized source attribution: Prepared By Western Hemisphere Department — STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 5, 2016).* ### conclusion of the World Bank’s technical assistance on the NRA is scheduled for May 24─25, 2016. ### conclusion of the World Bank’s technical assistance on the NRA is scheduled for May 24─25, 2016. ### Statistical issues and data adequacy - General assessment: Serious shortcomings in the provision of timely, comprehensive, and accurate data hamper surveillance, economic analysis and policy formulation. Authorities committed to establishing an independent National Statistics Institute (NSI) to replace the Central Statistical Office (CSO); legislation to establish the NSI is expected to be passed this year. - Real sector statistics: - Production-side real GDP data for 2012 finalized; calculation of real GDP data for 2013 and 2014 expected to be finalized by the end of 2016. - Last expenditure-side GDP data is from 2008; no immediate plans to produce such data. - Quarterly labor force bulletin publication lag reduced to about two quarters (from one year) since end-2014. - Plan to produce quarterly GDP statistics contingent on available resources and staffing. - Price statistics: - RPI revised mid-2012; RPI basket rebased to January 2015 using 2008/2009 household budgetary survey weights. - Food index inflation rose over 29 percent the past two years compared to 13 percent for All Items. - PPI weights nearly 40 years old; business establishment list (BEL) not updated in years. - Government finance statistics: - MoF compiles fiscal data using GFSM 1986 methodology; data on public enterprises and statutory bodies published once a year and compiled by three different MoF divisions, with differences among them. - Monetary and financial statistics: - Monthly monetary accounts cover CBTT and other depository corporations (ODCs); income funds not reported; mutual funds not regulated by CBTT—data access requires agreement with the Securities and Exchange Commission of Trinidad and Tobago. - Migration to standardized report forms (SRFs) for CBTT and ODCs completed; SRFs for OFCs developed in May 2014 covering insurance corporations, pension funds, HSF, ADB, and TTMF. - Coverage expansion needed to include NIB, UTC, HMB, and credit unions. - External sector statistics: - Official trade data from the CSO available up to February 2012; data for rest of 2012 through September 2015 are CBTT estimates with methodological weaknesses. - Authorities auditing and revising trade data covering 2012 to September 2015; anticipate audits completed in time for official release by September 2016. - Improvements underway for IIP compilation and implementation of Balance of Payments Manual sixth edition. - Data systems and reporting: - External loans and domestic public sector debt migrated to CS-DRMS used by MoF and CBTT. - Participant in the General Data Dissemination System (GDDS) since 2004. - No data ROSC available. - Reporting to STA: only partial fiscal data reported with significant lag; CBTT reports monetary SRFs since mid-2013; most recent data sent by CBTT to STA for publication are for 2011. ### Relations with the Inter-American Development Bank (IDB) and portfolio - Current CS 2011─2015 remains in force until end-2016; priority areas: (i) financial sector regulation and supervision; (ii) public sector management; (iii) education; (iv) social protection; (v) climate change; (vi) energy; (vii) water and sanitation; and (viii) transport. - The CS envisaged Sovereign Guaranteed (SG) lending of US$1.5 billion for the period; SG lending reached only US$695.0M as of March 15, 2016. - Active portfolio: 11 loans totaling US$695.5M, 85.6 percent undisbursed. - Main sectors: Water and Sanitation (3 loans, 60 percent of total volume); Social Protection and Health (2 loans); Housing (1 loan); Integration and Trade (2 loans); Public Sector Modernization (3 loans). - Table 1 (Net Flow of IDB Convertible Currencies 2012–2016) key figures (In millions of U.S. dollars): - a. Loan disbursements: 2012: 29.8; 2013: 48.9; 2014: 21.4; 2015: 50.6; 2016: 61.3 - PBL Disbursements: 0.0 for 2012–2016 - b. Repayments (principal): 2012: 49.6; 2013: 47.6; 2014: 40.3; 2015: 39.3; 2016: 43.3 - c. Net Loan Flow (a-b): 2012: -19.8; 2013: 1.3; 2014: -18.9; 2015: 11.3; 2016: 18.0 - d. Subscriptions and Contributions: 2012: 0.0; 2013: 0.0; 2014: 1.5; 2015: 0.0; 2016: 0.0 - e. Interest and Charges: 2012: 12.3; 2013: 11.2; 2014: 10.6; 2015: 10.5; 2016: 14.0 - f. Net Cash Flow (c-d-e): 2012: -32.1; 2013: -9.9; 2014: -31.1; 2015: 0.8; 2016: 4.0 - Table 2 (Projects in Execution as of March 15, 2016) summary (US$ million): - Total projects in execution: 11; Approved amount total: 695.5; Disbursed life total: 100.4; Percent undisbursed: 85.6; Available: 595.1 - Selected project entries: - Citizen Security Program: Approval 3/11/2008; Approved Amount 24.5; Disbursed 16.2; Life Percent Disbursed 66; Available 8.3 - Multi-Phase Wastewater Rehabilitation Program-Phase I: Approval 12/12/2012; Approved Amount 246.5; Disbursed 48.1; Life Percent Disbursed 20; Available 198.4 - Flood Alleviation and Drainage Program: Approval 12/4/2013; Approved Amount 120; Disbursed 0; Life Percent Disbursed 0; Available 120 ### Executive Director statement and macroeconomic context (Statement by Otaviano Canuto and Veronica Ramcharan; May 20, 2016) - Authorities thank mission team; focused on consolidating fiscal position and implementing strategic structural reforms to enhance competitiveness and medium-term growth prospects. - Key strengths: low levels of public debt, substantial financial buffers, a well-educated workforce, a stable political system. - Economic shock history: global financial crisis followed by a large terms of trade shock; growth contracted in 2014 and 2015; lower domestic absorption expected to continue in 2016. - Staff GDP projection: rebound sharply to 2.3 percent in 2017 and maintain steady positive growth over the medium term. - Inflation and labor: headline inflation well contained by historical standards; unemployment rate has remained very low. - Financial buffers: - International reserves: US$9.8 billion or 13.4 months of import cover. - Heritage and Stabilization Fund (HSF): US$5.8 billion. - Combined buffers equivalent to about 63 percent of GDP in 2015. - Assumptions noted in footnote: - April 2016 assumption: US$35 per barrel and a gas price of $2.00 per mmbtu. - October 2015 assumption: $45 per barrel and a gas price of $2.75 per mmbtu. ### Fiscal policy, consolidation measures, and financing - Medium-Term Fiscal Consolidation Framework introduced to meet budgetary targets, improve expenditure prioritization, and foster government performance. - Fiscal year 2016 intentions: - Reduce total expenditure by TT$4 billion than originally budgeted in October 2015. - Fiscal deficit for 2016 expected to be around 4 percent of GDP using the cash basis accounting methodology. - Financing gap for 2016 and 2017 to be closed using borrowings and one-off items: recoveries from sale of CLICO assets, dividends from National Gas Company (NGC), drawdowns from HSF, proceeds from Phoenix Park IPO. - Target by 2018: balance between current income and expenditure; reliance on borrowings only for capital expenditure. - Expenditure and revenue measures: - Cuts in recurrent spending including reduction of operational expenditure by 7 per cent for all ministries. - Revenue measures: implementation of a property taxation system; broadening of the VAT base; increasing excise taxes; elimination of fuel subsidies and reducing other subsidies and transfers; introduction of wage and hiring restraint mechanisms. - Levy of 7 percent on online purchases of goods and services from overseas retail companies effective from September 01, 2016. - Capital investment program for fiscal year 2016 reduced by 14.2 percent from the previous fiscal year and re-prioritized. - Revenue administration reforms: - Proposal to establish a unified revenue authority. - Amendments passed: Finance Act No.1 of 2016 in February; Finance Bill No.2 of 2016 expected to be passed later this month. - Steps to establish a “General Accounting Office” for continuous real-time budget assessment and a Tax Policy Unit with TA from the Fund. - Energy taxation and subsidies: - Discussions with energy industry on reforming energy taxes; TA requested from the Fund. - Removal of fuel subsidies commenced and to be phased, with savings used to improve social safety nets and reduce transportation costs for low-income groups. - Proposal for a new pricing mechanism allowing world oil price changes to pass through to local fuel prices. - Social protection and efficiency: - Collaboration with World Bank on comprehensive review of social expenditures to reduce costs and improve program efficiency without sacrificing social safety nets. - Increased transparency and consultations; National Tripartite Advisory Council inaugurated March 2016. ### Monetary and exchange rate policy - Monetary policy framework: multiple objective framework; policy rate 4.75 percent as of December 2015 assessed appropriate. - CBTT Monetary Policy Committee (MPC) monitoring heightened external risks. - Exchange rate policy: - Aimed at minimizing market volatility, reflective of supply and demand conditions. - TT dollar began to depreciate against the US dollar since end-2015. - Official intervention via biweekly auctions; rate and volumes informed by anticipated FX inflows and outflows. - Government announced TT dollar would not be allowed to depreciate more than 7 percent from its September 2015 level. - Authorities assert no restrictions on payments and transfers for current international transactions and no deviation by 2 percent or more of official exchange rate from prevailing market exchange rate. - Fund staff classification: Trinidad and Tobago de facto exchange rate regime classified as a stabilized arrangement by the Fund. - Observed market issue: shortage of foreign currency in the market and distributional problems among commercial banks leading to occasional queues; CBTT to make special interventions to clear queues. - Minister of Finance requested TA from the Fund to analyze foreign exchange market distributional issues. ### Financial sector reform and legislation - Priority to pass delayed financial legislation: Insurance Bill and Credit Union Bill to be laid in Parliament shortly. - Procurement Bill enacted; regulations and amendments in train to effect proclamation by end-2016. - Review of Financial Intelligence Unit Act and Central Bank Act to align with international best practice; full legislative agenda to be brought to Parliament within the current fiscal year. - AML/CFT: authorities committed to addressing shortcomings from CFATF evaluation and strengthening AML/CFT framework. - CL Financial resolution continues: plan entails sale of assets to satisfy outstanding liabilities under 2009 Memorandum of Understanding and orderly divestment of traditional insurance portfolio. ### Structural reforms and diversification strategy - Diversification strategy focuses on international financial services, tourism, and maritime activities. - Initiatives and projects: - Expansion of international financial centre. - New commercial port, maritime and shipbuilding complex, industrial park, and development of Special Economic Zones. - Establishment of a maritime maintenance facility to catalyze ship-repair and ship-building industry—aim to emerge as a CARICOM hub. - Tourism: Tourism Growth Strategy under development; reconvening of Trinidad Tourism Standing Committee; Tobago Comprehensive Development Plan to support tourism-driven growth. - Public-Private Partnerships (PPPs): major role in infrastructure development (health, education, ICT); provisions made to support technical and operational aspects of PPPs; commitment to modern, transparent public procurement; review and amendments to institute New Procurement Agency in 2016. - Social and labor programs: - Assessments of CEPEP and URP for cost efficiencies and operational streamlining. - High-Level Committee established to oversee GATE reform. - Comprehensive review of labor legislation including Industrial Relations Act and Retrenchment and Separation Benefits Act. - Energy sector: - Recognition that energy sector remains major revenue source; discussions on incentives for small and marginal gas fields to increase production. - Comprehensive review of natural gas value chain arrangements and potential measures where necessary. *IMF staff report content (conclusion and related sections) as provided in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16204.pdf_