Trinidad and Tobago: Staff Concluding Statement of the 2018 Article IV Mission

IMF News, July 6, 2018

Source details

Canonical URL

Trinidad and Tobago: Staff Concluding Statement of the 2018 Article IV Mission

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: July 6, 2018

Economic outlook and recent performance

• The economy is slowly recovering from a prolonged recession driven by energy supply shocks and low energy prices; return to positive growth expected in 2018 as recovery takes hold in the non-energy sector.
• Real GDP contracted at a slower pace of 2.6 percent in 2017, following the 6.1 percent drop in 2016 driven by energy sector shocks.
• Energy sector developments:
  • Strong recovery in gas production in 2017H2; oil production remained largely flat at a historically low level.
• Non-energy sector constraints:
  • Weak activity in construction, financial services, and trade.
  • Continued shortage of foreign exchange (FX) and slow implementation of public investment projects.
• Inflation and labor market:
  • Headline inflation fell to historic lows of 1.9 percent in 2017, and further to 1.1 percent y-o-y in April (2018).
  • Unemployment rose to 5.3 percent in 2017Q2 from 4.4 percent in 2016Q2 (up from 3.3 percent in 2014Q2).
  • Youth unemployment estimated at 12 percent in 2017, compared with 7.9 percent in 2014.

Fiscal developments and recommendations

• Fiscal performance in FY2017:
  • The fiscal deficit reversed its rising trend and registered a slightly lower overall deficit in FY2017.
  • Energy-related revenues remained flat despite higher energy prices, in part due to fiscal incentives.
  • Spending was reduced by 2.2 percent of GDP via cuts in transfers and subsidies, goods and services, and capital investment.
  • Central government debt rose to 42 percent of GDP; public debt, including contingent liabilities, reached 61 percent of GDP (approaching the government’s soft target of 65 percent).
  • Borrowing and one-off sources (from the Heritage and Stabilization Fund (HSF), and asset sales) helped finance the deficit.
• Fiscal buffers:
  • HSF and sinking-fund assets at 30 percent of GDP.
  • Gross FX reserves at 9.4 months of imports at end-2017.
• Medium-term projections and recommended adjustment:
  • Growth projected to stabilize at 1.5 percent over the medium term with natural gas-led near-term growth and gradual non-energy recovery.
  • Fiscal deficit expected to narrow to an average 4 percent of GDP as energy revenues rise, non-energy revenues recover, and spending falls with improved efficiency of transfers and subsidies.
  • With one-off financing diminishing, central government (public) debt expected to reach 43 (64) percent of GDP by 2023.
  • Staff suggests measures yielding about 4.4 percent of GDP paced over 4-5 years to contain central government debt around 30 percent of GDP and public debt below 55 percent.
• Revenue-side priorities:
  • Complete energy taxation and tax administration reforms.
  • Speed approval and implementation of Revenue Authority (RA) legislation and Tax Administration Diagnostic Assessment Tool recommendations.
  • Accelerate VAT refund payments owed to taxpayers.
  • Consider higher taxes on tobacco or sugary drinks as contingency measures, and a gradual increase in the VAT rate toward the regional average (15 percent).
• Expenditure-side priorities:
  • Contain current spending; transfers to public utilities are a significant fiscal drain.
  • Guide utility tariff increases by a rate determination exercise by the Regulated Industry Commission and implement urgently.
  • Identify cost savings from the World Bank Public Expenditure Review (PER) in education, health, and social services.
  • Redirect savings toward the most vulnerable and efficient, growth-enhancing public investment.
• Fiscal framework and asset-liability management:
  • Support for establishing a medium-term fiscal policy framework (MTFF) with formal fiscal targets and clear communication.
  • Integrate the HSF fully with the MTFF; link HSF transfers to appropriate fiscal targets.
  • Consider adopting an asset-liability management framework to manage public debt and HSF in an integrated way and publish a medium-term debt strategy.

External balance and FX market

• Balance of payments and FX situation:
  • Balance of payments remained weak, with outflows through the financial account offsetting the current account surplus.
  • FX shortages persist despite a 7 percent nominal depreciation in 2016, the current account surplus in 2017, and increased FX inflows from energy companies.
  • Anecdotal evidence suggests existence of an informal parallel market.
• Impact on non-energy sector:
  • Some companies with large import needs reportedly left the market; delays in settling bills and getting inputs; some moved to import substitution.
  • FX queuing continues; waiting time can range from 2-3 weeks to a month depending on amount, purpose, and banking relationships.
  • FX hoarding incentivized by uncertainty about FX availability or expectations of further depreciation.
• Policy recommendations:
  • Clear the FX market on a sustained basis by adjusting the price or supplying FX at the given exchange rate.
  • Carefully design the US$100-million EximBank FX Facility (introduced May 2018) to ensure transparency, consistency with international standards, and avoid market distortions or misuse.
  • Ensure authorities provide sufficient FX to meet demand for all current international transactions.
  • Consider allowing greater exchange-rate flexibility (e.g., widening bands) to act as an automatic stabilizer, facilitate adjustment to external shocks, restore competitiveness, and safeguard reserves.
  • Assess balance-sheet exposures and exchange-rate passthrough to inflation before moving to a more flexible arrangement; accompany any move with supportive fiscal, monetary, financial, structural policies, safety nets, a defined intervention rule, and a communication strategy.

Monetary policy

• Policy stance and challenges:
  • The Central Bank of Trinidad and Tobago (CBTT) has balanced support for recovery against risks from narrowing TT-US short-term interest rate differential and capital outflows.
  • Staff supports the decision to increase the repo rate to 5 percent on June 29 (2018), given signs of pickup in activity, low inflation, and rising US interest rates.
  • Further rises in the US interest rate differential could complicate monetary policy and make it difficult to maintain rates that support recovery.
  • Monetary policy will bear much of the adjustment burden in the absence of exchange rate flexibility and ambitious fiscal consolidation.
  • Allowing gradual exchange-rate adjustment within a band could provide scope for more flexible monetary policy.

Financial sector stability and supervision

• System resilience and vulnerabilities:
  • Financial system remained remarkably stable despite the deep recession; banks well-capitalized and profitable with relatively high credit quality and NPL ratios among the lowest in the region.
  • Early-2018 data indicate emerging weaknesses in asset quality (real estate, construction, credit cards) and some increase in past due loans for 30-89 days.
  • Robust private-sector credit growth in 2018 merits vigilance given high household indebtedness, sovereign exposures, and relatively low domestic interest rates.
  • Increasing complexity and cross-border presence of insurers, and oversight gaps for credit unions and mutual funds, require careful monitoring.
• Supervisory priorities:
  • Focus on risk-based, consolidated, cross-border supervision and systematic monitoring of bank profitability, asset quality, loan-loss-provisioning, and classification.
  • Ascertain indirect FX and sovereign exposures with appropriate prudential oversight.
  • Implementation of Basel II on track for January 2019.
  • Progress on TA recommendations for mutual funds and credit unions; Insurance Bill passed but must be proclaimed to become law.
• AML/CFT and international compliance:
  • Strengthen AML/CFT framework to avoid remaining on the FATF ICRG list of jurisdictions with strategic deficiencies.
  • Further improvements needed; removal from ICRG list pending passage of legislation and other measures.
  • Some banks have de-marketed customers and business lines seen as high risk; no CBR losses observed since the 2016 IMF survey.

Structural reforms to support growth and diversification

• Business environment and diversification:
  • Address obstacles to non-energy growth and intensify diversification efforts given heavy dependence on the energy sector.
  • Support tourism (linked to agriculture, services, lite-manufacturing) by addressing air/sea connectivity, cost of doing business, and access to finance.
  • Institutional reforms should improve paying taxes and enforcing contracts; legal frameworks should facilitate legislative passage of ongoing reforms.
• Crime and growth:
  • Violent crime with homicide rates among the highest in the Caribbean imposes direct crime-related costs estimated at 3.5 percent of GDP.
  • Staff supports government efforts for crime reduction and suggests a balanced approach combining prevention and crime-control programs.
• Public sector management:
  • Urgent attention needed to strengthen public sector management and reduce labor rigidities.
  • Support reforms to the National Insurance System (NIS): proposals to increase contribution rate and gradually raise effective retirement age from 60 to 65 starting in 2025.
  • Comprehensive public service reforms would strengthen the Public Services Commission Department and the Chief Personnel Officer.

Data, statistics, and capacity

• Data improvements and remaining gaps:
  • Important progress made in data quality and coverage, but further efforts needed, particularly in national accounts and balance of payments.
  • CARTAC technical assistance led to substantial changes in current account historical data, including an upward revision of trade data since 2011 and a sizeable reduction in the 2016 current account deficit.
  • Frequent changes in data complicate external assessment.
• Institutional capacity needs:
  • Move to an independent National Statistical Institute is ongoing; sustained efforts required to commence operations.
  • Household budget survey and survey of living conditions need full funding.
  • Economic Management Division of the Ministry of Finance needs to attract and retain staff to assist in fiscal planning.
  • Inter-agency collaboration is key to timely and accurate data production.

Key statistics (selected)

• GDP per capita (U.S. dollars, 2017): $16,819
• Adult literacy rate (2015): 99
• Population (millions, 2016): 1.35
• Gini index (2010): 40.3
• Life expectancy at birth (years, 2015): 70.6
• Unemployment rate (Q2 2017): 5.3
• Under 5 mortality rate (per thousand, 2016): 18.5
• Human Development Index (2015): 65

Selected projections and indicators (as presented in Table 1)

• Real GDP growth:
  • 2014: -1.2
  • 2015: 1.7
  • 2016: -6.1
  • 2017: -2.6
  • 2018 (proj): 1.0
  • 2019 (proj): 0.9
  • 2020 (proj): 1.6
  • 2021 (proj): 2.1
  • 2022 (proj): 1.2
  • 2023 (proj): 2.2
• Energy sector growth (annual percent changes):
  • 2016: -10.0
  • 2017: -0.3
  • 2018 (proj): 6.0
  • 2019 (proj): 2.4
• Non-energy growth (annual percent changes; includes VAT and FISIM):
  • 2016: -3.8
  • 2017: -1.8
  • 2018 (proj): 0.0
  • 2019 (proj): 2.5
• Consumer prices (headline), period average:
  • 2016: 1.9
  • 2017: (historic low) 1.9
  • 2018 (Apr y-o-y): 1.1
• Central government overall balance (percent of FY GDP):
  • 2014: -4.5
  • 2015: -8.0
  • 2016: -11.7
  • 2017: -11.0
  • 2018 (proj): -6.0
  • 2019 (proj): -4.6
  • 2020 (proj): -3.3
• Nonfinancial public sector (NFPS) gross debt (percent of GDP):
  • 2016: 57.6
  • 2017: 60.9
  • 2018 (proj): 62.5
  • 2019 (proj): 63.5
  • 2020 (proj): 64.1
• Heritage and Stabilization Fund assets (percent of GDP):
  • 2016: 24.9
  • 2017: 25.4
  • 2018 (proj): 26.0
  • 2019 (proj): 26.3
• Current account balance (percent of GDP):
  • 2016: -2.9
  • 2017: 10.2
  • 2018 (proj): 10.6
  • 2019 (proj): 7.1
  • 2020 (proj): 5.4
• Gross official reserves (US$ million):
  • 2014: 11,493
  • 2015: 9,927
  • 2016: 9,466
  • 2017: 8,370
  • 2018 (proj): 7,542
  • 2019 (proj): 6,937
  • 2020 (proj): 6,398
• Reserves in months of goods and NFS imports:
  • 2017: 9.4
  • 2018 (proj): 7.8
  • 2019 (proj): 7.2
• Nominal GDP (in billions of TT$):
  • 2017: 154.4
  • 2018 (proj): 157.8
  • 2019 (proj): 163.9
  • 2020 (proj): 171.3
  • 2023 (proj): 202.1
• Exchange rate (TT$/US$, end of period):
  • 2014: 6.38
  • 2015: 6.43
  • 2016: 6.78
• Crude oil price (US$/barrel):
  • 2014: 96.2
  • 2015: 42.8
  • 2016: 52.8
  • 2017: 70.2
  • 2018 (proj): 69.0
  • 2019 (proj): 65.0
• Henry Hub natural gas price (US$ per MMBtu):
  • 2017: 4.4

*Among announced measures, staff’s baseline includes yields only from those related to the property, corporate, and royalty tax, but not those from PER, gaming tax, the RA or procurement reform.

Historical current-account data was revised significantly with recent CARTAC technical assistance, which resulted in an upward revision of trade data since 2011, and a sizeable reduction in 2016 current account deficit.

Mission Concluding Statement — Trinidad and Tobago: Staff Concluding Statement of the 2018 Article IV Mission (July 6, 2018).

References

• Trinidad and Tobago and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home