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

_IMF News, July 6, 2018_

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**Canonical URL:** [Trinidad and Tobago: Staff Concluding Statement of the 2018 Article IV Mission](https://www.imf.org/en/news/articles/2018/07/06/mcs070618-trinidad-and-tobago-staff-concluding-statement)

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## Bibliographic details
- Published: July 6, 2018

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### 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).*

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## References

- [Trinidad and Tobago and the IMF](http://www.imf.org/external/country/TTO/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2018/07/06/mcs070618-trinidad-and-tobago-staff-concluding-statement_