For more information, see Trinidad and Tobago and the IMF
March 16, 2000Mr. Michel Camdessus
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
Dear Mr. Camdessus:
1. Following a period of wide-ranging structural adjustment to improve the conditions for sustained growth, Trinidad and Tobago has adopted an economic and financial program in order to consolidate recent gains and strengthen the conditions, especially in the non-oil/gas sector, that would generate significant employment opportunities. In this regard, we presented to parliament in early October 1999 a medium-term policy framework with the goals of :
2. The annexed memorandum of economic and financial policies presents the government's specific macroeconomic objectives and policies for 1999/2000 (the fiscal year runs from October 1 to September 30). In support of these objectives, the government requests that Fund staff monitor and follow up the execution of its program.
3. The government believes that the policies set forth in the attached memorandum will enable it to achieve its program objectives, but it is ready to adopt any additional measures that may prove necessary to this end. During the period of the staff-monitored program (SMP), the authorities will consult with the Managing Director of the Fund on the adoption of any measure deemed appropriate, at their own initiative or whenever the Managing Director requests such a consultation.
4. The government will communicate to the Fund all the information needed to monitor its progress in implementing its economic and financial policies and the measures required to achieve the program objectives. The authorities of Trinidad and Tobago will review the SMP with the Fund staff no later than end-May 2000.
Annex: Memorandum of Economic and Financial Policies
The Government of Trinidad and Tobago for 1999/2000
1. To consolidate the progress already achieved in improving Trinidad and Tobago's economic performance, the government would like to resume the informal monitoring program with the International Monetary Fund that was in place until the end of 1998. This informal monitoring has served Trinidad and Tobago well and has been a signal to financial markets that over the medium term the government will maintain sound macroeconomic policies and persevere with structural reforms. This memorandum of economic and financial policies reviews recent economic developments and describes the government's economic objectives and policies for 1999/2000 and over the medium term, as laid out in the government's budgetary submission to parliament.1
2. The economy has performed well since the mid-1990s, with steady economic growth, low inflation and a strengthened external position. Real GDP growth in 1999 is estimated at 7 percent after 4½ percent growth in the previous year (Table 1), reflecting strong export-led growth in both the energy and nonenergy sectors. Continued monetary restraint, a relatively stable nominal exchange rate and the absence of any food price shocks, as occurred in 1998, have led to a drop in inflation from 5½ percent in 1998 to about 2 percent as of October 1999, on a year-on-year basis. The unemployment rate is estimated to have declined from 15 percent in December 1998 to about 12 percent in June 1999.
3. A main concern early in 1998/99 was the course of the central government budget because of lower-than-expected oil prices and delays in privatization. However, a doubling of world oil prices in recent months and expenditure restraint strengthened the government's finances, resulting in a small overall central government deficit of ½ percent of GDP compared with the budgeted surplus of ¼ percent. The rest of the public sector--comprising state enterprises, utilities, and statutory authorities--is estimated to have run a deficit of almost 3 percent of GDP, reflecting large capital expenditure (financed by a combination of domestic and external sources). Thus, the public sector is estimated to have incurred an overall deficit of about 3½ percent of GDP in 1998/99, similar to that in 1998.
4. The central bank implemented a strict monetary policy in 1999, with growth of the main monetary aggregates kept at about the growth of nominal GDP. The recent increase in oil prices and a US$230 million September 1999 Euro-bond issue contributed importantly to an overall balance of payments surplus of about US$160 million in 1999, raising gross official international reserves to about US$945 million by year-end, equivalent to about 3¼ months of imports of prospective goods and services. The external current account deficit has narrowed to 6¼ percent of GDP in 1999 from 10½ percent of GDP in 1998, reflecting the increase in the price of oil, expansion in the volume of exports as new petrochemical investments came on line, and a sharp decline in the imports of capital goods following the completion of several major petrochemical projects. The capital account surplus has narrowed as a result of reduced foreign inflows from privatization and foreign direct investment and some large outward direct investments in the regional economy (mainly Jamaica and Barbados).
5. The main objectives of the government's economic program are to maintain a high rate of growth with low inflation and diversify the economic base to reduce further the unemployment rate. In so doing, the program will help provide a bulwark against turbulence in international financial and commodity markets by reducing external debt and increasing foreign exchange reserves.
6. To achieve these objectives, the government intends to preserve conservative fiscal and monetary policies, and an exchange rate policy that maintains the competitive position of the nonenergy sector. Preliminary projections based on the government's policy intentions outlined below indicate that over the medium term (2000-04), real GDP growth will average 5¼ percent per year and inflation 2¾ percent per year (Table 2). Over this period, gross official international reserves are expected to strengthen gradually to about five months of prospective imports (650 percent of external debt service for all maturities). External debt relative to GDP is projected to fall from 19 percent in 1999 to 13¼ percent by about 2004, and external debt service relative to exports of goods and nonfactor services from 12 percent to 7 percent. The most important downside risk to this scenario relates to possible lower oil prices, which would reduce budgetary revenues and impede the accumulation of international reserves. In such a case, the government intends to respond by adjusting expenditures--particularly nonpriority outlays.
7. For 2000, growth is projected at 6 percent and inflation at 3 percent. The projected modest slowing of growth reflects some tailing off of investments in the energy sector that are only partially offset by continued buoyancy elsewhere in the economy. Although external debt service relative to exports of goods and nonfactor services would rise temporarily in 2000, reflecting heavy amortization, external debt relative to GDP would fall and gross official reserves would rise.
8. Over the medium term, the government is committed to achieving an annual surplus of about 1 percent of GDP in the central government budget and a balance in the operations of the rest of the public sector. Although Trinidad and Tobago has important social and infrastructure needs, such a conservative fiscal stance is warranted to avoid excessive budgetary reliance on revenues from the exploitation of depletable natural resources and to build a reasonable nest egg to weather temporary shocks. Given that current revenue effort (excluding oil/gas revenue) appears broadly appropriate for a country at its economic development level, fiscal policy will emphasize achieving a budgetary surplus through effective constraint on expenditure and, in particular, through an appropriate public sector wage policy.
9. For 1999/2000, the central government budget is expected to be roughly balanced.2 The main emphasis of the budget is to increase capital and social spending. Transfers to public enterprises would rise, reflecting a sizeable allocation of funds to allow Caroni (1975) Ltd., the sugar-producing state enterprise, to eliminate its tax arrears. Transfers will also rise to local and regional authorities to meet our objectives of increasing support for health and education. In addition, the budget contains a substantially higher level of capital spending, including about TT$500 million (1 percent of GDP) for the assumption by the budget of the maximum security prison project, which was built by the private sector under a design, finance, and construction arrangement on behalf of the government.
10. Despite a roughly balanced budget, the government will need to finance large external debt amortization in 2000. While domestic instruments will be used in part, the government may also seek external funding in a manner that would reduce the overall interest bill and maintain the country's presence in international markets. In combination with public enterprises borrowing related to their continued restructuring, the government's program provides for an increase in domestic financing of the nonfinancial public sector. Even with this borrowing, there is expected to be ample scope for growth in private sector credit.
11. Given that the oil price assumed in the budget may be low if world prices remain at their current levels, actual revenue may exceed the budgeted amount. The government intends to split in a 2:1 ratio any additional funds between running a budgetary surplus and increasing productive capital spending (and related maintenance of the capital stock) under the government's medium-term public investment plan, which has been backlogged because of budgetary constraints. The program sets quarterly indicative targets for the 1999/2000 central government balance.
12. The government attaches great importance to stepped-up monitoring of the state enterprises, public utilities, and statutory authorities in order to ensure that their commercial performance continues to improve and that a greater share of their capital spending is financed from retained earnings rather than from borrowing in domestic and external financial markets. Accordingly, the program sets quarterly indicative targets for the overall balance of a group of selected public entities.
13. The government also intends to improve the structure of the tax system and to strengthen revenues over the medium term, mainly through broadening the tax base and through continued improvements in tax and customs administrations. In this regard, the government has requested technical assistance from the Fiscal Affairs Department of the IMF to help decide an appropriate tax and royalties regime for energy producers. Expenditure allocation will continue to emphasize social sector and infrastructure spending, and to reduce subsidies to public enterprises.
14. Monetary policy has been conducted with a view to maintaining relative stability of the exchange rate against the U.S. dollar and low inflation. The monetary program for 2000, entails a strengthening of the net creditor position of the central government to the central bank, and some expansion of financial system credit to the nonfinancial public enterprises and to the private sector. Accordingly, appropriate monetary targets and quantitative benchmarks--corresponding to the quarters of 1999/2000--have been established for (i) the net domestic assets of the central bank, (ii) net credit of the financial system to the central government, and (iii) net international reserves, and an indicative target on broad money (Tables 6 and 8).
15. High domestic real lending rates are an impediment to the development of small and medium-sized firms, which is the main source of new jobs, given the capital intensive nature of energy-sector investments. The government recognizes that high real rates reflect in part high reserve requirements on domestic currency denominated deposits in commercial banks.3 Given the strengthening of the fiscal position and the financial sector, continuing stability in the exchange rate and reduction in inflation, at least two phases of the reduction of the reserve requirements on domestic currency denominated deposits in commercial banks will be undertaken in 1999/2000 (2½-3 percentage points each in the first and second halves of the year). The ultimate goal over the medium term is to unify the reserve requirements on domestic and foreign currency deposits in commercial banks and other financial institutions at a lower rate reflecting mainly prudential considerations. The government will issue securities at market-based rates to neutralize the released resources arising from the reduction of these reserve requirements.
16. There has been an ongoing effort to improve open-market operations by expanding and diversifying the instruments used, and by widening market participation to include nonbank financial institutions. Following the establishment of primary dealers in November 1999, the central bank will take appropriate steps under the program to make operational a system of secondary market trading by primary dealers.
17. The balance of payments is expected to remain in surplus over the medium term (Table 2). The external current account is projected to improve from an estimated deficit of6¼ percent of GDP in 1999 to near balance in 2000, mainly as a result of higher oiland petrochemical exports--reflecting both price and volume increases--and lower imports ofcapital goods as large investments are completed.
18. However, the capital account is expected to weaken in 2000, with a bunching of foreign amortization and a further tailing off of foreign direct investments in the energy sector. The government is currently negotiating with the investors in the Atlantic Liquefied Natural Gas project for a possible tripling of the capacity of the plant (amounting to an additional investment of about US$1.3 billion over the next three years) and several other large investments mainly in the petrochemical sector. If agreement is reached on these projects, there would be some overall strengthening of the balance of payments, though the additional capital inflows would be largely offset by higher capital goods imports.
19. Over the medium term, the government intends to maintain a flexible exchange rate policy, with the exchange rate for the Trinidad and Tobago dollar determined largely by demand and supply conditions in the foreign exchange market. In this regard, market mechanisms will be used to smooth out short-term fluctuations in the exchange rate that do not reflect changes in the fundamental economic situation rather than relying on foreign exchange queuing. The government recognizes that a challenge in this regard would be to correctly discern changes of a temporary nature from those associated with changes in fundamentals. To give substance to the emphasis on a market-determined exchange rate policy, interventions in the foreign exchange market will focus on meeting the net international reserves targets and smoothing out large fluctuations. In this context, monetary instruments would also be used to avoid excessive fluctuation in the rate. In any event, the program sets quarterly benchmarks on the net international reserves of the central bank.
20. The government may borrow in international markets to maintain market presence and for overall public sector debt management purposes. However, such borrowings will be limited to ensure continued sustainability of external debt service. In this regard, the program sets cumulative quarterly benchmarks on both short-term and medium- and long-term external borrowings on commercial terms.
21. In further pursuit of the policy of trade liberalization, the government is seeking to expand the export-oriented production base through increased investment (both foreign and domestic). In this regard, the current foreign investment act is being replaced by a more investor-friendly investment promotion act. In addition, as an incentive to export-oriented investment the government is in the process of negotiating with foreign governments agreements on investment promotion and protection, double taxation, and protection of intellectual property rights. Finally, the trade regime will be reviewed with the aim of identifying areas for further liberalization.
22. Regarding other structural policies, the government attaches great importance to reducing the role of the public sector in commercial activities and streamlining the civil service to enhance efficiency. Accordingly, in 1999/2000 the government intends to divest 30 percent of its shareholding in the National Enterprise Limited (NEL)--a government holding company with shares in the National Flour Mills Ltd., Trinidad Nitrogen Co. Ltd., and Telecommunications Services of Trinidad and Tobago Ltd. In addition, selected public enterprises will be prepared for privatization while the monopoly of others will be removed by allowing private sector participation in the industry (Table 7).
23. Also, the Water and Sewerage Authority Act and the Trinidad and Tobago Electricity Commission (T&TEC) Act will be amended to facilitate among other things more private sector involvement. T&TEC will begin reducing its arrears to suppliers. To improve the regulatory framework in the public utilities sector, the Public Utilities Commission is being replaced by the Regulated Industries Commission, which would help maintain a tariff structure consistent with sound commercial principles and maximum welfare for consumers. Also, the government-owned sugar company--Caroni (1975) Limited--will be transformed into a holding company under independent management and subsidiary companies will be established to run its nonsugar operations.
24. Public service reform will be deepened to establish an efficient internal administrative system, which will deliver high quality services and facilitate effective interaction among ministries and departments and between the government and its various stakeholders. In the labor market, to support high quality job opportunities, the government will facilitate the establishment of a fund to compensate employees facing layoffs.
25. The government will reinforce its commitment to poverty reduction through continued pension reform, restructuring of transfers to households in the budget, expanded skills development programs, and strengthening of the various social safety net programs.4 The government intends to allocate additional resources for these programs and encourage private sector participation, while continuing to make them more focused and improving their monitoring.
26. In order to strengthen the statistical base used to set monetary and fiscal policies, the government has requested technical assistance from the Statistics Department of the IMF to develop an action plan for improving key statistics. As part of the program, the government will begin implementing the recommendations of the plan in 2000 within the resources available and will commit additional resources in the future to complete the reforms.
1In 1998 the central government switched to a fiscal year running from October 1 to September 30.
2Given the government's desire to avoid the problems of early 1998/99 following lower-than-expected oil prices, an oil price of US$16 per barrel was used for the 1999/2000 budget estimates and balance of payments projections, which is lower than the latest WEO estimate. On an annual basis, a US$1 per barrel higher oil price would raise central government revenue by about 1/3 percent of GDP and improve the external current account balance by about 2/3 percent of GDP.
3Domestic currency deposits are subject to a reserve requirement of 21 percent in commercial banks and 9 percent in other financial institutions; and a 5 percent liquidity requirement. Foreign currency deposits are subject to a 25 percent liquidity requirement, but not a reserve requirement.
4These include the National Training Agency and the Youth Training and Employment Partnership Program in the skills area; and the Old Age Pension Program, Public Assistance Program, Disability Assistance Program, and School Feeding Program in the social safety net area.