An International Monetary Fund mission, led by Mr. Elie Canetti, visited Trinidad and Tobago during March 18-April 1, 2014 to conduct the country’s annual Article IV consultation. Mr. Canetti issued the following statement in Port of Spain at the conclusion of the mission today:
“Trinidad and Tobago is experiencing more robust growth after several years of sub-par performance. With the end of maintenance-related outages in the energy sector, we project the economy will grow around 2 1/2 percent in 2014 after around 1 1/2 percent growth in 2013. The non-energy sector was fairly buoyant in 2013, which we anticipate will continue to be the case in 2014. Core inflation has been relatively quiescent, though it picked up to 2.7 percent in February 2014.
“The country’s external position remains healthy, with external reserves at US$10.0 billion, while the Heritage and Stabilization Fund’s assets continue to grow. Serious data deficiencies hinder a more complete assessment of balance of payments developments, but our best estimate is that the current account surplus should continue to be in double digits (as a percent of GDP) in 2014 thanks to a strong rebound in energy exports from 2013. However, there are signs that the growth of imports, notably automobiles, may be picking up. On the capital account, there is anecdotal evidence that portfolio outflows are responding to interest rate differentials that have moved marginally in favor of investing in U.S. dollar-denominated assets.
“The mission projects a fiscal deficit of about 1½ percent of GDP in 2013/14, closer to balance than envisaged in the budget statement. However, this is due in part to one-off developments, without which the deficit would be closer to 3½ percent of GDP. Looking ahead, the case for expansionary fiscal policies to support the economy is waning amid signs that excess capacity, notably in the labor market, is rapidly being used up. Thus, the smaller budget deficit is welcome. We see a strong case to continue fiscal consolidation into the medium-term, but based on policy changes that durably improve the structure of non-energy-based revenues and spending. The mission welcomes the government’s efforts to significantly reduce or eliminate arrears on energy subsidies, VAT refunds and to suppliers.
“With excess liquidity in the banking system rising to TT$7.1 billion through March 2014, monetary policy will have to continue contending with a structural liquidity overhang for the foreseeable future. In addition, the time for withdrawing the accommodative monetary stance of the past few years may be coming nearer as the unemployment rate has fallen meaningfully, credit to consumers and for real estate is growing at a relatively rapid pace, core inflation has risen, and interest rate differentials are shifting in favor of U.S. interest rates. While credit to business has continued to fall, this appears to be due primarily to a lack of demand, in part given firms’ already ample cash resources.
“The foreign exchange market has been relatively tight recently. Despite significant dollar injections from the Central Bank of Trinidad and Tobago (CBTT), recent reports suggest that foreign exchange shortages, while temporary, have been fairly widespread. Increases in foreign exchange inflows may soon help to alleviate shortages, although some uncertainty about the availability of foreign exchange may be providing an incentive to hold larger than usual cash balances in foreign currency. The mission looks forward to seeing the impact of a new system of allocating foreign exchange that commenced April 1, but calls on the CBTT to consider moving towards a more flexible, market-clearing system should significant unanticipated shortfalls recur.
“Fiscal policy should be set in a long-term context that ensures the country’s non-renewable energy reserves are used as a stepping stone to lasting prosperity. This requires increasing savings from the substantial resources extracted from this sector, which should be accomplished by moving the fiscal position into surplus within a few years. In addition, expenditures should shift away from consuming the country’s resources towards investing them for the future. In particular, we would like to reiterate our previous advice to quickly move to start ending fuel subsidies, consistent with the IMF’s increasing emphasis on this issue globally. Fuel subsidies are extremely costly and inequitable, starving the government of resources that could be better targeted towards poverty reduction. They also induce excessive reliance on automobiles, leading to pollution and traffic jams that have a materially adverse impact on productivity. In addition, overlapping social programs should be rationalized and better targeted to the less fortunate segments of society. Revenue policies should be aimed at broadening tax bases to ensure a level playing field across activities.
“The government should continue to build on recent successes in implementing structural reforms to unlock the country’s full growth potential. There has been measurable progress in easing the impediments to doing business and in financial sector reforms, although more remains to be done in both areas. Beyond that, there are still critical needs for streamlining the government’s structure and improving the efficiency of the public service and the functioning of labor markets. The country would also benefit from reforms in procurement, corporate bankruptcy and bank resolution. Finally, we wish to place the greatest stress on remedying the continued shortcomings of the Central Statistical Office (CSO) in generating critical data, which hamper effective policy making and lessen transparency.