On June 16, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation1 with Trinidad and Tobago.
Trinidad and Tobago’s economy is embarking on a sustainable growth path. Maintenance-related slowdowns in the energy sector are ending, while non-energy growth is robust, with economic slack being used up. Headline inflation is trending down (in part for statistical reasons), while core inflation remains contained at about 2–3 percent. The unemployment rate has fallen to only 3¾ percent, although this masks sizable underemployment in government “make-work” programs. The fiscal balance is likely to improve in fiscal year 2013/14, with the deficit falling to only 1½ percent of GDP, but largely for ad hoc reasons rather than durable improvements in revenues or expenditures. The external current account surplus has rebounded to over 10 percent of GDP and reserves are at 12 months of imports. However, the foreign exchange allocation system, although it had generally worked well for several years, led to fairly widespread and persistent foreign exchange shortages, as supply and demand imbalances grew from late 2013. A recent series of actions by the central bank has improved the supply of foreign exchange to the market.
The time is drawing near for policy tightening. The main external risk is from a sustained decline in energy prices. The domestic medium-term challenges are to boost long-run growth through structural reforms and reorienting fiscal policy, with measures to save more of the nation’s nonrenewable energy wealth, and limiting current expenditures while increasing growth-enhancing capital spending. Such policies would likely pose near-term headwinds, but enhance competitiveness and boost potential growth in the non-energy sector. However, significant reforms are likely to be delayed by the electoral calendar. A greater degree of flexibility is needed in the foreign exchange system to avoid further shortages.
Executive Directors welcomed the improved growth outlook, and noted the strong external position and limited fiscal vulnerabilities. They agreed, however, that the reduction in economic slack and the need for a durable consolidation of the fiscal position suggest that a tightening of macroeconomic policies may be necessary in the near future. Over the medium term, Trinidad and Tobago remains vulnerable to a decline in energy prices, which calls for structural reforms to diversify the economy and improve its growth potential.
Directors concurred that the authorities should stand ready to start tightening monetary policy in view of the reduced labor market slack and high consumer credit growth, and to prepare for the spillovers from the normalization of monetary policy in the United States. Implementing this tightening, however, could be complicated by banks’ excess liquidity and the weak monetary transmission mechanism. Against this background, Directors concurred that tighter prudential regulations could be considered.
Directors welcomed recent measures to improve the budget outturn for the current fiscal year. They underscored the importance of moving toward fiscal surpluses as soon as feasible, using more durable improvements in revenues and expenditures, in order to make better use of the country’s nonrenewable energy endowment. Spending should be reoriented away from current expenditure toward growth-enhancing capital projects, including by better targeting social benefits and reducing energy subsidies. Broadening the non-energy tax base remains key to strengthening revenues.
Executive Directors welcomed continued progress in financial sector reform, including improvements to the legislative framework for financial regulation. They also supported the actions taken to bring systemically important non-bank financial institutions into the regulatory perimeter and looked forward to a comprehensive assessment of Trinidad and Tobago’s regime against money laundering and the financing of terrorism.
Directors took note of recurring shortages in the foreign exchange market. They encouraged the authorities to allow for sufficient flexibility in the operation of the market to ensure that it clears, especially given the ample foreign reserve position.
Directors expressed concerns about the lack of reliable and timely economic statistics, which severely limits the ability to conduct surveillance. They recommended prompt action to provide adequate resources to the statistical office.
Directors emphasized the benefits of further structural reforms to boost competitiveness and lay the foundation for sustainable and diversified growth. They welcomed recent measures taken to reduce business impediments, but noted that action remains necessary in several areas. In particular, inefficiencies in the public sector and distortions in the functioning of labor markets hinder private investment and should be addressed decisively.