Public Information Notice No. 12/40

Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation Discussions with Trinidad and Tobago

April 27, 2012

On March 28, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 2011 Article IV consultation discussions with Trinidad and Tobago.¹

Background

The economy of Trinidad and Tobago is turning the corner and growth is expected to resume in 2012 after an extended slowdown lasting three years. A range of indicators point to a broad turnaround in the non-energy sector beginning in the second half of 2011. Real GDP is estimated to have contracted by 1.3 percent in 2011 mainly reflecting production disruptions in the energy sector and a lackluster performance in the non-energy sector. Inflation has picked up, rising from a historic low of 0.6 percent in August 2011 to 6.8 percent in January 2012, as food prices increased. However, core inflation, remained low at 1.8 percent in January. Unemployment has remained moderate 5.8 percent in mid-2011. The current account surplus rebounded strongly to 20 percent of GDP in 2010 and an estimated 21 percent in 2011 from 8 percent in 2009, stemming mainly from the improvement in oil prices and a recovery in non-energy exports. Gross official reserves reached US$9.8 billion (over 13 months of imports) at end-December 2011.

In the 2010/11 fiscal year, the central government’s finances were nearly balanced thanks to a strong revenue performance and lower than planned current and capital spending. Nevertheless, the deterioration in the non-energy balance implied a large fiscal stimulus. The debt-to-GDP ratio has significantly risen from 25 percent of GDP in 2008 to 33 percent in 2011.

In the face of subdued inflation, the Central Bank of Trinidad and Tobago (CBTT) has maintained an accommodative monetary policy lowering the policy rate by 75 basis points since end-2010 to 3 percent. After a decline that lasted 20 months, commercial bank credit to the private sector has been noticeably more dynamic since mid-2011 (5.3 percent growth in November y-o-y), consistent with the non-energy sector recovery. Commercial banks remain well capitalized, profitable, and liquid. The banking system’s non-performing loans (NPLs), after peaking at 7.6 percent of total loans in August 2011, have declined to 6.4 percent in November and remain low by regional standards. Following the collapse of the CL Financial Group and its insurance subsidiary, CLICO, significant progress has been made in compensating CLICO claimants. Nevertheless, vulnerabilities remain.

Real economic activity is expected to increase by 1.7 percent in 2012 as the non-energy sector picks up momentum with the acceleration of government investment and the restructuring of CLICO liabilities and as the energy sector resumes normal operations later in the year. Inflation is expected to remain moderate.

Executive Board Assessment

Executive Directors welcomed the signs of economic recovery following a prolonged slowdown, and commended the authorities for implementing supportive policies, aided by ample buffers, which had helped maintain stability. The immediate challenges are to support the recovery and to address remaining financial vulnerabilities. Enhancing competitiveness and promoting economic diversification continue to be important medium-term objectives for Trinidad and Tobago.

Directors supported the 2011/12 budget, which provides stimulus through a timely execution of the budgeted investment programs, while emphasizing the need to contain current spending and improve the targeting of social programs.

Directors recommended developing a medium-term fiscal framework that strikes an appropriate balance between consuming, saving, and investing energy revenue, with a view to resuming net savings of energy wealth for future generations. Containing real increases in transfers and subsidies, strengthening tax collection efforts, and broadening the tax base would facilitate a gradual return to fiscal surpluses and further improve policy buffers. Directors saw scope for clarifying the objectives and operating framework of the Heritage and Stabilization Fund to reflect the preference for savings while maintaining the stabilization component in view of volatile energy prices.

Directors supported maintaining the current low interest rate policy to sustain the nascent economic recovery. They stressed the need for continued strong surveillance of the financial sector. Directors welcomed the intense monitoring and supervision of banks, including through credit reviews and stress testing, and progress toward consolidated supervision. They encouraged further efforts to strengthen the regulatory environment of non-bank institutions and to implement the recommendations of the Financial System Stability Assessment. Directors welcomed the progress toward the resolution of the failed insurance company, and looked forward to its swift completion.

Most Directors supported the staff’s call for further steps to improve the functioning of the foreign exchange market. A few Directors acknowledged the authorities’ concern about greater exchange rate flexibility and its potential impact on competitiveness in the short term. Given depleting energy resources, it will be important to press ahead with structural reform to support diversification by boosting competitiveness in the non-energy sector, fostering a more vigorous private sector, and further enhancing the business environment. Improving the performance of the public administration and delivery of public services will be essential in this regard.

Directors highlighted the urgency of improving the quality and timeliness of statistics. They welcomed the authorities’ plans to create an independent statistical agency and to subscribe to the Special Data Dissemination Standard.