Press Release No. 16/115

Press Release: IMF Staff Completes 2016 Article IV Mission to Trinidad and Tobago

March 17, 2016

An International Monetary Fund mission, headed by Mr. Elie Canetti, visited Trinidad and Tobago during March 3–March 15, 2016 to conduct the annual Article IV consultation. Mr. Canetti issued the following statement in Port of Spain at the mission’s conclusion:

“Trinidad and Tobago’s economy is confronting a major shock with the sharp fall in energy prices that accelerated through early 2016. Based on available information, including on job losses and continued supply-side constraints in the energy sector, the mission projects GDP to fall 1 percent this year. In addition, declines in energy-based revenues will constrain the Government’s ability to act as an engine of growth. Beyond 2016, new energy projects will modestly boost energy production, while non-energy growth could start to recover, provided there is confidence in the country’s ability to navigate the harsher global environment.

“Despite the great challenges posed by the need to adjust to energy prices, Trinidad and Tobago still has enormous strengths, including a well-educated work force and a stable political system. With substantial financial buffers and low, albeit rising levels of public debt, Trinidad and Tobago is not in a crisis. Nonetheless, in recent years, taking into account the size of energy revenue windfalls, the country has under-saved and under-invested in its future. As a consequence, the imbalances that are now starting to build up could lead the country to uncomfortable levels of debt and external financial cushions absent further action.

“The new Government agrees that policy adjustments are needed. Since assuming office six months ago, the Government has already taken some difficult but necessary steps in the face of sharply lower energy revenues, including widening the VAT tax base, cutting fuel subsidies, reducing the number of Ministries with a view to streamlining the civil service, and instituting spending cuts. Despite these measures, with the further fall in energy prices since the budget, the mission projects the FY 2016 budget deficit at some 11 percent of GDP, although if one were to consider asset sales as revenue rather than financing, this would be equivalent to about 5 percent of GDP. Continued projected deficits of this size call for further fiscal consolidation, perhaps of around 6 percent of GDP over the next few years.

“The Government has already identified additional measures that could meet some portion of this, including improving tax collections (with the help of a unified revenue authority), increasing gaming taxes and reintroducing property taxation. We believe there is further scope to widen the VAT base and increase some excise taxes, which are low by the region’s standards. The Government has agreed to conduct a wide-ranging expenditure review, and will seek the assistance of the World Bank to rationalize and reverse the unsustainable increases in spending on transfers and subsidies over the last several years.

“We support the Government’s intent to conduct a national dialogue on fuel subsidies with a view to phasing them out over time, and to review the CEPEP and URP Government employment schemes and the Government Assistance for Tuition Expenses (GATE) program to make them more cost-efficient. Reducing such expenditures would also leave room for a needed reorientation towards development spending.

“The country’s external situation has been very challenging. Against a backdrop of foreign exchange shortages that have intensified since the beginning of 2015, the recent sharp falls in energy prices are further reducing the available supply. Reflecting those energy price declines, the current account of the balance of payments is estimated to have registered a deficit of over 5 percent of GDP in 2015 after years of surpluses. The mission estimates that deficits will continue, albeit at a reduced level of 2–3 percent of GDP as the economy slows and public spending is contained. The modest pace of depreciation should help to improve the current account. On the other hand, speculative and precautionary motives are reportedly increasing demand for foreign exchange. In the circumstances, greater flexibility in the foreign exchange market would be critical to resolving the foreign exchange shortages.

“While it is appropriate that the Central Bank paused in its interest rate hiking cycle in January, there is little scope, as The Bank agrees, to cut interest rates, at least until shortages of foreign exchange are ameliorated.

“The mission met with Government officials, banks, and private sector representatives to assess the foreign exchange legal framework and market practices and conditions, including the widespread shortages of foreign exchange, to ascertain whether there are measures in place which may give rise to exchange restrictions or multiple currency practices.”

“The financial system remains sound, but some reform legislation has been lagging. Accordingly, the mission welcomes the Government’s intention to push forward with passing long-delayed insurance legislation, while improving the supervision of credit unions and systemically important financial institutions is also a priority.

“Structural reforms remain key to unlocking the country’s growth and diversification potential. The mission welcomes the continued emphasis on improving the business environment and streamlining Government “make-work” programs to help alleviate shortages of less-skilled labor. The Government has initiated a much needed review of GATE, which we trust will better focus the educational system. Procurement reform, a key Government priority, is needed to assure contractors of an even playing field and reduce perceptions of corruption. The Government has also made a strong start on the urgent need to reform the country’s statistics agency, with a view to turning it into a strong and independent National Statistical Institute.

‘The authorities were in broad agreement with the mission’s assessment, and the mission wishes to express its gratitude towards the authorities for their candor and gracious cooperation and hospitality throughout our stay.”