Public Information Notice: IMF Concludes Article IV Consultation with Trinidad and Tobago

June 21, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 9, 1999, the Executive Board concluded the Article IV consultation with Trinidad and Tobago.1

Background

After emerging from a prolonged period of decline in the 1980s, the Trinidad and Tobago economy has performed well in recent years, with steady economic growth and low inflation. Although a sizeable investment boom in the energy sector should contribute to faster growth in the coming years, a serious terms of trade shock in 1998 limited output growth. Inflation has declined to a relatively low level, although rising food prices led to some pick-up in 1998. The unemployment rate, although declining, remains high, at about 14 percent.

The deficit of the nonfinancial public sector in 1998 reflected deterioration in the financial position of the central government and a small improvement in the rest of the nonfinancial public sector. The central government deficit of just over 1½ percent of GDP in 1998 reflected the absorption of sizeable off-budget capital expenditures incurred in earlier years. In addition, tax collections weakened, owing to lower than projected oil prices and tax deductions associated with investments in the energy sector that were only partly offset by improvements in value-added tax and customs collections.

Monetary policy continued to be tight in 1998, although monetary aggregates fluctuated in response to changes in reserve requirements. In April 1998, the authorities extended the coverage of reserve requirements to new fund-raising instruments, designed to avoid high reserve requirements, and lowered the required reserve ratio on the deposit liabilities of commercial banks to 21 percent from 24 percent. The banks subsequently reduced their reliance on these new instruments.

The external current account deficit remained at around 10 percent of GDP in 1998 and continued to be largely financed by an inflow of foreign direct investment, which was sufficient to allow some build up of foreign exchange reserves. Deterioration in the trade account was offset by an improvement in the services account. The larger trade deficit reflected increasing imports of capital goods and construction materials related to foreign direct investment projects in the petrochemical sector, and a weakening of oil and petrochemical export earnings owing to the drop in their prices. In 1999, the external current account deficit is projected to improve significantly, even without a recovery in export prices, as export volumes expand. The exchange rate has continued to be under moderate and intermittent pressure, and limited queueing and foreign exchange market intervention have been used in an effort to maintain a nominal exchange rate below TT$6.30.

There was some progress on structural change in 1998. There were several changes in the administration of the income tax designed to improve compliance. The threshold on the VAT was raised to exempt small taxpayers and free up administrative resources to focus on compliance by large taxpayers. A large taxpayers' unit was formed.

Since completion of a stand-by arrangement in 1991, the IMF staff has collaborated with the authorities in formulating and monitoring their economic policies under annual staff-monitored programs (SMP). While these SMPs have been generally quite successful, a number of deviations from program benchmarks occurred in 1998, largely as a result of the sharp decline in oil prices.

Executive Board Assessment

Executive Directors commended the authorities for their pursuit of sound macroeconomic policies and for the progress achieved in implementing a number of structural reforms, which had helped achieve sustained growth with low inflation, a steady decline in external debt, and falling unemployment. Moreover, they noted that an investment boom in the energy sector was expected to spur economic growth and diversification of exports, as well as strengthen fiscal revenues over the longer run.

Directors stressed the need for the authorities to continue to maintain a prudent fiscal stance and to accelerate their program of structural reforms so as to achieve a high rate of growth, address the still high unemployment rate, and cushion the impact of fluctuating oil prices. Directors welcomed the authorities' efforts to restrain expenditure in the current fiscal year in order to compensate for the shortfall in oil revenues and achieve their budget target. They stressed that, over the medium term, it would be important to strengthen revenues through continued improvements in tax administration and broadening of the tax base, including with respect to the value-added tax. Directors welcomed the authorities' commitment to eliminate off-budget operations by bringing all financial activities of the central government under the control of the annual budget process.

Directors encouraged the authorities to press ahead with improvements in the performance of public enterprises and in trade liberalization.

Directors noted that the pursuit of prudent fiscal and monetary policies had supported a stable exchange rate, but urged the authorities to take a more flexible approach to management of the rate, and in particular to avoid any emergence of queueing, which has at times characterized the foreign exchange market.

Directors commended the authorities for their responsive management of monetary policy. They welcomed the authorities' decision in 1998 to lower reserve requirements on domestic currency deposits in commercial banks and to extend them to cover new fund-raising instruments, which the commercial banks had designed to circumvent the high requirements. Directors recommended that the authorities take early steps to lower these requirements to prudential levels. They endorsed the authorities' efforts to continue to improve surveillance of the banking system and to strengthen further the indirect instruments of monetary policy.

Directors encouraged the authorities to resume the informal monitoring of their economic program by the IMF staff in the context of a macroeconomic framework covering the 1999-2000 fiscal year, which would be a clear indication of their commitment to sound economic management. They welcomed the authorities' decision to publish the Article IV consultation staff report under the pilot project for the publication of these reports.

Trinidad and Tobago: Selected Economic Indicators
  1996 1997 Prel.
1998		 Proj.
1999
  (Annual percentage changes)
Output and prices  
Real GDP 3.5 3.5 3.2 4.5
GDP deflator 4.0 2.4 -2.1 2.4
Consumer prices (annual average) 3.3 3.7 5.6 4.2
  (In percentage of GDP)
Investment and savings  
Gross investment 16.4 27.1 25.9 22.0
Gross national savings 18.8 17.1 15.8 15.6
Budgetary operations 1/  
Overall central government balance 0.5 0.1 -1.6 -0.4
Total revenue and grants 28.0 27.6 26.9 27.9
Total expenditure and net lending 27.5 27.4 28.5 28.3
External sector  
Exports, f.o.b. 44.3 44.1 40.2 42.3
Imports, c.i.f. 36.9 52.6 51.8 46.1
External current account balance 2.4 -10.0 -10.0 -6.4
External public debt (end-of-period) 34.2 26.8 24.6 25.3
Gross reserves (in months of imports) 2/ 2.0 2.6 3.2 3.9
  (Changes as a percentage of liabilities to the
private sector at the beginning of the period)
Monetary sector  
Net foreign assets 9.2 4.5 3.4 7.6
Net domestic assets 10.2 18.6 -10.6 1.6
Money and quasi-money 7.3 7.7 5.4 6.6
Sources: Data provided by the Trinidad and Tobago authorities; and IMF staff estimates and projections.
1/ The central government switched to an October 1-September 30 fiscal year as of October 1, 1998. Hence 1999 refers to October 1, 1998-September 30, 1999.
2/ Imports of goods and nonfactor services in the following year.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100