Public Information Notice No. 98/41

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

June 24, 1998

On June 15, 1998, the Executive Board concluded the Article IV consultation with Trinidad and Tobago¹.

Background

Since emerging from a decade-long decline in output and international reserves in the early 1990s, the Trinidad and Tobago economy has expanded at a steady, if moderate rate underpinned by growth in the oil, gas and petrochemical sectors. More recently, the economy is experiencing an acceleration in growth owing to the strength of investment in the petrochemical sector. Extensive structural reforms have substantially liberalized the external and financial sectors and downsized the public sector. While inflation has declined steadily to a rate near that of trading partners in the past several years, unemployment has fallen more modestly from its peak of about a quarter of the labor force in the mid-1980s to about 15 percent in 1997, because of the capital intensive nature of the important energy and petrochemical sector.

The fiscal accounts and the balance of payments have registered consistent, but declining surpluses in recent years. In the public sector, the surplus has contracted because profitable state enterprises have been divested, income taxes have been reformed, external tariffs have been reduced, and public infrastructure investment has been stepped up. More recently, revenues have been weakened by large investment-related write-offs, the drop in world oil prices, and the lack of progress in improving tax administration. However, these losses have been temporarily offset by divestment proceeds and advance payments for oil exploration contracts. In the external sector, the current account has opened a sizeable deficit as raw material and capital goods imports related to the boom in energy and petrochemical investment have risen sharply. Nevertheless, large private capital inflows, particularly of foreign direct investment, have financed these imports and permitted the continued accumulation of international reserves.

Rapid innovation in the financial system to circumvent the high reserve requirements has undermined the effectiveness of monetary policy, and the authorities have recently initiated measures to address the issue.The real effective exchange rate has varied only about 2 or 3 percent around its average since the currency was floated in 1993. However, the currency has been under intermittent downward pressure, and the central bank has alternated between moral suasion and periodic intervention to stabilize the nominal rate.

Executive Board Assessment

Directors commended the authorities for having successfully pursued sustained growth with low inflation in recent years. The economy is now experiencing an investment boom in the petrochemical sector, which would sharply accelerate economic growth in 1998. Directors endorsed the authorities’ efforts to maximize the beneficial spillover effects of this boom on the rest of the economy by increased attention to infrastructure investment needs. However, Directors noted the impact on the public finances of the recent drop in oil prices and the temporary loss of revenue due to the intensified use of investment tax credits, as well as the challenges posed to the effectiveness of monetary policy by the rapid pace of innovation in domestic financial markets. In this environment, Directors supported the authorities' efforts to maintain a prudent fiscal stance and to move promptly to restore the effectiveness of monetary policy instruments.

Directors supported the authorities’ efforts to maintain the 1998 central government fiscal surplus target by cuts in discretionary expenditure, while noting the importance of increasing the proportion of expenditure on education, health, and social programs. They stressed, nevertheless, that to ensure medium-term sustainability, high priority should be given to implementing improvements in tax administration and enforcement, drawing on the IMF’s recommendations. They also suggested addressing skilled personnel shortages in the public sector by correcting the compression in the structure of the salaries.

Directors encouraged the authorities to continue the efforts to restructure some of the public utilities, but expressed concern about the prospect of continued losses by certain large state enterprises, namely Caroni and Petrotrin, and recommended actions to limit the financial burden imposed by these enterprises. They also recommended the adoption of a comprehensive plan to shorten significantly the long list of remaining state-owned enterprises.

Directors expressed concern about developments in the domestic financial markets that had reduced the effectiveness of monetary control and resulted in an unduly rapid growth of credit in the economy. Innovation in domestic financial instruments, aimed at circumventing high andnon-uniform reserve requirements, has created distortions and undermined the central bank’s ability to control the growth of credit. They welcomed the initial measures taken by the authorities in response to these developments, but urged the authorities to take prompt steps to address the problem of high and uneven unremunerated reserve requirements, noting that delay may have undesirable effects. Directors recommended that legal reserves be lowered to prudential levels, and that they be applied uniformly to all commercial bank liability categories, including those in foreign currency. Some Directors also expressed concern about the proliferation of nonbank financial intermediaries and their relationship with the banking system. In this regard, they encouraged the strengthening of banking supervision. Directors endorsed steps under way to develop indirect instruments for monetary policy, along the lines of the recommendations of the recent mission of the IMF’s Monetary and Exchange Affairs Department.

Although there is no evidence of a parallel market for foreign exchange, Directors expressed concern over the extended use of moral suasion in exchange rate management, which had resulted in periodic queuing for foreign exchange purchases. Directors urged a more flexible approach to exchange rate management, and closer monitoring of external competitiveness.

Directors noted that the quality and timeliness of some economic data required for effective surveillance, especially in the public sector vis-à-vis public enterprises and utilities, need to be improved. They urged the authorities to bring about a substantial improvement in areas of statistical weakness.

The authorities’ decision to continue with the arrangement of informal monitoring of their economic program by the staff was welcomed as a clear indication of their commitment to sound economic management.