Public Information Notice No.  01/67

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

July 17, 2001

On July 6, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Trinidad and Tobago.¹

Background

Trinidad and Tobago's economic performance improved markedly toward the end of the 1990s owing to sound policies, and significant new energy-related investments. The nonenergy sector has also been buoyant, reflecting a pickup in exports of manufactured goods, and strong demand in construction and services. Real GDP growth accelerated from 3-4 percent in the middle of the decade to 5 percent a year in 1998-99, and inflation and unemployment declined.

In late-1999, to signal their commitment to sound policies, the authorities requested that the Fund staff monitor their economic program covering the fiscal year beginning October. The program aimed at achieving adequate rates of economic growth and job creation, and maintaining macroeconomic stability through a strengthening of fiscal policy, credit restraint, and structural reforms, particularly privatization. Performance under the program was in line with the authorities' objectives. Output grew by just under 5 percent in calendar 2000, inflation remained at about 3½ percent, and the balance of payments strengthened. Unemployment fell slightly, but remained high (12½ percent at mid-2000). Indicators through the first quarter of 2001 suggest that economic performance continues to be favorable. Real GDP growth for the year as a whole is expected to dip slightly owing to the effects of a drought on agricultural output and a moderation in construction activity. Consumer prices are expected to rise by an average of 4 percent.

The central government balance shifted to a small surplus in FY 1999/2000. However, this turnaround stemmed largely from high energy related revenues that masked some weakness in the VAT, and increased spending on infrastructure projects. The performance of the public enterprises also weakened owing to a marked pickup in spending on capital projects that led to an increase in the public debt from 54 percent of GDP at end-1998 to about 60 percent at the end of 2000. During the year, the authorities established an interim revenue stabilization fund (RSF) aimed at setting aside a significant proportion of the windfall revenue from the energy sector. At the end of the fiscal year, TT$415 million (about 1 percent of GDP) had been set aside in an account at the central bank. Continued favorable energy prices in FY 2000/01 are expected to contribute to another small budget surplus, and a further transfer to the RSF, also equivalent to 1 percent of GDP.

Monetary policy is centered on liquidity management and exchange rate stability. Following a tightening of liquidity and interest rates in the first half of 2000 related to the government's temporary financing requirements, conditions eased in the second half of the year. Consequently, interbank rates, which had risen by 2 percentage points to about 12 percent at mid-year, fell back by about the same magnitude toward December. Liquidity conditions during 2001 have permitted a reduction in banks' reserve requirements from 21 percent to 18 percent in late-May. As a result, banks' lending rates have fallen by about 1-1½ percentage points in the year to date.

The external current account surplus rose to 5 percent of GDP in 2000, owing to higher export volumes and prices of petroleum and LNG that more than offset a surge in imports related to the public sector projects noted above. This outturn, together with proceeds of a eurobond issue, led to an increase in gross international reserves at end-December 2000 to US$1.4 billion, equivalent to 3.2 months of imports of goods and services and 48 percent of broad money. By end-April 2001 gross international reserves reached US$1.6 billion (3½ months of imports of goods and services and 50 percent of broad money)

The government's privatization program has quickened in recent months. The first tranche of shares in the state holding company that controls a number of government-owned entities was sold in February 2001, and additional amounts are expected to be offered for sale by the end of FY 2000/01. In June this year, the parliament approved legislation that aims at liberalizing, and fostering competition in the telecommunications sector. Also, agreement in principle has been reached for the sale of part of the operations of the sugar company, and private sector participation in the state water and broadcasting companies is under consideration. Recently, the government announced that it would consider divesting its holdings in the energy sector. In the financial sector, reforms focus on improving the effectiveness of open market operations, developing money and capital markets, and strengthening further the regulatory framework of the financial system.

Executive Board Assessment

Directors commended the Trinidad and Tobago authorities for their strong track record of economic performance in recent years, as evidenced by robust output growth, low inflation, and a strengthening of the external position. Further, unemployment has declined and there has been progress in most social indicators.

Directors noted that these achievements are due largely to sound policies, in particular to broadly balanced budgets, and effective liquidity management. In addition, though, over the past two years, the fiscal and external positions have benefited from high energy prices. Directors commended the authorities for setting aside a portion of the windfall energy-related revenues in an interim revenue stabilization fund (RSF). They urged that the fund be formalized promptly, based on clear, comprehensive rules, and full accountability.

Directors emphasized the necessity of a prudent fiscal policy in the interests of all aspects of economic performance. They considered that, to ensure fiscal soundness in the context of fluctuating energy prices, weaknesses in revenue policy and spending growth need to be tackled. Regarding revenues, they noted the progress in addressing the recent slow growth in nonenergy revenues, but suggested that these efforts be complemented by raising excise tax revenues, restructuring energy sector taxation, reducing tax exemptions, and strengthening tax administration. Regarding budgetary expenditures, Directors emphasized the importance of containing the growth of the civil service wage bill, while ensuring that the salaries of skilled staff remain competitive.

Directors noted that the state enterprise sector is a drain on the budget, which needs to be addressed as a priority, both in the interests of fiscal consolidation and of promoting efficiency and growth. They suggested that more stringent financial reporting requirements for enterprises, and ensuring strict control over their contracting of new debt, would be useful first steps toward improving their performance and accountability.

Directors viewed the authorities' monetary policy framework, which centers on liquidity management and exchange rate stability, as appropriate. They took note of the initiatives being undertaken by the central bank to ensure an adequate supply of government paper for open market operations, and to promote a wider participation of institutions in these operations. They welcomed the recent reduction in banks' reserve requirements, as an initial step in reducing the unevenness of regulations across financial institutions.

Directors considered that the authorities' policies had contributed to exchange rate stability, without adversely affecting competitiveness. Maintaining this balance over the medium term would require the continuation of macroeconomic policies to contain inflation, and structural reforms to raise efficiency.

With respect to the direction of structural reforms, Directors commended the authorities' efforts to reduce—and set clear criteria for—the government's involvement in the economy. They considered that the privatization program should go forward as quickly as possible. They welcomed the proposals to include the state energy companies in the list of government assets that could be offered for sale, and noted the authorities' intention to move ahead with the restructuring of the sugar sector. Directors commented that the strength of recent performance primarily reflected developments in the energy sector. It was therefore appropriate that economic policy should facilitate the flow of additional resources to this sector. At the same time, Directors supported the authorities' desire not to become over-dependent on the energy sector, and to diversify the economy accordingly. In this regard, they were pleased to note the continuing robustness of the manufacturing and service sectors.

Directors mentioned Trinidad and Tobago's growing importance as a regional financial center, and welcomed the steps to keep supervision of the financial system in line with international standards, particularly in the areas of cross border activity, the consolidated supervision of financial groups, and the regulation of nonbanks.

Directors remarked on the generally good quality of statistics but recommended that the authorities implement promptly the recommendations of the Fund's Statistics Department, especially in the area of national accounts, prices, and the finances of the state enterprises.

Directors welcomed the authorities' intention to enter into a new staff-monitored program.