Trinidad and Tobago: 2018 Article IV Consultation—Press Release and Staff Report

2018 Article IV Consultation-Press Release and Staff Report

Abstract

2018 Article IV Consultation-Press Release and Staff Report

Background

1. The 2018 Article IV Consultation took place in a difficult, but promising economic environment. After a prolonged recession, the economy is projected to return to positive growth from 2018 as the recovery takes hold in the energy and non-energy sectors. The relatively favorable circumstances in 2018, with stronger energy prices and low inflation, provide a window of opportunity to implement a comprehensive medium-term strategy that signals determination to resolve the challenges to sustained strong growth and complete the needed reforms, many of which are ongoing (Annex I).

Recent Economic Developments

2. The economy shows signs of improvement from the second half of 2017 following two years of recession. Real GDP contracted at a slower pace of 2.6 percent in 2017, following the 6.1 percent drop in 2016 driven by energy sector shocks. The strong recovery in gas production in 2017H2 had knock-on effects on downstream industries, while oil production remained largely flat, at a historically-low level. The weak non-energy sector dampened the overall growth, reflecting weak activity in construction, financial services, and trade; continued shortage of foreign exchange (FX) and slow implementation of public investment projects weighed on the sector. Headline inflation fell to historic lows of 1.9 percent in 2017 on weak aggregate demand. While at relatively low levels, the unemployment rate rose to 5.3 percent in 2017Q2, from 3.3 percent in 2014Q2, with youth unemployment at an estimated 12 percent in 2017, compared with 7.9 percent in 2014.

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Contributions to Real GDP Growth

(Percentage points, left; Percent, right)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Country authorities and IMF staff calculations.

3. Fiscal performance improved. The fiscal deficit reversed its rising trend of the past 7 years, registering a slightly lower overall deficit in FY2017. Despite higher energy prices, energy-related revenues remained flat, due in part to fiscal incentives.1 The significant reduction in expenditures by 2.2 percent of GDP implemented through cuts in spending on transfers and subsidies (1.6 percent of GDP), goods and services (1 percent of GDP), and capital investment (0.7 percent of GDP) was partly offset by the fall in non-energy revenues from weak economic activity and increased interest payments. Borrowing and one-off sources (from the Heritage and Stabilization Fund (HSF) and asset sales) amounting to 3.5 percent of GDP helped finance the deficit.

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Central Government Revenue and Financing

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Ministry of Finance; and IMF staff projections.
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Central Government Deficit and Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

4. Government debt continued to rise, while financial buffers remained large. Central government debt (excluding borrowing from an overdraft facility with the Central Bank of Trinidad and Tobago (CBTT)) rose to 42 percent of GDP at end-FY2017, from 37 percent in end-FY2016, reflecting borrowing from domestic and external markets.2 Public debt, including contingent liabilities from guaranteed debt of state-owned enterprises and statutory authorities, reached 61 percent of GDP, approaching the government’s soft target of 65 percent, while external public debt increased slightly to 16.4 percent of GDP. Financial buffers remained substantial, with the HSF assets at 25.4 percent of GDP and sinking-fund assets (liquid-asset holdings to cover future principal payments) at 4.5 percent of GDP.

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Central Government Overdraft with CBTT

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: CBTT; and IMF staff estimates.

5. The external position improved, with a strong current account surplus of 10.2 percent of GDP in 2017.3 The goods-and-services balance improved by almost 11 percent of GDP, driven by higher energy-related exports and a modest recovery of energy prices. Lower imports due to weak domestic demand also played a role. However, the financial account registered strong outflows (driven largely by net acquisitions of portfolio and other investment instruments by domestic residents), resulting in a US$1.1 billion fall in gross international reserves (GIR), which still provide 9.4 months of import cover as of end-2017. The country remains a net creditor, although both gross reserves and net international investment position (NIIP) have been declining steadily since 2014.4

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Current Account, Foreign Assets and External Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Ministry of Finance; CBTT; and IMF staff calculations.Note: Numbers on top of Gross International Reserves indicate in months of imports.
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Current Account Balance and Capital Flows

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

6. The tightness in the FX market seems to have eased compared to last year, but the market continues to be in a disequilibrium with strong excess demand. FX shortages remain despite the 7-percent nominal depreciation in 2016, the strong current account surplus in 2017, and increased FX inflows from energy companies, and notwithstanding the CBTT’s bi-monthly intervention to maintain a stable exchange rate vis-à-vis the US$. Anecdotal evidence continues to suggest the existence of an informal parallel market. Notwithstanding the historically low inflation, the CBTT raised its policy rate on June 29 to 5 percent, considering the signs of a pickup in economic activity and the likely impact of rising US-TT interest-rate differentials on capital flows and the exchange rate.

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Inflation and Nominal Interest Rates

(In percent)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: CBTT; Haver; and IMF staff calculations.

7. The financial system remained stable, notwithstanding the deep recession in the past two years. Banks are well-capitalized and profitable and credit quality remains relatively high, with nonperforming loan (NPL) ratios one of the lowest in the region (3 percent) and loan-loss provisioning at 66 percent of impaired loans. The NPL ratio has been declining since 2011, with banks actively resolving large NPLs and the recession not fully reflected in unemployment until recently. However, late 2017 and early-2018 data indicate some weakening in asset quality, with the NPL ratio rising for real estate and credit cards, and some discernible increase in the overall level of past-due loans for 30–89 days. The insurance sector remained resilient despite large claims from the 2017 hurricanes in the region and the impact of the low-interest-rate environment on earnings. Private-sector credit grew at a robust pace (including from non-bank financial institutions), with business credit recovering after a virtual halt in 2016, while household credit expanded more slowly—the fall in the growth of credit-card and vehicle loans was offset by a pickup in refinancing and debt consolidation.

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Commercial Banks Financial Soundness Indicators, 2017

(in percent)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Central Banks of Caribbean countries; and IMF staff calculations.Note: Caribbean average does not include Suriname due to lack of data. Caribbean average of FX loan to total loan only include ECCU countries, JAM and TTO. Barbados data is 2017Q2.
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Credit to Private Sector Growth

(In percent, year-on-year)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Source: Central Bank of Trinidad and Tobago.

Outlook and Risks

8. Economic prospects are expected to improve broadly over the medium term. The economy is projected to recover as energy projects come onstream and the recovery takes hold in the non-energy sector. Near-term growth will likely be led by natural-gas production, with continued challenges in the oil sector and subdued execution of the Public-Sector Investment Program (PSIP). Gradual recovery in the non-energy sector should help stabilize growth at 1.5 percent over 2018–23, with inflation projected to rise along with non-energy sector recovery to 3.8 percent. The fiscal deficit is projected to narrow to an average 4 percent of GDP over the medium term as energy revenues rise, non-energy revenues recover, and the efficiency of transfers and subsidies improve. With one-off financing options diminishing over time, central government debt (excluding overdrafts) is expected to reach 43 percent of GDP by 2023, and public debt 64 percent.

9. The external sector outlook is subject to price volatility, energy-supply shocks, and persistent fiscal deficits. Despite projected current account surpluses averaging 6.6 percent of GDP over the projection period, GIR are projected to fall to about 5.4 months of imports by 2023 with continued FX intervention under the current FX regime, absent a sharp rebound in energy prices and a tighter fiscal stance. The steady decline in reserves, in turn, suggests declining financial buffers over the medium term vis-à-vis the projected levels of central government debt-to-GDP net of HSF buffers.

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Central Government Net Debt, Reserves and Energy Price

(In percent of GD P, unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: CBTT; Ministry of Finance; and IMF staff estimates.

10. The outlook is subject to risks tilted to the downside in the near term. Key risks include lower energy prices, delays in delivering energy-related projects on time, and further disruptions to output, pending completion of the oil and gas tax regime reform (Annex II). Implementation delays in the ongoing fiscal adjustment and persistence of FX shortages may weaken market confidence, and adversely affect funding costs.5 Although high bank liquidity and external bond spreads suggest capacity for further market absorption of debt, there are risks from high debt and gross-financing needs. Tighter financial conditions and regional financial risks (e.g., cyber-attacks or adverse regional developments) could affect financial stability and undermine the non-energy sector’s capacity to produce. Rising US rates and US-dollar appreciation could worsen competitiveness under the stable exchange rate policy, further increasing currency pressures. A sharp rise in energy prices or implementation of a comprehensive medium-term macroeconomic strategy and structural reforms provide upside risks.

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Emerging Market Bond Index Global (EMBIG)

(Basis points)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Source: Bloomberg.

Authorities’ Views

11. The authorities share staff’s concerns about an uncertain energy price and external outlook, but are more optimistic about the medium-term prospects. They project a more robust growth outlook around 2 percent for 2018–19, based on the current and upcoming energy sector projects, higher execution of the PSIP, and stronger pick up in non-energy sector activity. The authorities expect a more favorable fiscal position, based on higher revenues from improving tax administration and ongoing fiscal reforms.

Medium-Term Macroeconomic Framework (Baseline Scenario)

article image
Sources: Ministry of Finance; Central Statistics Office; and IMF staff projections.

The fall in growth in 2022 is due to a fall in projected output due to depletion of exisiting fields and the timing of new projects coming onstream.

Includes VAT and Financial Intermediation Services Indirectly Measured (FISIM).

Fiscal year ending in September.

Excluding debt issued for sterilization, public bodies’ debt, and borrowing from the CBTT.

Includes asset sales and super-dividends. These are counted as financing based on IMF’s Government Finance Statistics Manual.

Policy Discussions

12. The risks to the outlook call for a comprehensive medium-term adjustment and growth strategy to support the recovery and safeguard fiscal and external sustainability. The strategy should focus on reducing over-reliance of macroeconomic performance on the energy sector and increasing resilience to future shocks by: (i) completing the fiscal and external adjustment, while insulating the economy from future commodity-price swings, and (ii) creating an enabling environment for the non-energy sector as an engine of growth, including through improved FX access, reduced cost-of-doing-business, efforts to diversify the economy, reduced crime, and growth-friendly, efficiency-enhancing public-investments. Chapter 1 of the Selected Issues Paper (SIP) explores insights from the external-adjustment experiences of commodity-exporting countries, where financial buffers, appropriate institutions, and a supportive macro-structural policy mix helped reduce the adjustment costs.

A. Addressing Fiscal Imbalances and Strengthening the Fiscal Framework

13. Higher energy prices provide both an opportunity and a risk to the reforms. The rise in energy prices since 2017 supported improvements in fiscal and external balances and the ongoing fiscal consolidation efforts. However, the difficulty in predicting energy prices underscores the need to keep the momentum of fiscal adjustment, establish mechanisms for systematic implementation of countercyclical fiscal policy and continue with diversification efforts.

14. Staff supported the authorities’ fiscal consolidation measures underway, and stressed that the adjustment needs to remain on track. The measures taken (including royalty and corporate taxes and reduced fuel subsidies) are welcome steps, but some revenue reforms have been delayed due to legislative and institutional constraints (e.g., the gaming tax and the Revenue Authority (RA), which require 3/5th parliamentary majority for approval, the Tax Policy Unit (TPU), and reintroduction of the property tax; Annex III). Further cost savings from reduced transfers and subsidies (still high by regional standards) await completion of the World Bank Public Expenditure Review (PER), to identify the duplications and inefficiencies in public spending. Recent appointment of the public procurement regulator should create cost savings over the medium term. The authorities should continue efforts to address the obstacles to speedy implementation of the measures, and focus on reducing reliance on non-core revenues.

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Transfers and Subsidies

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Ministry of Finance; and IMF staff calculations.

15. Efforts should focus on delivering the targeted fiscal adjustment over the medium-term. Notwithstanding the improvement in FY2017/18, the high primary deficit and public debt call for further adjustment to create fiscal space for future shocks, alleviate market concerns about the adequacy of fiscal and external adjustment, and put the public debt on a downward trajectory to safeguard sustainability. While the debt profile seems favorable with long-term maturity and low external financing, the projected debt path remains vulnerable to risks, particularly from real interest rate shocks, weak growth, and worsened primary balance (Annex IV). Following the significant adjustment of 2.2 percent of GDP in FY2017, staff suggest additional revenue-raising and current-spending measures that yield about 4.4 percent of GDP paced over 5 years and would contain central government debt to around 30 percent of GDP and public debt below 55 percent (the active scenario), and result in some improvement in external accounts.6 Many of these measures are already in train, but require steadfast implementation over the medium term.

Potential Fiscal Measures

(FY, Cumulative percent of GDP)

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Source: IMF staff estimates.

Medium-Term Macroeconomic Framework (Active Scenario)

article image
Sources: Ministry of Finance; Central Statistics Office; and IMF staff projections.

The fall in growth in 2022 is due to a fall in projected output due to depletion of exisiting fields and the timing of new projects coming onstream.

Includes VAT and Financial Intermediation Services Indirectly Measured (FISIM).

Fiscal year ending in September.

Starting in 2013, assumes no additional contributions to the HSF.

Includes asset sales and super-dividends. These are counted as financing based on IMF’s Government Finance Statistics Manual.

16. On the revenue side, accelerating implementation of tax reforms is a priority, including completing the energy taxation and tax administration reforms. Swift completion of the ongoing reforms to enhance the oil-and-gas tax regime and reduce tax leakages would provide clarity on the operating environment for the energy sector, offering attractive terms for investment while securing appropriate payment to the government. Enhancing fiscal transparency in the petroleum sector would strengthen the credibility of the authorities’ fiscal plans and market confidence, while providing a comprehensive picture of potential fiscal risks (Annex III). Speedy establishment of RA legislation would enhance revenue collection and cost-saving across agencies and address weaknesses in tax administration and compliance, given the substantial amount of outstanding tax arrears to the government (7 percent of GDP as of end-March 2018).7 Accelerating the payment of VAT refunds the government owes to taxpayers is also important, since such delays may impact liquidity positions of businesses and their tax compliance.

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Tax Arrears

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Ministry of Finance; and IMF staff calculations.
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VAT Refund Arrears

(TT$ billions)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

17. On the expenditure side, containing current spending and improving the efficiency of public spending remain priorities. Transfers to public utilities continue to represent a significant fiscal drain (1.5 percent of GDP). Staff concurred with the authorities that raising utility tariffs should be guided by a rate-determination exercise (tariffs were last raised in 1996 for water and 2006 for electricity), and implemented with urgency. The PER should suggest further efficiency gains in public expenditures, including in spending on education, health, and social services. Redirecting savings from current spending to the most vulnerable segments of society and efficient, growth-enhancing public investment could deliver better returns (given higher fiscal-multiplier effects of such spending), reducing the measures’ negative social/growth impacts.8

18. Staff welcomed the authorities’ intention to establish a medium-term fiscal policy framework (MTFF). Staff noted that the framework should consider potential uncertainties associated with commodity cycles and provide a systematic tool for countercyclical policy implementation to insulate the economy from commodity-driven volatility going forward. The HSF, which accumulates financial buffers from windfall savings, could in principle perform such a role, accumulating reserves during revenue booms to use during revenue downturns, but the rules governing its inflows and outflows are neither linked to fiscal indicators nor based on longer-term fiscal sustainability assessments.9 Staff recommended formal fiscal targets and a clearly-communicated MTFF to guide fiscal policy. The HSF should be fully integrated with the MTFF, and transfers to/from it should be linked to an appropriate fiscal target that provides the government with a commitment device to anchor its adjustments and shield it from pressure to deviate from the adjustment path (Chapter 2, SIP). Tailored-TA could help determine an appropriate anchor to support fiscal sustainability and implement countercyclical fiscal policy.

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Central Government Balance and Transfers to HSF

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Ministry of Finance; and IMF staff calculations.

19. The authorities should also consider adopting an asset-liability management framework. Public debt and the HSF should be managed in an integrated framework, to limit situations where the authorities may have to borrow to save into the HSF (e.g., when running a fiscal deficit). Publishing a medium-term debt strategy should also clarify the desired composition of the government-debt portfolio, capturing the government’s preferences regarding cost-risk tradeoff between alternative financing options, provide more clarity and predictability to the financial system, and reduce adverse implications of various borrowing strategies on the economy. Settling the overdraft balance at the CBTT, implementing stricter limits to monetary financing, and hence reducing reliance on central-bank financing are also important.

20. Other structural reforms to strengthen public sector management need urgent attention. Staff noted initiatives to reform the National Insurance System, with contribution income no longer sufficient to meet benefits payments since 2014. Proposals to further increase the contribution rate and gradually raise the effective retirement age from 60 to 65 should help keep the system sustainable and reduce contingent liabilities to the government. Urgent action is also needed to increase efficiency and reduce labor rigidities in the public sector. Comprehensive public service reforms should increase the ability of the Public Services Commission Department and the Chief Personnel Officer to address the institutional constraints to government’s efficient functioning.

Authorities’ Views

21. The authorities agreed on the need for gradual fiscal adjustment and reiterated their commitment to fiscal discipline. They emphasized the significant consolidation since FY2015 through spending cuts (in the main) and noted that most of staff’s proposed revenue and expenditure reforms were already underway. The authorities are committed to complete the ongoing reforms, including, the RA, the TPU, property and gaming taxes, and the transfer-price regime. They expect implementation of measures proposed by the PER to further improve the efficiency of subsides and transfers, and higher revenue gains from the RA (3 percent of GDP), compared to staff’s more conservative assumptions. Overall, the authorities are confident that they can balance the budget by 2020, and note the progress in recovering CLICO assets after the company was placed in compulsory liquidation. With the ongoing review of the HSF, the authorities take keen note of staff’s suggestions on the MTFF and inflow-outflow rules for the HSF.

B. Restoring External Balance

22. Staff assesses the external position in 2017 as weaker than the level consistent with medium-term fundamentals and desirable policies. Estimates based on a model specifically designed for oil exporting countries (Bems and Carvalho (2009), which, in staff’s view, better suits commodity-exporting countries) suggest that the current account norm should be a surplus of 13.5 percent. The estimated current account gap is -4.0 percent, which suggests an overvaluation of 12.1 percent. The EBA-Lite REER regression approach also points towards a degree of overvaluation, with an REER gap of 42.1 percent (Annex V). The REER estimated by the Fund Information Notice System (INS) shows a 21 percent appreciation between 2010 and end-March 2018. In staff’s view, the outcome of these different tools conforms with shortages in the FX market and anecdotal evidence of an informal parallel market. Nonetheless, the country is a net creditor, with an NIIP of 20.9 percent of GDP. Reserve adequacy remains satisfactory under all metrics, and is sufficient to absorb most shocks in the short-term.

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Exchange Rate Developments

(Index 2010=100)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: IMF Information Notice System; and IMF staff estimates.

23. Notwithstanding the reduced tightness in the FX market, the impact of continued FX shortages on the non-energy sector remains a concern. Some companies with large import needs reportedly closed their business, with delays in settling bills and getting inputs for production, while others moved to import substitution. FX queuing continues; while requests are eventually fulfilled, waiting time can range from 2 to 4 weeks, depending on the amount, purpose, and timing of the request, and liquidity position of the authorized dealer. Uncertainty about FX availability or expectations of a further depreciation feed FX hoarding (which may be evident also in banks’ growing net-long-FX positions), which in turn contribute to tightness in the market. With continued disequilibrium in the market, the government launched, in May 2018, a US$100-million EximBank FX Facility, through which eligible small and medium exporters would be able to obtain FX to finance inputs for export operations.10

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Commercial Banks’ Net Open Position of FX to Capital

(In percent)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Source: Central Bank of Trinidad and Tobago.

24. The FX market should be cleared on a sustained basis. Considering further potential volatility in energy prices, the authorities could take advantage of the current relatively stable period (with low inflation and positive steps taken for fiscal consolidation) to address the FX-shortages, and supply more FX at the given exchange rate. While the EximBank facility may help alleviate somewhat the FX shortage for eligible manufacturers, it could add to market distortions and create incentives for misuse. The Facility needs to be carefully implemented to ensure transparency and consistency with international standards, while the authorities should provide sufficient FX to meet demand for all current international transactions. Since the Facility serves as a form of prioritization in an environment of FX shortages, it is inconsistent with the country’s Article VIII obligations.11

25. The exchange rate could play a more active role as an automatic stabilizer and help manage the transition to a more balanced FX market. The currency remained broadly stable since the depreciation in 2016, while vulnerability to terms-of-trade shocks continues. Greater flexibility, implemented through a mechanism that allows some market forces in determining the exchange rate (e.g., within a gradually-widening horizontal or crawling band accompanied with an appropriate FX intervention strategy), would facilitate adjustment to external shocks, help restore competitiveness, and safeguard foreign reserves. Implementing exchange rate adjustments through this mechanism could signal to the market that the rate can move in either direction, and in so doing reduce incentives for FX-hoarding and one-way currency bets, while maintaining the exchange rate as an anchor for inflation expectations.

26. In staff’s view, a move to a more flexible exchange rate regime would require careful design and implementation. Assessing balance-sheet exposures of the public and private sectors and exchange-rate passthrough to inflation would be important to make sure the arrangement does not result in adverse balance sheet problems or offsetting second-round effects.12 Accompanying the new regime with (i) supportive fiscal, monetary, financial, and structural policies, and safety nets, (ii) clarity of the roles and responsibilities of policymakers in determining the exchange rate regime and its implementation, and (iii) an appropriately-designed intervention and communication strategy (on when and how to intervene and what and when to announce) could help limit large currency movements and prevent the rate from being pushed quickly to band limits. Communication with key stakeholders, such as trade/labor unions, could focus on the benefits of addressing FX shortages for non-energy sector growth and employment. Maintaining the current policy puts the burden of adjustment on fiscal, monetary, and structural policies, and requires ample reserve/fiscal buffers and adjustments with larger growth effects. Country experiences suggest that preserving a peg regime can provide a helpful anchor for undiversified economies, but only if large financial buffers exists and/or credible fiscal adjustments are possible under persistent shocks.

Trinidad and Tobago: Balance Sheet Analysis Matrix, 2017 Net positions

(In percent of GDP)

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Sources: Country authorities; and IMF staff calculations.NBFIs: non-bank financial institutions; NFCs: non-financial corporations; HHs: households; and ROW: rest of the world.

Authorities’ Views

27. The authorities recognize that there may be some degree of imbalance in the FX market, but continue to favor an appropriate combination of fiscal, monetary, and structural policies to address the disequilibrium. They expect the improved fiscal position and increased FX inflows from a more favorable energy outlook to help address some of the imbalances over time, and the EximBank facility to enhance FX access for eligible manufacturers in the interim. At this current juncture, with the fiscal and structural reform agenda not yet fully complete, the authorities prefer to maintain the status quo on the exchange rate regime. In the context of Trinidad and Tobago being a small open economy, they expressed their uncertainty of the benefits of adjusting the regime without these supportive measures in place, reiterating their concerns about the exchange rate pass-through to inflation and the potential negative feedback loops from higher wage demand.13

C. Addressing Monetary Policy Challenges

28. Staff support the recent increase in the policy rate, given domestic and external circumstances. In setting the policy rate, the CBTT has been balancing the need to support the recovery, while guarding against the risks from a further narrowing of the TT-US short-term interest rate differential. With the differential falling below parity during 2018 with rising US interest rates and relatively stable domestic rates, staff supports the CBTT’s decision to increase the repo rate to 5.0 percent on June 29, taking into consideration the likely impact on capital outflows and the currency and the signs of a pickup in economic activity. In staff’s view, further rises in the US interest rate differential would complicate monetary policy, making it difficult to maintain the rate to support economic recovery. Allowing a gradual exchange-rate adjustment within the constraints of a band could provide some scope for more flexible monetary policy.

D. Safeguarding Financial Sector Stability

29. While the financial system remained stable through the deep recession in the past two years, there are pockets of vulnerabilities. With some signs of weakening in asset quality and robust growth in private-sector credit in 2018 from banks and non-banks, staff welcomes the authorities’ vigilance in identifying and monitoring credit quality—particularly important, given high gross indebtedness of the household sector (35.5 percent of GDP), high sovereign exposures (more than 20 percent of banking sector assets, with exposures to the domestic sovereign accounting for more than 70 percent), equity exposures in subsidiaries and affiliates (42 percent in the region), and further tightening of US interest rates (Financial Stability Report 2017). An increasingly complex and interconnected financial system within and across borders, cross-border presence of banks and insurance companies, and gaps in the oversight framework for credit unions and mutual funds call for careful monitoring of systemic risks.

30. Efforts must focus on risk-based, consolidated, cross-border supervision and completing the regulatory reforms. Systematic monitoring of bank profitability, asset quality, loan-loss-provisioning, and classification are key to identifying promptly the sources of systemic risk. Banks’ FX and domestic and regional sovereign exposures seem well managed, but direct and indirect exposures must be ascertained regularly and managed carefully with appropriate prudential tools and adequate capital and liquidity buffers, considering the stable exchange rate environment and potential fallout from adverse regional developments. Implementation of Basel II (by January 2019), strengthened oversight of mutual funds and credit unions, and proclamation of the Insurance Bill to become law would go a long way in strengthening the overall supervision framework.

31. The AML/CFT framework must be strengthened to avoid remaining on the FATF list of jurisdictions with strategic deficiencies and limit potential fallout for financial institutions. While FATF International Cooperation Review Group (ICRG) noted the significant progress in addressing the existing deficiencies, further improvements are needed, with the removal from the ICRG list pending the passage of legislation and other measures in the deficient areas. The legislation for Global Forum compliance is with the Joint Select Committee, but the jurisdiction must still resolve some issues of discriminatory tax treatment. While no Correspondent Banking Relationships (CBR) losses have been observed recently, banks experience higher fees in drafts and de-marketed some customers and business lines seen as high risk (gaming, money transfer operators, and drafts). Efforts to ensure compliance with international standards, implement risk-based supervision, and complete legislative requirements should go hand-in-hand with banks’ ongoing efforts for due diligence, relationship maintenance, and prudent risk-management.

Authorities’ Views

32. The authorities are focusing on risk-based, consolidated, cross-border supervision, with proactive monitoring of key risks and vulnerabilities facing the financial system. They highlight the overall strength and soundness of the financial system, but are aware that there is no room for complacency. The authorities are keen on strengthening regulatory and supervisory capacities to move to risk-based supervision once the Insurance Bill is proclaimed, and are reaching out to regional regulators to effectively implement cross-border regulation, participating in supervisory colleges for regional financial groups, and taking part in regional financial interconnectedness analyses. The authorities agree on the need to systematically monitor FX and sovereign exposures, as well as potential risks associated with real-estate lending, and look forward to the upcoming FSAP in FY2020 for the overall assessment of financial stability. The authorities are making progress in expanding capacity in fintech and cyber-related issues and acknowledge the need to make progress on the legislative front to address tax black-listing and Global Forum decisions.

E. Structural Reforms to Support Sustainable Growth

33. Structural reforms are key to enhancing competitiveness and creating an enabling environment for the non-energy sector. Reforms should focus on addressing the key obstacles to its development:

  • Improving business environment. Reforms to improve the business environment are crucial to support fiscal adjustment, boost economic growth, and promote the nonenergy sector. The World Bank 2018 Doing Business Report shows some deterioration in paying taxes and enforcing contracts over the past few years, but the country scores well in several areas, and its corruption score improved in 2017.14 Institutional reforms should focus on addressing the remaining areas of weakness, and strengthening the legal framework to facilitate legislative-passage of ongoing reforms.

  • Addressing crime: Homicide rates are one of the highest in the Caribbean and victims predominantly young (Chapter 3, SIP). Reported crimes rose 4 percent between 2016 and 2017, with transitional organized crime, illegal importation of arms and drugs, and the geographical location contributing to the rise. Crime has negative social and economic costs, with direct costs from public, private, and social spending estimated at 3.5 percent of GDP— around the Latin American and Caribbean average, but excluding indirect costs, such as loss of productivity and perception of safety that affect investment and business.15 Staff welcomes ongoing efforts for crime reduction (e.g., hotspot policing, partnering with different stakeholders, collaboration among national security agencies, training and media campaigns) and supports a balanced approach between crime-control and prevention programs (e.g., focusing on education, parenting, mentoring, and community-based initiatives involving civil society and the private sector).

  • Improving diversification: With the economy heavily-dependent on the energy sector and vulnerable to commodity boom-bust cycles, obstacles to non-energy sector growth must be addressed and diversification efforts intensified. These efforts are underway, but lacking coordination, implementation, and sustained support may undermine progress. Efforts to support tourism should continue, given its backward linkages to agriculture, services, and light-manufacturing and its FX-earning potential, and obstacles to its growth (e.g., air and sea-connectivity, cost of doing business, access to finance, infrastructure gaps, and coastal erosion) should be addressed. Exploring options for diversification within the energy sector (e.g., renewable energy) could also help reduce vulnerability to climate mitigation policies.

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Doing Business Distance to Frontier, 2015 vs 2018

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Source: World Bank Doing Business Report.Note: An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100the frontier, which is the best performance observed on each of the indicators across all economies in the DB sample since 2005.
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Doing Business Distance to Frontier, 2018

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

34. Addressing data gaps is an urgent priority. Data quality and timeliness continue to limit the ability to assess vulnerabilities, and effectiveness of surveillance and policymaking. Notwithstanding important progress, further efforts are needed to complete data improvements, particularly in national accounts and balance of payments, where frequent changes make the task of surveillance very difficult. Attention is also needed to improve the timeliness of social statistics (including on poverty and inequality)—key to assessing macroeconomic and social vulnerabilities and potential impacts of policy reforms on the poor and vulnerable segments of the society. Building on the authorities ongoing initiatives to strengthen data quality and timeliness, sustained efforts are needed to build capacity in the independent National Statistical Institute by prioritizing operationalization and ensuring inter-agency collaboration. The household budget survey and the survey of living conditions need full funding to improve data quality and timeliness. The Economic Management Division of the Ministry of Finance needs to attract and retain staff.

Authorities’ Views

35. The authorities agreed on the need for further structural reforms. They created an Inter Ministerial Committee, chaired by the Minister of Trade and Industry, to enhance the efforts for diversification and address bottlenecks at the highest level. They noted progress in tourism, light manufacturing, business processes, and legal outsourcing. Work is also progressing in land-licensing and reduction of red-tape to facilitate private investment, particularly in the non-energy sector. Reforms in the state-owned enterprise (SOE) sector are also underway, most notably in the state-owned oil company (Petrotrin), while price reviews are being actively pursued in the public utilities. The authorities agreed to fully fund the surveys by the Central Statistical Office for improved data quality.

Staff Appraisal

36. Trinidad and Tobago is slowly recovering from a deep recession. The economy continued to contract but at a slower pace, underpinned by the strong recovery in gas production, while weak activity in construction, financial services, and trade, continued FX shortages, and slow pace of public investment dampened non-energy sector growth. Positive growth should return from 2018 as the recovery takes hold in both sectors. Good progress has been made in fiscal consolidation through spending cuts, but public debt continued to rise, approaching the government’s soft target of 65 percent of GDP. The external position is weaker than the level consistent with medium-term fundamentals and desirable policies, but gross international reserves provide significant financial buffers, along with the HSF, although reserves are projected to fall gradually given the current FX regime. The financial sector remains stable, with profitable, well-capitalized banks, while the recent decline in asset quality, rising household debt, large domestic and regional sovereign exposures, and an interconnected financial system create pockets of vulnerability.

37. Economic prospects are expected to improve over the medium term, but remain heavily dependent on the energy sector. The medium-term growth, fiscal and external outlook is vulnerable to negative surprises in energy prices and output, a sizeable primary deficit, and elevated levels of public debt. Possible delays in completing the ongoing fiscal adjustment and reforms, persistence of FX shortages, tightening of financial conditions, and ongoing regional financial sector challenges also tilt the risks to the downside.

38. A multi-pronged strategy is needed to ensure a sustained recovery, and safeguard fiscal and external sustainability. Such a strategy should aim at improving the economy’s resilience to future shocks, focusing on: (i) completing the fiscal adjustment to put the public debt on a downward trajectory to safeguard sustainability, while reducing the economy’s over-reliance on the energy sector; (ii) safeguarding financial stability; and (iii) creating an enabling environment for the non-energy sector as an engine of growth, by removing the obstacles to its development, while increasing transparency of the operating environment for the energy sector.

39. The authorities should take advantage of the impact higher energy prices had on the fiscal position and complete the ongoing adjustment, given the inherent volatility in energy prices. Efforts should focus on speedy implementation of the delayed revenue reforms, finalizing the energy taxation reform, and reducing reliance on noncore revenues, including through increased tax compliance. Improved efficiency and containment of public spending should continue. Further cost savings from increased utility tariffs and reduced transfers and subsidies should be redirected to the most vulnerable segments of society and public investment targeted at closing skills and infrastructure gaps to reduce adverse impacts of adjustment. Paced over the medium term, an adjustment equivalent to 4.4 percent of GDP should create fiscal space to confront future shocks, alleviate market concerns about the adequacy of adjustment, and put the public debt on a downward trajectory to safeguard sustainability.

40. An appropriate MTFF could provide a systematic tool for countercyclical fiscal policy and help insulate the economy from energy price swings. Adopting an appropriate formal fiscal target within a clearly-communicated MTFF to guide fiscal policy could provide a tool to anchor fiscal adjustments. The HSF should be fully integrated with the MTFF, by linking transfers to/from it to the fiscal target. Such a mechanism can shield the government from pressure to deviate from the adjustment path, and allow the HSF to build reserves during revenue booms to use during downturns. Managing public debt and the HSF in an integrated framework may limit situations where the government must borrow to save into the HSF. Establishing a medium-term debt strategy may clarify the desired debt composition and limit adverse implications of borrowing strategies. The government should settle the overdraft balance with the CBTT, and rely on market-based financing.

41. The continued state of FX market imbalance must be addressed on an urgent and sustained basis. Notwithstanding the reduced tightness in the market, owing to increased FX inflows from energy companies, continued FX shortages affect market confidence, raise the cost of doing business, hampers non-energy sector activity, and could result in responses that further feed shortages. The authorities could take advantage of the current relatively stable period with low inflation and progress in fiscal consolidation to address the shortages, while minimizing distortions.

42. Going forward, the exchange rate could play a more active role in an economy exposed to frequent terms-of-trade shocks and help manage the transition to a more balanced FX market. Allowing gradually some market forces in determining the exchange rate (e.g., within a widening band) could facilitate adjustment to external shocks, help restore competitiveness, and safeguard foreign reserves. Permitting two-way exchange-rate variation could help reduce incentives for FX-hoarding and one-way currency bets, while allowing the exchange rate to anchor inflation expectations with some scope for flexible monetary policy. Such a move requires careful design and implementation to avoid adverse balance-sheet problems or second-round effects and needs to be supported by a prudent fiscal, monetary, financial, and structural policy mix, adequate safety nets, and well-designed intervention and communication strategies.

43. Preserving financial stability calls for careful monitoring of the sources of systemic risk and swift implementation of the ongoing reforms. Staff welcomes the authorities’ cautious and proactive approach, given a highly-indebted household sector, bank-sovereign linkages domestically and regionally, and rising interest rates in a complex, interconnected financial system. Efforts must focus on risk-based, consolidated, cross-border supervision with appropriate prudential regulations, and completing the ongoing regulatory reforms, including Basel II, the Insurance Law, and nonbank supervisory frameworks. Trends in CBRs should be systematically monitored, given the ongoing weaknesses in AML/CFT and tax transparency regimes. Ensuring compliance with international standards, risk-based supervision, and complete legislative processes should accompany banks’ ongoing due-diligence, relationship-maintenance, and risk-management efforts.

44. A structural reform agenda should create an enabling environment for the non-energy sector, and boost its potential to support sustainable growth and resilience. Institutional reforms should focus on improved tax collection and contract enforcement and strengthening existing legal frameworks that hinder legislative-passage of ongoing reforms. Reduced cost of doing business, addressing crime (with prevention and response efforts), reducing skills gaps (with ongoing training programs), and sustained government support in removing obstacles to diversification within and outside the energy sector should help reduce heavy reliance on the energy sector, enhance FX-earning potential, and attract foreign investment.

45. The quality and timeliness of data continue to present a significant challenge to surveillance and policymaking. Staff welcomes the progress made, and calls for further efforts to complete data improvements needed for surveillance, prioritize operationalization of the independent statistical authority, and enhance interagency cooperation.

46. Staff recommends that the next Article IV consultation with Trinidad and Tobago be held on the standard 12-month cycle.

Figure 1.
Figure 1.

Trinidad and Tobago: Key Economic Developments

(In percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Trinidad and Tobago authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Trinidad and Tobago: External Sector Developments

(In billions of U.S. dollars, unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Trinidad and Tobago authorities; and IMF staff estimates.
Figure 3.
Figure 3.

Trinidad and Tobago: Monetary Sector Developments

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Trinidad and Tobago authorities; and IMF staff estimates.
Figure 4.
Figure 4.

Trinidad and Tobago: Fiscal Sector Developments 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: Trinidad and Tobago authorities; and IMF staff projections.1/ Central government only unless otherwise specified.
Figure 5.
Figure 5.

Trinidad and Tobago: Comparative Regional Developments

Citation: IMF Staff Country Reports 2018, 285; 10.5089/9781484378120.002.A001

Sources: WEO; and IMF staff calculations.Note: Caribbean average of unemployment figure does not include ECCU countries due to lack of data.1/ Argentina’s inflation data are not available in 2015–16.
Table 1.

Trinidad and Tobago: Selected Economic Indicators

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Sources: Trinidad and Tobago authorities; UN Human Development Report; WEO; and IMF staff estimates and projections.

Includes VAT and Financial Intermediation Services Indirectly Measured (FISIM).

2017 reflects Staff projection.

Data refer to FY year; for example 2017 covers FY17 (October 2016-September 2017).

Defined as non-energy revenue minus expenditure of the central government.

Excluding debt issued for sterilization, public bodies’ debt, and borrowing from the CBTT.

Table 2.

Trinidad and Tobago: Summary of the Central Government Operations 1/

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Sources: Trinidad and Tobago authorities; and IMF staff projections.

Fiscal years run from October 1st in the previous year to September 30th of the stated year.

This largely includes transfers to health regional authorities.

Excluding debt issued for sterilization, public bodies’ debt, and borrowing from the CBTT.

Table 3.

Trinidad and Tobago: Summary Balance of Payments

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Sources: Central Bank of Trinidad and Tobago, Central Statistical Office and IMF staff projections.

Includes net errors and omissions.

Includes goods and services for the energy sector.

WEO simple average of three spot prices: Dated Brent, West Texas Intermediate, and Dubai Fateh.