WASHINGTON, DC – The International Monetary Fund (IMF) Friday said Trinidad and Tobago’s economic activity is recovering supported by higher global energy prices and the rebound of the non-energy sector.
It said real gross domestic product (GDP) is estimated to have expanded by 2.5 percent last year and that inflation has increased, reaching 8.7 percent by end of 2022, driven by imported energy and food prices, partial liberalization of domestic fuel prices in 2022, and domestic weather-related shocks.
“The financial sector appears well-capitalized, liquid, and profitable. Higher energy prices contributed to further improving the external position in 2022 and turning the fiscal position into a surplus in financial year2022, for the first time in over a decade,” the IMF said following the Executive Board conclusion of the 2023 Article IV consultation.
According to the Washington-based financial institution, the economic recovery is expected to gain broad-based momentum in 2023 and that inflation is projected to slow to 4.5 percent by end of this year and to continue declining with international prices.
“The current account surplus will narrow in line with the anticipated decline in global energy prices, reaching 6.6 percent of GDP in 2023. International reserve coverage is expected to remain adequate at around 7.2 months of prospective total imports and is complemented by large public external buffers in the Heritage and Stabilization Fund of about 18.4 percent of GDP.
“The overall fiscal balance is projected to turn into a deficit of 2.8 percent of GDP in financial year2023, reflecting lower energy revenues due to declining energy prices and domestic production, and increased capital spending,” the IMF said.
It noted that the balance of risks to the outlook is tilted to the downside.
“Downside risks stem from potential disruptions to domestic oil and gas production; a sharper-than-expected global slowdown affecting energy markets, and global financial instabilities. On the upside, there is the potential for higher-than-expected energy prices and production, including new or expanded projects, and new renewable energy projects.”
The IMF said Trinidad and Tobago’s commitment to balancing the budget over the medium term is prudent and welcome and to support this effort, “it is recommended to enhance revenue mobilization, cut down non-priority current expenditure, and maintain debt well below the new soft debt target.
“Additional revenue could be generated by implementing tax reforms and strengthening the tax administration. It is advisable to continue gradually phasing out subsidies, streamlining transfers to state-owned enterprises (SOEs), and improving public spending efficiency, while preserving the spending for the most vulnerable, supporting growth-friendly expenditure, and protecting essential capital spending.”
The IMF said that long-term fiscal risks related to the pension system and the global energy transition need to be addressed.
It said the National Insurance System’s (NIS) deficit is expected to widen, gradually depleting its reserve by mid-2030s.
The proposal to increase the retirement age to 65 years would help partially contain the deficits, the IMF said, adding that increasing contribution rates could also help.
It said also that an energy transition that avoids disruptive policy adjustments requires the design of a sustainable long-term fiscal strategy
“Enhancing the fiscal policy framework would help strengthen planning and reinforce fiscal sustainability. A rule-based medium-term fiscal framework would strengthen policy formulation, help avoid procyclical spending, and mitigate fiscal risks.
“This could include a formal fiscal anchor—with an escape clause for unexpected events—to support fiscal discipline and sustainability. A sound debt management strategy would mitigate macro-financial risks,” the IMF executive directors said.
They said Port of Spain should be encouraged to maintain sound and consistent policies to support the exchange rate arrangement.
“The Central Bank of Trinidad and Tobago (CBTT) should seriously consider increasing its repo policy rate to contain inflationary pressures and narrow the negative interest rate differentials with the US monetary policy rate. This would also mitigate potential risks of capital outflows and reduce excessive risk-taking incentives that could threaten financial stability.”
The IMF said reforming the foreign exchange (FX) market infrastructure remains a priority to eliminate FX shortfalls, saying it would also create a more conducive business environment for the private sector to invest and diversify the economy.
“Over the medium to longer term, greater exchange rate flexibility would reduce the need for fiscal policy adjustments over the cycle and allow for countercyclical monetary policy. The authorities are encouraged to remove all restrictions on current international transactions while providing sufficient FX to meet demand for all current international transactions.
“The authorities need to remain vigilant to vulnerabilities in the financial system. The system appears sound and resilient but vulnerabilities emanate from rising household and businesses’ debt, high exposures to the sovereign, and interconnectedness.”
The IMF said closely monitoring financial risks is warranted and welcomes the progress in enhancing the resilience of the banking and insurance sectors in line with the 2020 Financial Sector Assessment Program (FSAP) recommendations.
“However, progress is needed in transforming the investment fund sector from constant to variable net asset value (NAV), enhancing the consolidated supervision of conglomerate groups, providing the CBTT with explicit macroprudential authority and tools, and strengthening supervisory resource and independence in line with international best practices.”
The IMF said it also welcomes and supports the efforts by the authorities in Trinidad and Tobago in embracing Fintech for financial inclusion and development, while working on mitigating its potential risks.
“Noteworthy are the efforts, in collaboration with IMF Technical Assistance, to develop the Fintech ecosystem (e.g., the Joint Regulatory Hub, launching a Regulatory Sandbox, developing the payment system, and strengthening the cybersecurity),” the IMF said, welcoming also the efforts to strengthen the financial integrity and international tax transparency frameworks.
It said following the removal from the Financial Action Task Force (FATF) monitoring list in February 2020, Trinidad and Tobago is being encouraged to further strengthen the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework.
