An International Monetary Fund (IMF) staff team, led by Mr. Camilo E. Tovar, visited Port of Spain and held discussions on the 2023 Article IV consultation with Trinidad and Tobago’s authorities during March 1–14. At the end of the consultation, the mission issued the following statement, which summarizes its main conclusions and recommendations.
Economic recovery is ongoing
1. Economic activity is recovering . Real GDP is estimated to have expanded by 2.5 percent in 2022, supported by thenon-energy sector which was partially offset by an unexpected weak performance of the energy sector. Inflation increased, reaching 8.7 percent by end-2022, driven by imported energy and food prices, partial liberalization of domestic fuel prices in 2022, and domestic floodings. Banks’ credit to the private sector is recovering and the banking sector appears well-capitalized, liquid, and profitable. The current account surplus expanded, and foreign reserves coverage remained adequate at 7.6 months of prospective total imports.
2. Higher global energy prices and prudent consolidation measures contributed to a fiscal surplus and a decline in public debt in 2022 . The overall fiscal balance registered a surplus of 0.3 percent of GDP in FY2022—for the first time in over a decade and after a record deficit of 11.7 percent of GDP in FY2020. The surplus reflects higher than anticipated energy revenues, some spending cuts relative to the budget, and the reduction of the fuel subsides. Central government debt declined to 53.8 percent of GDP (from 60 percent of GDP in FY2021) and gross public debt declined to 71 percent of GDP (from 79.2 percent of GDP in FY2021). Public financial buffers remain strong with total assets in the Heritage and Stabilization Fund (HSF) at US$5.0 billion (18.6 percent of GDP) by end-FY2022.
Positive outlook but looming uncertainties
3. The recovery is expected to gain broad-based momentum in 2023 with a 3.2 percent GDP expansion. Over the medium term, new energy projects will come into production but as oil and gas fields mature, potential growth will slow down to 1.5 percent. Inflation is projected to slow down to 4.5 percent by end-2023 and will continue declining with international prices. Waning gas and petrochemicals exports starting in 2024 and the anticipated decline in global energy prices, will result in a narrower current account surplus, averaging 6.7 percent of GDP. International reserve coverage is projected to remain adequate at around 6.5 months of prospective total imports by 2028.
4. The fiscal position is expected to swing from surplus in FY2022 to a deficit in FY2023, and then stabilizes at moderate deficits over the medium term . The fiscal balance is projected to deliver a deficit of 2.8 percent of GDP in FY2023. This reflects lower energy revenues due to declining prices and domestic production, and increased capital spending. The deficit is expected to persist over the medium term which could widen with the outcome over the ongoing public sector wage negotiations. Public debt is projected to reach 74.2 percent of GDP in FY2028, slightly below the government’s new soft debt target of 75 percent of GDP.
5. The balance of risks to growth 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 production and prices, including from a new U.S. license to Trinidad and Tobago to develop a major gas field in Venezuela.
Preserving fiscal discipline and sustainability
6. IMF staff welcomes the authorities’ prudent management of the energy revenue windfall and underscores the importance to continue rebuilding buffers. With the economic recovery ongoing, it is recommended to continue prudently managing the energy revenue windfall, avoiding procyclical spending, and rebuilding fiscal buffers. IMF staff welcomes the deposit of about US$345 million (1.3 percent of GDP) into the HSF in 2022.
7. The envisaged expenditure envelope in the FY2023 budget is appropriate, particularly considering the capital expenditure needs. The capital expenditure increase will support the economic recovery and address critical bottlenecks, including in infrastructure. However, it is necessary to improve the investment execution rate, while ensuring spending remains efficient and high quality. IMF staff welcomes the decision to partially liberalize fuel prices as it will improve the efficiency and the sustainability of the public accounts. It is important to continue providing targeted and temporary support to alleviate the rising living costs among the most vulnerable. To confront downside risks, developing a spending contingency plan would help prevent adverse effects on the fiscal accounts.
8. The authorities’ commitment to balance the budget over the medium term is prudent and welcome. The recent fiscal measures introduced to mobilize revenues, rationalize spending, and incentivize private investment will help improve the fiscal position. To support this, IMF staff recommends further measures to enhance revenue mobilization, cut down on non-priority current expenditure which would help maintain debt levels well below the soft debt target. Additional revenue could be generated through implementing tax reforms and strengthening the tax administration. It is advised to continue gradually phasing out subsidies, streamlining transfers to state-owned enterprises (SOEs), and improving public spending efficiency. The pace and composition of the adjustment should continue to preserve the spending for the most vulnerable and for essential capital.
9. Long-term fiscal risks related to the pension system and the global energy transition away from fossil fuels need to be addressed. In the absence of reforms,the National Insurance System’s deficit is expected to widen, and its reserve be depleted by mid-2030s. IMF staff welcomes the authorities’ proposal to increase the retirement age to 65 years. Other parametric measures including gradually increasing the contribution rate could be considered to ensure the long-term financial viability of the system. Ensuring an energy transition that delivers on the fiscal objectives and avoids disruptive policy adjustments requires the design of a sustainable long-term fiscal strategy.
10. 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 mitigatefiscal risks. A formal fiscal anchor with an escape clause for unexpected events, could help support the accumulation of financial buffers during periods of high energy prices and delink expenditure from energy revenue volatility, while ensuring the transfers of funds into and out of the HSF. Developing a sound debt management strategy would mitigate macroeconomic and financial stability risks.
Maintaining a consistent monetary and exchange rate policy
11. IMF staff encourages the authorities to continue maintaining sound and consistent policies to support the current exchange rate arrangement. The Central Bank of Trinidad and Tobago (CBTT) has maintained its repo rate at 3.5 percent since March 2020 to support the recovery of the economy. Increasing the policy rate should be seriously considered to contain inflationary pressures and narrow the negative interest rate differentials with the U.S. monetary policy rate. This would also help mitigate potential risks of capital outflows and reduce incentives for excessive risk taking that could threaten financial stability.
12. A more efficient FX infrastructure would help eliminate FX shortfalls. It would also help create a more conducive business environment for the private sector to invest and diversify the economy. Over the medium term, greater exchange rate flexibility would reduce the need for fiscal policy adjustments to restore external balance and create room for more countercyclical monetary policy. IMF staff encourages the authorities to remove all restrictions on current international transactions while providing sufficient FX to meet demand for all current international transactions.
Reinforcing financial stability
13. The authorities need to remain vigilant to potential vulnerabilities in the financial system. Whilethe system appears sound and resilient, it faces potential vulnerabilities emanating from rising household and businesses’ debt, high exposures to the sovereign,and interconnectedness. Closely monitoring financial sector risks is warranted.
14. The authorities are encouraged to further strengthen the financial regulatory and supervisory framework. IMF staff welcomes the progress towards enhancing the resilience of the banking and insurance sectors in line with the recommendations of the 2020 Financial System Stability Assessment (FSAP) .Going forward, it is encouraged to make progress on: (i) orderly transforming the investment fund sector from constant to variable net asset value; (ii) enhancing the consolidated supervision of conglomerate groups; (iii) providing the CBTT with explicit macroprudential authority and tools; and (iv) strengthening supervisory resource and independence in line with international best practices.
15. Trinidad and Tobago is actively embracing Fintech for financial inclusion and development, while working on mitigating its potential risks. The authorities are leveraging on new technologies to improve the delivery of financial services, boost financial inclusion, and modernize the payment system. IMF staff welcomes the authorities’ efforts, in collaboration with IMF Technical Assistance, to develop the Fintech ecosystem, including by establishing the Joint Regulatory Hub, launching a Regulatory Sandbox, developing the payment system, and strengthening the cybersecurity.
16. IMF staff welcomes the authorities’ progress to enhance the financial integrity and international tax transparency frameworks. Following the removal of Trinidad and Tobago from the Financial Action Task Force (FATF) monitoring list in February 2020, the authorities are encouraged to further strengthen the AML/CFT framework, through making beneficial ownership available including for the procurement sector through the finalization of amendments to the public procurement act, and adopting risk-based AML/CFT supervision. IMF staff welcomes the authorities’ commitment and efforts to addressing issues related to the EU’s Commission Tax Blacklist and the OECD Global Forum requirements on Exchange of Information Request and the Automatic Exchange of Information Standards.
Promoting economic diversification and a green economy
17. There is a need to step up the efforts to secure an economic transformation to deliver a sustainable and inclusive economy . The energy sector will remain the country’s main growth engine in the near to medium term.IMF staff welcomes the authorities’ efforts totake advantage of its existing petrochemical infrastructure and know-how to transition into clean energy. At the same time there is scope to diversify its exports products and markets.
18. The economic diversification process requires supporting policies to address structural bottlenecks. In addition to a sound and stable macroeconomic environment, the authorities are encouraged to step up their efforts towards improving the business environment by delivering on measures (e.g., infrastructure, governance, trade policy, education) laid out in the Vision 2030. IMF staff welcomes the country’s digitalization agenda to deliver more efficient public services, improve the business environment, and enhance the social safety net.
19. The authorities’ actions to reduce greenhouse gas emissions are commendable . Several renewable energy projects are being developed to meet the 30 percent target of renewable energy sources by 2030. IMF staff encourages the authorities to continue advancing on these initiatives and welcomes their new green hydrogen strategy for the energy transition. Efforts tointegrate the climate change considerations in the financial sector supervision are also welcome.
Enhancing the adequacy of statistics
20. IMF staff welcomes the progress to improve the quality, timeliness, and coverage of macroeconomic statistics, but some challenges remain. Transforming the Central Statistical Office into an independent National Statistical Institute would help strengthen the country’s institutional capacity. It is encouraged to continue building on the recent efforts to broaden fiscal data coverage of SOEs and other public bodies.