In Part V of the re­pub­li­ca­tion of the In­ter­na­tion­al Mon­e­tary Fund's Ar­ti­cle IV analy­sis of the T&T econ­o­my, the Fund iden­ti­fies the down­side risks to the lo­cal econ­o­my and

• The ex­ter­nal ac­counts re­bound­ed strong­ly in 2010.

The cur­rent ac­count sur­plus in­creased to 20 per­cent of GDP in 2010 and an es­ti­mat­ed 21 per cent in 2011 up from 8 per cent in 2009, stem­ming main­ly from the im­prove­ment in en­er­gy prices and a re­cov­ery in non-en­er­gy ex­ports. Gross of­fi­cial re­serves grew to US$9.8 bil­lion (over 13 months of im­ports) at end-2011 from US$9.1 bil­lion at end-2010.

• The eco­nom­ic out­look has im­proved in the short term.

Re­al eco­nom­ic ac­tiv­i­ty is ex­pect­ed to in­crease by 1.7 per cent in 2012 as the en­er­gy sec­tor re­sumes nor­mal op­er­a­tions lat­er in the year, and the non-en­er­gy sec­tor picks up mo­men­tum with the ac­cel­er­a­tion of pub­lic in­vest­ment and the re­struc­tur­ing of CLI­CO li­a­bil­i­ties.

In­fla­tion is ex­pect­ed to re­main mod­er­ate.

Medi­um-term growth is ex­pect­ed to rise to 2.5 per cent, sig­nif­i­cant­ly less than in the years pre­ced­ing the cri­sis, in part due to the weak out­look for the en­er­gy sec­tor, while non-en­er­gy growth is ex­pect­ed to reach its po­ten­tial of 3.5 per cent.

• Nev­er­the­less, there are sig­nif­i­cant down­side risks.

Do­mes­ti­cal­ly, these stem from the pace of im­ple­men­ta­tion of pub­lic in­vest­ment, on­go­ing le­gal chal­lenges to the Cli­co re­struc­tur­ing, and con­tin­ued tech­ni­cal dis­rup­tions in oil and gas pro­duc­tion. There is al­so the po­ten­tial for ex­ter­nal spillovers from low­er prices for oil and gas and grow­ing com­pe­ti­tion from shale gas, and oth­er glob­al de­vel­op­ments, in­clud­ing any fur­ther weak­ness in de­mand for the coun­try's ex­ports, from the Caribbean.

Com­mer­cial banks do not de­pend on ex­ter­nal fund­ing and there­fore are less prone to spillovers on the li­a­bil­i­ty side, and there are some lim­it­ed risks from lend­ing to the rest of the Caribbean.

• The gov­ern­ing Peo­ple's Part­ner­ship took of­fice in May 2010 with a five-year term.

The key pri­or­i­ties of the coali­tion gov­ern­ment have been to re­store eco­nom­ic sta­bil­i­ty, to im­prove gov­er­nance, and to ad­dress the high lev­el of crime. A state of emer­gency im­posed in Au­gust 2011 af­ter a spike in crime ex­pired in De­cem­ber.

• The au­thor­i­ties im­ple­ment­ed many of the key pol­i­cy rec­om­men­da­tions in the 2010 Ar­ti­cle IV con­sul­ta­tion.

These in­clude pro­vid­ing fis­cal sup­port for a re­cov­ery; un­der­tak­ing fur­ther pol­i­cy rate re­duc­tions; im­ple­ment­ing the FS­SA rec­om­men­da­tions; and fi­nal­iz­ing the Cli­co re­struc­tur­ing while pro­vid­ing more fa­vor­able treat­ment to cred­it unions.

The au­thor­i­ties set forth their medi­umterm pol­i­cy plans in the 2011/12 bud­get, with­out spec­i­fy­ing a medi­um-term fis­cal tra­jec­to­ry and the mea­sures to achieve it. They are work­ing to ex­tend su­per­vi­sion to the non­bank sec­tor and have act­ed to re­duce vul­ner­a­bil­i­ties in the sec­tor.

POL­I­CY DIS­CUS­SIONS

Notwith­stand­ing the weak eco­nom­ic per­for­mance, am­ple buffers have pro­vid­ed room for ma­neu­ver. How­ev­er, a ma­jor shift in the fis­cal tra­jec­to­ry is need­ed in the medi­um term to put the fis­cal frame­work on a sound foot­ing. Dis­cus­sions fo­cused on how to sup­port the re­cov­ery in the short term while re­turn­ing to sus­tain­able fis­cal path go­ing for­ward con­sis­tent with the prospec­tive de­ple­tion of en­er­gy re­sources, and on ad­dress­ing fi­nan­cial vul­ner­a­bil­i­ties and pro­mot­ing di­ver­si­fi­ca­tion.

A. Fis­cal Pol­i­cy

• The 2011/12 bud­get, if im­ple­ment­ed as en­vis­aged, will ap­pro­pri­ate­ly pro­vide stim­u­lus to sup­port the re­cov­ery.

The cen­tral gov­ern­ment bud­get deficit is pro­ject­ed to be 5 per cent of GDP as­sum­ing con­ser­v­a­tive en­er­gy prices (oil price of US$75/bar­rel). The staff project a deficit of 2.5 per cent of GDP based on World Eco­nom­ic Out­look prices (oil price of US$105/bar­rel) and low­er in­ter­est pay­ments.

The staff wel­comed the sup­port­ive fis­cal stance while em­pha­siz­ing the need for time­ly ex­e­cu­tion of cap­i­tal spend­ing and de­vel­op­ment of new in­vest­ment plans in the rest of the pub­lic sec­tor to re­place the ones that are near com­ple­tion.

At the same time, staff cau­tioned against fur­ther in­creas­es in re­cur­rent cen­tral gov­ern­ment spend­ing, point­ing to the growth of trans­fers and sub­si­dies from 9 per cent of GDP in 2002/03 to 17 per cent in 2010/11.

The au­thor­i­ties agreed with staff on the need to ad­dress im­ple­men­ta­tion de­lays, in­clud­ing by strength­en­ing the ex­e­cu­tion unit with­in the Min­istry of Fi­nance, but not­ed that fill­ing va­can­cies, even in key min­istries, is com­pli­cat­ed by the in­flex­i­ble pub­lic ser­vice ad­min­is­tra­tion, lead­ing to grow­ing re­liance on con­trac­tu­al staff.

• The gov­ern­ment is seek­ing to im­prove the ef­fi­cien­cy and buoy­an­cy of rev­enue col­lec­tion.

The gov­ern­ment plans to un­der­take its first ma­jor re­view of the tax sys­tem since the 1980s when the VAT was in­tro­duced. Fol­low­ing the tax amnesty in 2011, which col­lect­ed TT$2 bil­lion (1.4 per cent of GDP), In­land Rev­enue is in­ten­si­fy­ing en­force­ment with its im­proved tech­nol­o­gy in­fra­struc­ture. The staff wel­comed this ini­tia­tive but al­so not­ed that se­ri­ous staffing short­ages could lim­it the ben­e­fits of the new IT plat­form. Broad­en­ing the tax au­thor­i­ty's le­gal pow­er to bet­ter uti­lize the new tech­nol­o­gy is al­so es­sen­tial to fur­ther in­crease com­pli­ance.

• Over the medi­um-term, a ma­jor shift in the fis­cal tra­jec­to­ry is need­ed to re­turn the fis­cal frame­work to a sus­tain­able path.

An even larg­er ad­just­ment will be need­ed to re­sume sav­ings for fu­ture gen­er­a­tions. The large 2009 de­cline in nom­i­nal GDP put the econ­o­my on a low­er tra­jec­to­ry. How­ev­er, cen­tral gov­ern­ment spend­ing has re­mained on the same pre-cri­sis path (see charts).

Ex­pen­di­tures are sig­nif­i­cant­ly high­er rel­a­tive to GDP, but rev­enues have not re­cov­ered. The prospec­tive de­cline in en­er­gy out­put and re­lat­ed rev­enues will fur­ther un­der­mine pub­lic fi­nances even­tu­al­ly re­quir­ing an abrupt ad­just­ment (Box 3). In a pas­sive sce­nario, the over­all deficit is pro­ject­ed to drift up­ward to over 5 per cent of GDP by 2016/17 even if non-in­ter­est ex­pen­di­ture is held con­stant as a share of GDP. The fis­cal de­te­ri­o­ra­tion is dri­ven by slow­er-than-GDP en­er­gy rev­enue and in­creas­ing in­ter­est pay­ments. Un­der this sce­nario, the debt-to-GDP ra­tio would rise from 32 per cent of GDP in 2010/11 to 48 per cent by 2016/17, and as high as 69 per cent in case of a growth shock. The au­thor­i­ties' medi­um-term pas­sive fis­cal pro­jec­tion point to a sim­i­lar de­te­ri­o­ra­tion.

• The mis­sion rec­om­mend­ed set­ting forth a cred­i­ble medi­um-term frame­work that smoothes con­sump­tion and ac­com­mo­dates in­vest­ment to sup­port de­vel­op­ment and di­ver­si­fi­ca­tion. The ac­tive sce­nario, which il­lus­trates a pos­si­ble strat­e­gy, would im­ply a di­min­ish­ing an­nu­al ad­just­ment from 1 per cen­t­age point in 2012/13 to 0.6 per cen­t­age points by 2016/17. The strat­e­gy is based on: -hold­ing trans­fers and sub­si­dies con­stant in nom­i­nal terms (there­by rolling back some of the large in­creas­es in the past decade); -al­low­ing oth­er non-in­ter­est com­po­nents of cur­rent spend­ing to grow in line with GDP, and -strength­en­ing non-en­er­gy rev­enues by im­prov­ing tax ad­min­is­tra­tion and broad­en­ing the tax base, in­clud­ing by re­duc­ing ex­emp­tions un­der the VAT and re­form­ing prop­er­ty tax­es. The neg­a­tive fis­cal im­pulse im­plic­it in this sce­nario could re­duce some­what the re­al growth of the non-en­er­gy sec­tor, but im­proved con­fi­dence in the sus­tain­abil­i­ty of the fis­cal frame­work may large­ly mit­i­gate this risk.