During the period, October 27 to November 8, 2010, the International Monetary Fund (IMF) conducted an Article IV consultation on T&T. While the publication will be formally presented to the IMF's executive board next month, the Business Guardian obtained a copy of the preliminary findings, which were presented in a Cabinet Note on November 10. The following is a summarised version of the 20-paragraph report:
Recent Developments
1. There is still no evidence of economic recovery. Real economic activity is projected to stagnate in 2010, reflecting, in part, the completion of several large capital projects and delays in new ones, the ongoing uncertainty related to Clico and the weak regional outlook.
2. The recovery in energy prices is strengthening the external accounts after the sharp deterioration in 2009. Lower export receipts and increased uncertainty led to temporary pressures on the foreign exchange market in 2009, but pressures have abated and international reserves increased to US$9.2 billion (14 months of import cover) at end-October 2010 from (US)$8.7 billion at the end of 2009.
3. The policy response has been constrained by concerns about increasing debt, the surge in inflation and the costs of the Clico bailout. Concerns about the magnitude of fiscal deterioration and rapid increase in public debt constrained a more supportive fiscal stance.
4. Economic prospects over the medium-term are weaker compared to the strong growth period preceding the economic crisis. Growth is expected to pick up in the second quarter of 2011 and is projected to be 2.0 per cent for the year. However, the near-term risks are tilted to the downside, reflecting the absence of concrete signs of recovery, the weak regional outlook and global uncertainty.
Over the medium-term, despite the firming of energy prices, real growth over 2012-2015 is expected to remain below three per cent.
Policy Discussions
A. Fiscal Policy
5. The 2010/11 budget is geared toward supporting the recovery. The budget envisages an overall deficit of 6.2 per cent of gross domestic product (GDP), excluding the cost of the Clico and Hindu Credit Union (HCU) bailouts, based on conservative oil and gas price assumptions.
The mission projects a lower fiscal deficit of about 4.5 per cent of GDP, reflecting World Economic Outlook forecasts for energy prices US$77/barrel for oil and US$4.4 per mmbtu for gas at Henry Hub), again excluding bailout costs.
The total financing requirement, including the additional cost of the Clico and HCU bailouts of about $10.6 billion, (7.7 per cent of GDP), will reach about 12.2 per cent of GDP, and gross public debt will increase to 49.6 per cent of GDP. However, this does not account for arrears to private sector contractors.
6. Over the medium-term, debt will continue on an upward trajectory as a share of GDP absent strong measures to rein in expenditure and/or increase revenue.
The more moderate level of energy revenues can no longer sustain the high level of expenditure, which increased sharply during the period of high world energy prices, particularly on transfers and capital.
7. The mission agrees that the immediate priority is to support an economic recovery. In view of the still weak state of the economy, the 2010/2011 fiscal deficit of 4.5 per cent of GDP appears broadly appropriate-increasing the fiscal impulse to 2 per cent of GDP-and is unlikely to jeopardise fiscal sustainability.
However, it will be crucial to stabilise the debt to GDP ratio in 2011/2012. The planned review of the across-the-board petroleum subsidy is a welcome step in this direction.
8. Strengthening tax administration will require regaining the momentum for reform. While the relatively high tax rates would suggest limited scope for tax increases, there is room to reduce the leaks from the system by removing some exemptions and increasing equity.
9. It will also be important to maintain the integrity of the National Insurance Board. The scheme is sound, but the increase in the monthly senior citizen's grant and the minimum civil service pension to $3,000 has created pressure for a large increase in pension benefits. Such an increase should only be considered in the context of the next actuarial review scheduled for completion in 2012.
10. The Government's large financing needs should be carefully managed. There is considerable liquidity in the domestic market, which could be tapped without crowding out private sector credit. Moreover, despite worldwide low interest rates, financing costs at home are even lower and larger reliance on domestic financing will reduce future exchange rate risks.
11. In the medium-term, actions are needed to bring down the debt ratio and to reduce the economy's reliance on energy revenues. The staff's active scenario involves an adjustment from a deficit of 2.3 per cent of GDP in 2011/12 to a surplus of 3.5 per cent of GDP in 2014/15. The strategy is based on partially reversing the recent large increase in transfers containing expenditures on goods and services and a moderate strengthening in non-energy revenues. However, if the debt-to-GDP ratio is indeed much higher as a result of the contractors and VAT arrears, a more ambitious strategy would be needed to bring down the debt-to-GDP ratio.
12. The framework for the Heritage and Stabilisation Fund (HSF) merits reconsideration given sustained level of asset accumulation required to smooth consumption of energy wealth. The framework should be modified to ensure that transfers are made into the HSF, on average, to build up balances in the HSF over time.
B. Monetary, Financial Sector and Exchange Rate Policy.
13. Inflation is high, but has begun to decline. The recalculation of the Consumer Price Index (CPI) should be a top priority as it is not providing reliable data to guide important policy decisions, including in the context of the ongoing wage negotiations.
14. The challenge now is to provide a monetary environment conducive to supporting a non-energy sector recovery. The effectiveness of monetary policy is constrained by the apparent weakness of the monetary transmission mechanism reflecting large excess liquidity in the system.
15. The authorities should seek to resolve the further delay in the restructuring of the outstanding Clico liabilities and to contain additional fiscal costs. Now that the Inter-Ministerial Committee has concluded its work, further delays on how to proceed will increase uncertainty and may contribute to a further weakening of the already poor private sector confidence.
16. An overlapping MCM Financial Stability Module mission assessed the broader risks and vulnerabilities in the financial system of Trinidad and Tobago. Their preliminary findings suggest that the banks have ample liquidity and are well-capitalised, but non-performing loans have risen substantially in some institutions and warrant intensified supervision.
17. The current real effective exchange rate appears broadly in line with fundamentals. Changing the exchange rate system is not an immediate priority, but maintaining a stable exchange rate will require supportive monetary and fiscal policies. Over the longer-term, the decline in energy reserves suggests a need for greater exchange rate flexibility to support the expansion of non-energy exports and a rebalancing of consumption. In addition, a more flexible exchange rate would allow monetary policy to respond more effectively to short-run macroeconomic shocks.
C. Reigniting Growth, Diversification and Structural Reforms.
18. The immediate priority is to reignite growth. A clear finding is that the uncertainty about the Government's intentions and delays in actions is inhibiting private sector confidence. Steps to enhance confidence would include expediting the appointment of key boards that oversee public sector investment and accelerating efforts to implement this year's public sector investment programme.
Further delays risk missing the weather cycle (in terms of construction) and could undermine next year's anticipated recovery.
19. Notwithstanding recent setback, diversification efforts are continuing. The mission would underline the importance of prioritising Government investments in support of diversification, particularly in view of the increasingly constrained availability of resources.
20. The authorities are pursuing other structural reforms. Staff highlighted the need to strengthen the measurement of macroeconomic statistics, in particular, the calculation of the CPI and the GDP deflator, where estimation errors can complicate the conduct of monetary policy and may lead to an overestimation of the deficit and the debt as a share of GDP.