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IMF warning on uncertain USD supply

Published: 
Friday, April 4, 2014
Elie Canetti

US dollar supply uncertainty in the local foreign exchange (forex) market encourages hoarding, the International Monetary Fund (IMF) warned as its mission concluded an Article IV Consultation in Port-of-Spain. “The foreign exchange market has been relatively tight recently. Despite significant dollar injections from the Central Bank of T&T (CBTT), recent reports suggest that foreign exchange shortages, while temporary, have been fairly widespread,” the IMF said in a release. “Increases in foreign exchange inflows may soon help to alleviate shortages, although some uncertainty about the availability of foreign exchange may be providing an incentive to hold larger than usual cash balances in foreign currency.”

 

The mission, headed by Washington-based Elie Canetti, said it “looks forward to seeing the impact” of the new system of allocating foreign exchange that commenced April 1, but “calls on the CBTT to consider moving towards a more flexible, market-clearing system should significant unanticipated shortfalls recur.” T&T is experiencing more robust growth after several years of sub-par performance, the IMF said. With the end of maintenance-related outages in the energy sector, the IMF projects that the economy will grow around 2.5 per cent this year after around 1.5 per cent growth in 2013. The non-energy sector was fairly buoyant in 2013, which the IMF anticipates will continue to be the case in 2014. Core inflation has been relatively quiescent, though it picked up to 2.7 per cent in February 2014, the IMF noted. “The country’s external position remains healthy, with external reserves at US$10.0 billion, while the Heritage and Stabilisation Fund’s assets continue to grow. Serious data deficiencies hinder a more complete assessment of balance of payments developments, but our best estimate is that the current account surplus should continue to be in double digits (as a per cent of GDP) in 2014 thanks to a strong rebound in energy exports from 2013. However, there are signs that the growth of imports, notably automobiles, may be picking up,” Canetti said in the release.

The IMF said it projects a fiscal deficit of about 1.5 per cent of gross domestic product (GDP) in 2013/14, closer to balance than envisaged in the budget statement. However, this is due in part to one-off developments, without which the deficit would be closer to 3.5 per cent of GDP. Looking ahead, the case for expansionary fiscal policies to support the economy is waning amid signs that excess capacity, notably in the labour market, is rapidly being used up, the IMF said. Thus, the smaller budget deficit is welcome. Canetti and his team said they see a strong case to continue fiscal consolidation into the medium-term, but based on policy changes that durably improve the structure of non-energy-based revenues and spending. The mission welcomed Government’s efforts to significantly reduce or eliminate arrears on energy subsidies, VAT refunds and to suppliers. “With excess liquidity in the banking system rising to $7.1 billion through March 2014, monetary policy will have to continue contending with a structural liquidity overhang for the foreseeable future. “In addition, the time for withdrawing the accommodative monetary stance of the past few years may be coming nearer as the unemployment rate has fallen meaningfully, credit to consumers and for real estate is growing at a relatively rapid pace, core inflation has risen, and interest rate differentials are shifting in favour of US interest rates. While credit to business has continued to fall, this appears to be due primarily to a lack of demand, in part given firms’ already ample cash resources,” the IMF said.

“Fiscal policy should be set in a long-term context that ensures the country’s non-renewable energy reserves are used as a stepping stone to lasting prosperity. This requires increasing savings from the substantial resources extracted from this sector, which should be accomplished by moving the fiscal position into surplus within a few years.“In addition, expenditures should shift away from consuming the country’s resources towards investing them for the future. In particular, we would like to reiterate our previous advice to quickly move to start ending fuel subsidies, consistent with the IMF’s increasing emphasis on this issue globally.” Fuel subsidies are extremely costly and inequitable, starving the government of resources that could be better targeted towards poverty reduction, the IMF said. They also induce excessive reliance on automobiles, leading to pollution and traffic jams that have a materially-adverse impact on productivity.
In addition, overlapping social programmes should be rationalised and better targeted to the less fortunate segments of society. Revenue policies should be aimed at broadening tax bases to ensure a level playing field across activities.

 

The IMF said: “The government should continue to build on recent successes in implementing structural reforms to unlock the country’s full growth potential. There has been measurable progress in easing the impediments to doing business and in financial sector reforms, although more remains to be done in both areas. Beyond that, there are still critical needs for streamlining the government’s structure and improving the efficiency of the public service and the functioning of labour markets. “The country would also benefit from reforms in procurement, corporate bankruptcy and bank resolution. “Finally, we wish to place the greatest stress on remedying the continued shortcomings of the Central Statistical Office (CSO) in generating critical data, which hamper effective policy making and lessen transparency. The authorities were in broad agreement with the mission’s assessment.”