This week, we continue on our “off the beaten path” examination of the 2027 Budget with a third budget issue that centres on the interaction between accounting and market reality. It is common at this time, to hear calls from the Trinidad and Tobago Manufacturers’ Association and chambers of commerce for Government to pay outstanding Value Added Tax (VAT) refunds. Alongside that call sits your constant concern over foreign exchange availability and the level of our official reserves.
What you rarely hear in the public debate is how directly these two issues connect. For the avoidance of doubt, a legitimate VAT refund is your money. When your business pays more allowable input VAT on purchases than it collects in output VAT on sales, the difference belongs to you. Withholding that cash traps working capital and effectively forces you to finance the State.
However, when billions of dollars in unpaid refunds accumulate over a decade and are settled in large blocks, it creates unintended consequences in the foreign exchange market. To see how we arrived here, let’s go back to 2015.
The revenue illusion
In May 2023, the then Minister of Finance told Parliament that unpaid VAT refunds stood at $3 billion in May 2010 and rose to $4.6 billion by September 2015 when his Administration took office. Recognize now that we are talking about a problem that existed prior to 2010.
In October 2015, the 2016 Budget presented by Minister Imbert proposed cutting the VAT rate from 15 per cent to 12.5 per cent and widening the base. The changes took effect in February 2016.
The expectation was that a broader base and better compliance could offset a lower rate, yet the projection in the 2016 Estimates of Revenue was still startling to say the least and it is something you should consider when you hear the current conversations about “the maths not mathsing” and projecting revenues that cannot be met to justify expenditure levels. Let’s just say this isn’t a new thing.
Against a revised 2015 estimate of $6.7 billion, the 2016 Budget forecast VAT collections of $12.4 billion, a jump of $5.7 billion, or 84 per cent, in one year while the VAT rate decreased. This was not a reasonable estimate by any stretch.
What was the actual outturn? The 2017 Review of the Economy shows fiscal 2016 VAT revenue was $7 billion, against a revised 2015 outturn of $7.2 billion. Collections fell $5.4 billion, or 43 per cent, below forecast and 3 per cent below the prior year, when the promise was for improved VAT collection.
Published tables do not show how much of that forecast relied on holding back refunds, but the cash arithmetic is simple. Suppose Government collects $10 billion in gross VAT and owes you $3 billion in valid refunds. Net revenue is $7 billion. Paying only $1 billion in refunds lets it utilize $9 billion in cash revenue while leaving $2 billion unpaid.
In its 2017 Article IV report, the International Monetary Fund pointed to this risk. Because Government recorded gross VAT while refunds depended on budget allocations, the IMF warned that “total tax revenues may be overstated” when unpaid refunds grow. It noted growing arrears should be classified as financing rather than revenue, and recommended remitting only net VAT proceeds to the Budget.
That habit has now persisted for years while businesses carried the cost and even where they may have been an entitlement to interest the fiscal 2023 public accounts showed just $2.33 million paid in delayed refund interest, noting payment depended on taxpayers requesting it.
Bonds and conversions
With arrears at $7.8 billion by March 2023, representing a $3.2 billion increase since September 2015, the State continued using three-year VAT bonds to manage the backlog. It issued $3 billion tranches in 2020 at 3.30 per cent, in 2023 at 3.15 per cent alongside borrowing to repay maturing 2020 bonds, and in 2025 at 4.01 per cent, effective January 31. Understand that issuing a VAT bond converts an overdue tax payable into formal interest bearing debt.
Now for the foreign exchange link. Appreciate the difference between the US dollars T&T earns from exports and the US dollars supplied to local banks. Energy firms earn US dollars abroad and keep much of it offshore for debt, equipment and dividends. They convert US dollars into TT dollars locally primarily to pay domestic taxes and expenses.
As the 2025 Budget disclosed, over 80 per cent of VAT refunds are normally owed to zero-rated energy firms. Energy companies also supplied around two thirds of dealers’ foreign currency purchases in transactions exceeding US$20,000 in 2025. When an energy firm gets TT dollars from a refund or sells a VAT bond to a bank, it converts fewer US dollars to pay local bills. At TT$6.78 to the US dollar, every TT$1 billion of local expenses funded by VAT settlements instead of conversions displaces about US$147 million of expected US dollar supply.
Central Bank data confirm this. Its 2023 Annual Economic Survey reported that energy FX conversions fell by about 29 per cent, from US$4.09 billion in 2022 to US$2.92 billion in 2023, linking the drop to lower domestic liquidity needs after sizeable VAT bond repayments. Recognising this, the then Minister placed a six-month restriction on the encashment and transfer of the January 2025 bonds by zero-rated energy firms.
A six month lockup postpones access to cash; the conversion effect can emerge when the bonds become liquid which for all practical purposes was during the last eighteen months. This is symptomatic of an approach of putting plasters on sores to delay the consequences of improper fiscal management and in this instance pushing it into the term of another administration.
From 2015 to 2025, natural gas output fell by one third from about 3.8 billion to 2.54 billion cubic feet per day, shrinking our FX base. Between 2024 and 2025, however, gas output was broadly flat and energy exports rose 6.6 per cent from US$8.0 billion to US$8.52 billion. Yet energy FX conversions fell 15.8 per cent in 2025 to roughly US$2.51 billion, which the Central Bank’s 2025 Survey attributed to VAT bond redemptions.
When private conversions fall while your import and credit card demand stays high, the Central Bank supplies part of the gap from reserves, selling US$1.34 billion to dealers in 2023, US$1.36 billion in 2024 and US$1.28 billion in 2025. Official reserves fell from US$9.93 billion in December 2015 to US$6.83 billion in December 2022, and dropped another US$1.53 billion, or 22.5 per cent, to US$5.29 billion by August 2026.
Lower gas output and import demand weighed heavily on the market over that period. External borrowing and Heritage and Stabilisation Fund withdrawals provided substantial support to reserves. That included US$750 million borrowed externally and US$370 million from the HSF in 2024, followed by US$1.8 billion across two 2026 bond issues. After refinancing the US$1 billion bond originally due in August 2026, those issues increased principal outstanding by about US$800 million before issuance costs and other adjustments, alongside fiscal 2026 HSF drawdowns.
The balancing act
How does this unfold going forward? The 2027 Budget cited an inherited backlog of $10.6 billion in VAT and other tax refunds. This is an amalgamated figure but it is of sufficient size to appreciate that there must be a clear trade off.
If the State clears billions of dollars of arrears at once, and historical relationships hold, payouts to energy firms and other FX earners can again substitute TT dollars for US dollar conversions, while cash paid to domestic importers can increase near-term FX demand. Both channels would add pressure to the FX market and potentially to reserves supported by foreign debt.
There has been an attempt to manage this via selective, sequenced payment of refunds. Domestic small and medium businesses and non-energy manufacturers may be prioritised for predictable cash refunds so they can operate and invest. Selective approaches are hardly transparent and are not sustainable.
To its credit, the 2027 Budget dropped replacing VAT with a sales tax after an international review, proposing instead to modify the VAT system. We await the outcome of this revised system but ultimately, administrative reforms must be matched by a change in how we budget. Until refund obligations are fully provided for and funded as collections arrive, using unpaid refunds to flatter fiscal accounts will continue to put tomorrow’s FX supply under pressure.
Ian Narine is a financial consultant who understands that there isn’t enough in the vat to pay the VAT. Please send your comments to ian@iannarine.com
