Trinidad & Tobago is confronting a major shock with the sharp fall in energy prices that accelerated early this year.
In a statement following the conclusion of a mission from the International Monetary Fund earlier this year, head of the IMF mission Elie Canetti said that based on available information, including that of job losses and continued supply-side constraints in the energy sector, Trinidad’s economy is expected to contract one per cent this year.
The mission also said that declines in energy-based revenues will constrain the government’s ability to act as an engine of growth.
Still: “With substantial financial buffers and low, albeit rising levels of public debt, Trinidad and Tobago is not in a crisis. Nonetheless, in recent years, taking into account the size of energy revenue windfalls, the country has under-saved and underinvested in its future,” the IMF said.
“As a consequence, the imbalances that are now starting to build up could lead the country to uncomfortable levels of debt and external financial cushions absent further action. The new Government agrees that policy adjustments are needed.”
The fund noted that in the half-year since they took office, the Keith Rowley-led administration has already taken “some difficult but necessary steps”, such as widening the value tax base, cutting fuel subsidies, and cutting the number of ministries.
BUDGET DEFICIT
Despite these measures, the IMF said it projects a 2016 Budget deficit at some 11 per cent of GDP. However, if asset sales were to be counted as revenue rather than financing, the deficit would be equivalent to about five per cent of GDP, it said.
“Continued projected deficits of this size call for further fiscal consolidation, perhaps of around 6 per cent of GDP over the next few years,” said the multilateral agency.
Trinidad has agreed to conduct a wide-ranging expenditure review, and will seek the assistance of the World Bank to rationalise and reverse the unsustainable increases in spending on transfers and subsidies over the last several years.
“We support the Government’s intent to conduct a national dialogue on fuel subsidies with a view to phasing them out over time,” said the fund. “The country’s external situation has been very challenging. Against a backdrop of foreign exchange shortages that have intensified since the beginning of 2015, the recent sharp falls in energy prices are further reducing the available supply.”
During the recent visit, the mission met with government officials, banks, and private-sector representatives to assess the foreign exchange market. The fund noted that the current shortage appears to be driven by business uncertainty but also speculative trades.
“While it is appropriate that the central bank paused in its interest rate hiking cycle in January, there is little scope, as the bank agrees, to cut interest rates, at least until shortages of foreign exchange are ameliorated,” the IMF said.