IMF Wraps Up 2023 Consultation with Trinidad and Tobago

Washington, DC: On end of lapse-of-time date, May 1, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the 2023 Article IV consultation[1] with Trinidad and Tobago and considered and endorsed the staff appraisal without a meeting.[2]

Trinidad and Tobago's economic activity is recovering supported by higher global energy prices and the rebound of the non-energy sector. Real GDP is estimated to have expanded by 2.5 percent in 2022. Inflation has increased, reaching 8.7 percent by end-2022, driven by imported energy and food prices, partial liberalization of domestic fuel prices in 2022, and domestic weather-related shocks. The financial sector appears well-capitalized, liquid, and profitable. Higher energy prices contributed to further improving the external position in 2022 and turning the fiscal position into a surplus in FY2022—for the first time in over a decade. Public debt has declined.

The economic recovery is expected to gain broad-based momentum in 2023. Inflation is projected to slow to 4.5 percent by end-2023 and to continue declining with international prices. The current account surplus will narrow in line with the anticipated decline in global energy prices, reaching 6.6 percent of GDP in 2023. International reserve coverage is expected to remain adequate at around 7.2 months of prospective total imports and is complemented by large public external buffers in the Heritage and Stabilization Fund of about 18.4 percent of GDP. The overall fiscal balance is projected to turn into a deficit of 2.8 percent of GDP in FY2023, reflecting lower energy revenues due to declining energy prices and domestic production, and increased capital spending.

The balance of risks to the outlook is tilted to the downside. Downside risks stem from potential disruptions to domestic oil and gas production; a sharper-than-expected global slowdown affecting energy markets, and global financial instabilities. On the upside, there is the potential for higher-than-expected energy prices and production, including new or expanded projects, and new renewable energy projects.

Executive Board Assessment

Trinidad and Tobago's economy is recovering. In 2022, economic growth picked up led by the non-energy sector. Inflation has increased, driven by imported energy and food prices, the partial liberalization of fuel prices, and floods. In 2023, the recovery is expected to gain broad-based momentum. Inflation is projected to slow in 2023 in line with international prices. In 2022, the external position was stronger than the level implied by fundamentals and desirable policies. The balance of risks to growth is tilted to the downside.

The fiscal position is expected to swing from surplus in FY2022 to a deficit in FY2023, and then stabilize at moderate deficits over the medium term. It is recommended to continue prudently managing the energy revenue windfall, avoiding procyclical spending, and rebuilding fiscal buffers, while providing targeted support to the most vulnerable. The fiscal stance in the FY2023 budget is appropriate. Capital expenditure will support the economic recovery and address critical bottlenecks (e.g., infrastructure), but it needs to be efficient and high quality. A spending contingency plan would help stabilize fiscal accounts should downside risks materialize.

The authorities' commitment to balancing the budget over the medium term is prudent and welcome. To support this effort, it is recommended to enhance revenue mobilization, cut down non-priority current expenditure, and maintain debt well below the new soft debt target. Additional revenue could be generated by implementing tax reforms and strengthening the tax administration. It is advisable to continue gradually phasing out subsidies, streamlining transfers to state-owned enterprises (SOEs), and improving public spending efficiency, while preserving the spending for the most vulnerable, supporting growth-friendly expenditure, and protecting essential capital spending.

Long-term fiscal risks related to the pension system and the global energy transition need to be addressed. The National Insurance System's deficit is expected to widen, gradually depleting its reserve by mid-2030s. The authorities' proposal to increase the retirement age to 65 years would help partially contain the deficits. Increasing contribution rates could also help. An energy transition that avoids disruptive policy adjustments requires the design of a sustainable long-term fiscal strategy.

Enhancing the fiscal policy framework would help strengthen planning and reinforce fiscal sustainability. A rule-based medium-term fiscal framework would strengthen policy formulation, help avoid procyclical spending, and mitigate fiscal risks. This could include a formal fiscal anchor—with an escape clause for unexpected events—to support fiscal discipline and sustainability. A sound debt management strategy would mitigate macro-financial risks.

It is encouraged to maintain sound and consistent policies to support the exchange rate arrangement. The Central Bank of Trinidad and Tobago (CBTT) should seriously consider increasing its repo policy rate to contain inflationary pressures and narrow the negative interest rate differentials with the U.S. monetary policy rate. This would also mitigate potential risks of capital outflows and reduce excessive risk-taking incentives that could threaten financial stability.

Reforming the foreign exchange (FX) market infrastructure remains a priority to eliminate FX shortfalls. It would also create a more conducive business environment for the private sector to invest and diversify the economy. Over the medium to longer term, greater exchange rate flexibility would reduce the need for fiscal policy adjustments over the cycle and allow for countercyclical monetary policy. The authorities are encouraged to remove all restrictions on current international transactions while providing sufficient FX to meet demand for all current international transactions.

The authorities need to remain vigilant to vulnerabilities in the financial system. The system appears sound and resilient but vulnerabilities emanate from rising household and businesses' debt, high exposures to the sovereign, and interconnectedness. Closely monitoring financial risks is warranted. Staff welcomes the progress in enhancing the resilience of the banking and insurance sectors in line with the 2020 Financial Sector Assessment Program (FSAP) recommendations. However, progress is needed in transforming the investment fund sector from constant to variable net asset value (NAV), enhancing the consolidated supervision of conglomerate groups, providing the CBTT with explicit macroprudential authority and tools, and strengthening supervisory resource and independence in line with international best practices.

Staff welcomes and supports the authorities' efforts in embracing Fintech for financial inclusion and development, while working on mitigating its potential risks. Noteworthy are the efforts, in collaboration with IMF Technical Assistance, to develop the Fintech ecosystem (e.g., the Joint Regulatory Hub, launching a Regulatory Sandbox, developing the payment system, and strengthening the cybersecurity).

Staff welcomes the authorities' efforts to strengthen the financial integrity and international tax transparency frameworks. Following the removal from the Financial Action Task Force (FATF) monitoring list in February 2020, the authorities are encouraged to further strengthen the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework. Staff welcomes the authorities' commitment and efforts to addressing issues related to the European Union's Commission Tax Blacklist and the Organization for Economic Cooperation and Development's (OECD) Global Forum requirements on Exchange of Information on Request (EOIR) and Automatic Exchange of Information (AEOI) Standards.

Economic diversification requires supporting policies to address structural bottlenecks. The authorities need to step up their efforts towards improving the business environment by delivering on their Vision 2030 agenda. The country's digitalization agenda to deliver more efficient public services, improve the business environment, and enhance the social safety net is welcome.

The country's actions to reduce greenhouse gas emissions are commendable. It is important to continue advancing the work on renewable energy projects and the new green hydrogen strategy. The CBTT's integrated climate change considerations in financial sector supervision, focusing on risk management, stress testing, and data collection, is welcome.

The quality, timeliness, and coverage of statistics has improved but challenges remain. It is recommended to strengthen the institutional capacity with the operationalization of the independent National Statistical Institute, and to build on recent efforts to broaden fiscal data coverage of SOEs and other public bodies.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.