WASHINGTON, DC September 26, 2018 (CMC) – The International Monetary Fund (IMF) said, yesterday, that positive growth should return to Trinidad and Tobago this year, even as it acknowledged that the oil-rich twin island republic is slowly recovering from a deep recession.
In a statement, following an examination by its board of directors, the Washington-based financial institution said that the local economy has continued to contract, but at a slower pace, underpinned by the strong recovery in gas production.
It said weak activity in construction, financial services, and trade, continued foreign exchange (FX) shortages, and slow pace of public investment dampened non-energy sector growth, and that positive growth should return from 2018, as the recovery takes hold in both sectors.
“Good progress has been made in fiscal consolidation, through spending cuts, but public debt continued to rise, approaching the government’s soft target of 65 percent of gross domestic product (GDP),” the IMF said.
It added, the external position is weaker than the level, consistent with medium-term fundamentals and desirable policies, but gross international reserves provide significant financial buffers, along with the Heritage and Stabilization Fund (HSF), although reserves are projected to fall, gradually, given the current foreign exchange regime.
“The financial sector remains stable, with profitable, well-capitalized banks, while the recent decline in asset quality, rising household debt, large domestic and regional sovereign exposures, and an interconnected financial system create pockets of vulnerability.”
The IMF said that economic prospects are expected to improve over the medium term, but remain heavily dependent on the energy sector.
“The medium-term growth, fiscal and external outlook is vulnerable to negative surprises in energy prices and output, a sizeable primary deficit, and elevated levels of public debt. Possible delays in completing the ongoing fiscal adjustment and reforms, persistence of FX shortages, tightening of financial conditions, and ongoing regional financial sector challenges, also tilt, the risks to the downside.”
The IMF said that a multi-pronged strategy is needed to ensure a sustained recovery, and safeguard fiscal and external sustainability.
It said such a strategy should aim at improving the economy’s resilience to future shocks, focusing on completing the fiscal adjustment to put the public debt on a downward trajectory to safeguard sustainability, while reducing the economy’s over-reliance on the energy sector; safeguarding financial stability; and creating an enabling environment for the non-energy sector as an engine of growth, by removing the obstacles to its development, while increasing transparency of the operating environment for the energy sector.
The IMF urged the Keith Rowley government to take advantage of the impact higher energy prices had on the fiscal position and complete the ongoing adjustment, given the inherent volatility in energy prices.
“Efforts should focus on speedy implementation of the delayed revenue reforms, finalizing the energy taxation reform, and reducing reliance on noncore revenues, including through increased tax compliance. Improved efficiency and containment of public spending should continue.
“Further cost savings from increased utility tariffs and reduced transfers and subsidies should be redirected to the most vulnerable segments of society and public investment targeted at closing skills and infrastructure gaps to reduce adverse impacts of adjustment,” the IMF noted.
The IMF said that paced over the medium term, an adjustment equivalent to 4.4 percent of GDP should create fiscal space to confront future shocks, alleviate market concerns about the adequacy of adjustment, and put the public debt on a downward trajectory to safeguard sustainability.
It said an appropriate Medium-Term Fiscal Framework (MTFF) could provide a systematic tool for counter-cyclical fiscal policy and help insulate the economy from energy price swings.
“Adopting an appropriate formal fiscal target, within a clearly-communicated MTFF to guide fiscal policy, could provide a tool to anchor fiscal adjustments. The HSF should be fully integrated with the MTFF, by linking transfers to/from it to the fiscal target.
“Such a mechanism can shield the government from pressure to deviate from the adjustment path, and allow the HSF to build reserves during revenue booms to use during downturns. Managing public debt and the HSF in an integrated framework may limit situations where the government must borrow to save into the HSF,” the IMF said, adding that establishing a medium-term debt strategy may clarify the desired debt composition and limit adverse implications of borrowing strategies.
It said that the government should settle the overdraft balance with the Central Bank of Trinidad and Tobago (CBTT), and rely on market based financing.
The IMF said that the continued state of foreign exchange market imbalance must be addressed on an urgent and sustained basis.
“Notwithstanding the reduced tightness in the market, owing to increased FX inflows from energy companies, continued FX shortages affect market confidence, raise the cost of doing business, hampers non-energy sector activity, and could result in responses that further feed shortages.
“The authorities could take advantage of the current relatively stable period, with low inflation and progress in fiscal consolidation, to address the shortages, while minimizing distortions,” the IMF said.
The Washington-based financial institution said that going forward, the exchange rate could play a more active role in an economy, exposed to frequent terms-of-trade shocks, and help manage the transition to a more balanced FX market.
“Allowing gradually, some market forces in determining the exchange rate, for example, within a widening band, could facilitate adjustment to external shocks, help restore competitiveness, and safeguard foreign reserves,” it said, noting that permitting two-way exchange-rate variation could help reduce incentives for FX-hoarding and one-way currency bets, while allowing the exchange rate to anchor inflation expectations with some scope for flexible monetary policy.
“Such a move requires careful design and implementation to avoid adverse balance-sheet problems or second-round effects and needs to be supported by a prudent fiscal, monetary, financial, and structural policy mix, adequate safety nets, and well-designed intervention and communication strategies.”
The IMF said that preserving financial stability calls for careful monitoring of the sources of systemic risk and swift implementation of the ongoing reforms, and it welcomes the government’s cautious and proactive approach, given a highly-indebted household sector, bank-sovereign linkages domestically and regionally, and rising interest rates in a complex, interconnected financial system.