IMF: Trinidad and Tobago economy strongest in a decade

DAYS before he presents his mid-year fiscal review, Finance Minister Colm Imbert received encouraging news from the International Monetary Fund (IMF) which gave Trinidad and Tobago a favourable outlook for growth.

The IMF, in its country report on June 5, said, for the first time in a decade, Trinidad and Tobago is experiencing a gradual and sustained economic recovery.

It praised Government's fiscal policies which led to a strong performance in the non-energy sector, its management of the public debt, diversification efforts and moves to strengthen its tax regime, and its climate and green energy agenda.

"(Directors) welcomed TT's sustained economic recovery, sharp decline in inflation in 2023 and strong external position," the IMF reports on its Article IV consultation with TT, which it concluded on May 8.

The positive review comes as Imbert prepares to give an account of where the country is economically, in Parliament on June 7.

“Real Gross Domestic Product (GDP) rebounded in 2022 and is estimated to have further expanded in 2023,” the IMF said. It said this is happening while headline inflation is declining sharply.

The report added that economic growth is expected to gain even more momentum this year, with real GDP expected to expand by 2.4 per cent while inflation is expected to remain steady.

However, it noted that while TT is seeing growth, it has not returned to pre-pandemic levels.

The IMF suggested that, going forward, Government continues to focus on strengthening TT's economic recovery.

Inflation deflation

After peaking at 8.7 per cent at the end of 2022, the IMF noted that headline inflation plummeted to 0.3 per cent in January this year. The report said it was mainly due to declining food and imported goods inflation.

It also noted a reduction in core inflation to one per cent in January.

The unemployment rate also decreased to 3.2 per cent in the third quarter of 2023, after peaking at 7.2 per cent in 2020, but female unemployment exceeds the national average at 4.1 per cent. Youth unemployment, although elevated at 9.3 per cent, is below the peak in 2021, which was 21.3 per cent.

The IMF also patted the Government on the back for keeping the budget in line with the fiscal balance for 2023.

“The overall fiscal deficit is estimated at 1.1 per cent of GDP in FY 2023, 0.2 percentage points better than budgeted,” the report said.

It added that debt margins also went under the estimates despite increasing. Central government debt increased to 54.3 per cent of GDP in 2023, as compared to 50.7 per cent in 2022. Public-sector debt went up to 70.9 per cent of GDP in 2023, as compared to 67 per cent in 2022.

Government’s soft target for public sector debt was 75 per cent of GDP.

The IMF noted accommodating financial conditions, with the Central Bank of TT (CBTT) keeping the repo rate at 3.5 per cent since 2020, in a bid to support economic recovery.

“This, together with excess liquidity in the banking system has helped keep lending rates low,” the report said.

Lending rates remained low, but credit to the private sector expanded to 8.2 per cent year-on-year, as recorded in December last year. The growth was driven by business, consumer and mortgage loans, the report said.

While the financial system appears sound, with banks’ capital at 16.7 per cent, well above the regulatory minimum, liquidity in the foreign exchange market remains tight. Shortages in foreign exchange increased mid-year last year, reflecting a higher demand for foreign currency.

“Resident holdings of US treasuries have increased by US$1.3 billion between mid-2022 and the end of 2023,” the report said. “To help alleviate the FX shortfall, CBTT has continued its bi-monthly US$50 million FX interventions, made a one-time million intervention in September and provided US$91.9 million to authorised dealers through the FX Liquidity Guarantee Facility.”

Statistics from Central Bank showed that up to April, TT had 6.7 months of import cover.

Non-energy sector supports 'struggling' energy sector

The non-energy sector was identified as the main driver of economic growth, increasing by 4.2 per cent. In contrast, the energy sector “continues to struggle,” as the report said it contracted by 3.1 per cent.

The contraction in the energy sector also affected foreign exchange supply, as the sector supplies three-quarters of foreign exchange.

The non-energy manufacturing sector was identified as the main contributor to non-energy exports and was named as an important source of external revenue.

“According to the bilateral trade flow data at the harmonised system product level, non-energy manufacturing contributes to about 95 per cent of TT’s total non-energy exports,” it said.

However, exports in the sector declined in value, the report indicated, attributing the decline to overall economic conditions in TT and heightened global competition. It said however, that the sector’s decline may have bottomed out during covid19 and is due for a turnaround.

“Over the past decade, non-energy manufacturing has been one of the most dynamic sectors in TT’s economy,” the report said. “Non-energy manufacturing stands at the second-largest non-energy sub-sector after trade and repairs.”

The IMF said by 2022 it represented 13.1 per cent of the total non-energy GDP.

It pointed out food, beverages and tobacco products as some of the highest performers, as they constitute 77 per cent of the sub-sector. It delivered consistent growth despite challenges posed by covid19, the report said.

While the non-energy sector sees consistent growth, the IMF noted that the energy sector is at a crossroads, with mature oil and gas fields and consistently declining production.

“Recent government initiatives will encourage the development of new fields but these will take time to boost production,” the report said.

It also noted that climate change and the global push for energy transition will shift the economy away from fossil fuels, posing an added challenge to the sector.

It said in the near term non-energy will remain below its potential because of the fact that some sub-sectors have not fully recovered from covid19.

A boost to the energy sector is expected as well in the medium term, as projects such as the Dragon gas deal come on stream. The IMF expects the deficit to balance by 2027, consistent with improvements in energy revenue.

“Central government is projected to peak at 56.3 per cent of GDP in FY2026 before gradually declining to 49.8 per cent. Public debt is expected to reach 68.1 per cent of GDP in FY 2029 remaining below the authorities’ soft debt target of 75 per cent of GDP throughout the period.”

The IMF suggested a need for reforms to strengthen the economic recovery, rebuild buffers and secure a more diversified, green, resilient and inclusive economy. Staff at the IMF also agreed that developing a rules-based fiscal framework (such as the Procurement Act) and sound debt-management strategies would help fiscal management and mitigate risk.

“The proclamation of the Procurement and Disposal of Public Property Act in April will enhance the legal and institutional framework for transparent and competitive public procurement,” the IMF said. “It will also help improve the efficiency and quality of public spending.”