Feb 2006 Financial News

IMF predicts strong TT dollar

Feb 09, 2006

At the end of January, the International Monetary Fund published its staff for the 2005 Article IV consultation which ended on September 30 last year. Given the recent concerns about the exchange rate, we publish this excerpt from the report in which the IMF predicts an appreciation of the TT dollar.

Macroeconomic performance and financial developments are being driven by a highly favourable external environment.

Surging oil prices have strengthened the external current account balance, financed an expansion of aggregate demand and contributed to high levels of liquidity in the financial system.

The labour market has tightened significantly, and there are tentative signs that the economy is producing at, or near, capacity.

Inflationary pressures have emerged—annual headline inflation stood at seven per cent in September, up from 5.75 per cent a year and a half ago.

The non-energy fiscal deficit has widened substantially, adding to demand pressures in the short run and heightening exposure to long term vulnerabilities.

Following an already expansionary stance in fiscal year 2004/05, the budget for fiscal year 2005/06 envisages a significant further widening of the non-energy deficit (the overall deficit less energy revenues).

This is due to a combination of lower non-energy revenues (from reduced tax rates and increased allowances) as well as increases in non-interest expenditures. However, large overall surpluses are expected to continue on account of high energy prices.

Staff advice focused on the benefits of saving a larger portion of the current high energy revenues and strengthening expenditure administration.

The strong external inflows and widening non-energy fiscal deficits pose several challenges for monetary and exchange rate policy. In the short run, the priority remains to address the liquidity in the system stemming from the rising non-energy deficit.

In the long run, if oil prices remain at high levels, a real appreciation appears inevitable in the absence of sufficient fiscal tightening.

In this context, the mission recommended moving toward greater nominal exchange rate flexibility.

Business Guardian
The Trinidad Guardian
Thursday, 9th February, 2006.
http://www.guardian.co.tt/bussguardian12.html