Jun 2016 Financial News

IMF Predicts Further Contraction Of Trinidad Economy

Jun 22, 2016

The International Monetary Fund (IMF) says Trinidad and Tobago's output has continued to shrink while declines in global energy prices are leading to surging fiscal deficits and are pushing the external current account of the oil-rich twin-island republic into deficit.

The Washington-based financial institution said energy output is sharply lower due to supply-side constraints and that combined with weak non-energy growth, real gross domestic product is estimated to have contracted 2.1 per cent in 2015 and is expected to shrink another 2.7 per cent in 2016.

The IMF said that lower energy prices and weaker growth have contributed to a steep fall in fiscal revenues, raising the financial year 2014-15 deficit to 4.7 per cent of GDP, and once the full-year impact is felt, to a projected 10.9 per cent of GDP in the financial year 2015-16.

"In addition, lower energy prices reversed Trinidad and Tobago's usual current account surplus, with the current account estimated at a deficit of 5.4 per cent in 2015, while gross official reserves fell from US$11.3 billion to US$9.8 billion during 2015," the IMF said in a statement issued late Monday.

The IMF said that core inflation remained anchored at two per cent in 2015, while headline inflation fell to 1.5 per cent. It said unemployment remained low at 3.6 per cent in September 2015, in part as make-work programmes continue to facilitate employment, though layoffs are picking up.

The IMF said that the Keith Rowley government has undertaken fiscal adjustments intended to bring the economy back into balance.

"It introduced new revenue measures with 2015-16 budget, and made further adjustment measures midyear when it became clear that even the seemingly conservative energy price assumptions in the budget were over-optimistic, due to the subsequent continued decline in energy prices."

The central bank began tightening monetary policy to mitigate capital outflows beginning in late 2014, before pausing in January 2016.

But the IMF noted that although the currency has been allowed to depreciate modestly against the US dollar, external balance models suggest the currency remains substantially overvalued, although the degree of overvaluation is subject to uncertainty due to historical shortcomings in domestic data, while foreign exchange shortages persist.

BANKS STRONG

It said banks remain strong, while there has been some progress on structural reforms, notably with respect to a significant start on efforts to remedy statistical shortcomings.

The IMF said that the recent sharp decline in energy prices is posing major challenges to Trinidad and Tobago's economy and welcomed the efforts taken by the new government and encouraged further policy actions, including additional fiscal consolidation and structural reforms, to preserve macroeconomic stability, diversify the economy, and enhance medium-term growth prospects.

The IMF said that a strong medium-term fiscal plan is needed to re-establish a sustainable fiscal path and ensure debt sustainability, and commended the authorities for the important steps taken thus far and encouraged them to put in place a comprehensive fiscal framework to guide their multiyear adjustment efforts.

It also agreed that priority should be given to broadening the revenue base with a comprehensive VAT reform, improving tax administration, phasing out fuel subsidies, while improving targeted social protection.

In this context, the IMF also welcomed the authorities' intention to pursue a comprehensive expenditure review and supported the current pause in monetary policy tightening given the challenges to growth. The IMF noted that while the immediate policy priority is to focus on maintaining external balance, addressing foreign exchange shortages on current transactions would be important.

The IMF said it is also encouraging efforts to reform the labour market, improve the business climate, and make further progress on the establishment of a tax policy unit and the National Statistical Institute to address the remaining shortcomings.

- CMC

Source:
Jamaica Gleaner
Wednesday June 22, 2016

http://jamaica-gleaner.com/article/business/20160622/imf-predicts-further-contraction-trinidad-economy