IMF projects growth in 2011 due to 'expansionary' budget, praises plans for structural reform

The International Monetary Fund (IMF) said Tuesday economic growth in Trinidad and Tobago will pick up in 2011 after a sharp decline in 2009 caused by the global financial crisis and the CL collapse.

The report is based on the findings of an IMF team headed by Judith Gold, Deputy Division Chief in the IMF’s Western Hemisphere Department following discussions in Port of Spain, which ended Monday.

The team said it had excellent cooperation and "open and fruitful exchanges" with many government and non-government representatives.

The IMF mission spent two weeks in consultations with government officials and private sector representatives reviewing the economic situation as part of its annual "Article IV Consultation". It also looked at economic prospects and policies.

With respect to the economic situation, the IMF said the country entered a period of crisis in 2009 after 15 years of positive growth during which Trinidad and Tobago had with large fiscal surpluses and low debt, which provided important buffers to help deal with both the external and domestic shocks.

The international financial institution noted that Trinidad and Tobago was hit hard in 2009 by the global financial crisis, the fall in energy prices, and the collapse of CL, one of the region's largest financial conglomerates. 

It said the government’s intervention in CL in January 2009 avoided a crisis but has been costly. "The financial sector policy priorities are completing the intervention while containing the fiscal costs; intensifying financial sector supervision; enacting new legislation on insurance, credit unions, and securities; and enhancing the financial safety net," it said.

With respect to the overall economic situation, the IMF report said the fiscal balance has turned negative, despite a real decline in expenditure in 2009. Inflation has surged despite weak economic activity, reflecting weather-related increases in food prices, and unemployment has increased sharply, to 6.7 per cent in the first quarter of 2010."

However it said it expects growth to pick up only in 2011, "with the near-term risks tilted to the downside reflecting fragile confidence, the weak regional outlook, and global uncertainty."

The IMF said, "Even with the expected firming of energy prices, economic prospects over the medium term are weaker compared to the strong growth period preceding the economic crisis."

It expressed some measure of optimism because of the 2010/11 budget which it said "appropriately adopts an expansionary stance with some additional expenditure and tax incentives to catalyze increased private sector activity and higher domestic and external investments to support a recovery."

It suggested that the government could enhance confidence by "accelerating efforts to implement the public sector investment program and addressing arrears to contractors and on VAT refunds."

It added, "The medium-term challenge is to place debt on a downward trajectory as energy revenues are expected to moderate. A credible framework would contain and reverse the increases in spending on goods and services and on transfers during the boom period, while strengthening the collection of non-energy revenue through improved tax administration.

"The challenge for monetary policy is to provide an environment conducive to a non-energy sector recovery in the context of large excess liquidity in the financial system."

The IMF said it welcomes the recent policy rate reductions that signal the central bank’s commitment to improve credit activity in the economy. It noted that the banking system remains "robust, with strong capital and profitability despite increases in non-performing loans which need to be monitored carefully."

It said it also supports the government’s plans for diversification and structural reform, which focuses on investing in physical and human capital to support the development of a knowledge-based economy, improving the business climate including through a one-stop shop for investors, strengthening the public enterprise sector by inviting private sector participation, and accelerating privatization.

"It will be important to prioritize government investments in support of diversification particularly in view of the increasingly constrained availability of resources. The mission also supports efforts to improve the timeliness and accuracy of economic statistics," the report said.