From Caribbean360

WASHINGTON D.C., United States, CMC – The International Monetary Fund (IMF) Wednesday warned that Trinidad and Tobago remains vulnerable to a decline in energy prices, and called for structural reforms to diversify the economy and improve its growth potential.

The IMF said while it welcomed the improved growth outlook, and noted the strong external position and limited fiscal vulnerabilities, it agreed, however, that the reduction in economic slack and the need for a durable consolidation of the fiscal position suggest that a tightening of macroeconomic policies may be necessary in the near future.

The Washington-based financial institution said that the authorities in Port of Spain should stand ready to start tightening monetary policy in view of the reduced labour market slack and high consumer credit growth, and to prepare for the spillovers from the normalization of monetary policy in the United States. “Implementing this tightening, however, could be complicated by banks’ excess liquidity and the weak monetary transmission mechanism,” The IMF said, suggesting that tighter prudential regulations could be considered.

The IMF, which concluded Article IV consultation with Trinidad and Tobago last month, said that the economy is embarking on a sustainable growth path.

“Maintenance-related slowdowns in the energy sector are ending, while non-energy growth is robust, with economic slack being used up. Headline inflation is trending down …while core inflation remains contained at about 2–3 per cent.”

The IMF said unemployment rate has fallen to only 3.75 per cent “although this masks sizable underemployment in government “make-work” programmes”.

It said the fiscal balance is likely to improve in fiscal year 2013/14, with the deficit falling to only 15 per cent of gross domestic product (GDP) “but largely for ad hoc reasons rather than durable improvements in revenues or expenditures.”

The IMF made reference to the shortage of foreign exchange noting that “the foreign exchange allocation system, although it had generally worked well for several years, led to fairly widespread and persistent foreign exchange shortages, as supply and demand imbalances grew from late 2013”.

But it noted that a recent series of actions by the Central Bank has improved the supply of foreign exchange to the market.

The IMF said it was also encouraging “the authorities to allow for sufficient flexibility in the operation of the market to ensure that it clears, especially given the ample foreign reserve position”.

But the IMF said that the time is drawing near for policy tightening in Trinidad and Tobago.

“The main external risk is from a sustained decline in energy prices. The domestic medium-term challenges are to boost long-run growth through structural reforms and reorienting fiscal policy, with measures to save more of the nation’s nonrenewable energy wealth, and limiting current expenditures while increasing growth-enhancing capital spending.

“Such policies would likely pose near-term headwinds, but enhance competitiveness and boost potential growth in the non-energy sector. However, significant reforms are likely to be delayed by the electoral calendar. A greater degree of flexibility is needed in the foreign exchange system to avoid further shortages,” the IMF said.

The Washington-based financial institution said that it was also concerned “about the lack of reliable and timely economic statistics, which severely limits the ability to conduct surveillance” and recommended prompt action to provide adequate resources to the statistical office”.

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