Trinidad and Tobago : Staff Report for the 2013 Article IV Consultation

The economy is reviving. Output is poised for a modest recovery in 2013 after again registering disappointing growth in 2012. Maintenance-related outages will continue to hamper the energy sector, but the non-energy sector should grow around 21⁄2 percent. Core inflation remains moderate and staff estimates considerable slack in the economy. Policy should support the economy in the short run. The overall fiscal deficit is expected to grow to 21⁄2 percent of GDP in fiscal year 2012/13, which provides broadly appropriate support for growth, along with still-accommodative monetary policy. Sustainable growth requires reconsidering fiscal policy. Fiscal policy should be placed in the long-term context of the country’s non-renewable resource endowment. A gradual path of fiscal adjustment that allows the economy to enjoy the fruits of its energy sector wealth well into the future is achievable by a combination of revenue reforms and current spending restraint. In particular, subsidies are on an unsustainable path, with fuel subsidies particularly difficult to justify. This strategy should create space to ramp up development spending over time. Progress in protecting against financial vulnerabilities should be sustained. The passage of a new Securities Act should be followed by legislative reforms in the insurance, credit union, and pensions sectors. Key nonbank systemic financial institutions should be brought within the regulatory perimeter. Structural reforms are needed to foster a diversified economic base. Achieving a more diversified base will require investment outside of the energy sector. This will, in turn, require structural reforms to increase the government’s capacity to implement its development budget, along with initiatives to improve the country’s competitiveness in attracting private sector investment