An IMF staff report on the article iv consultation with Trinidad and Tobago, the IMF said "With signs of improvement driven by energy sector growth from the second half of 2017, the economy is expected to return to positive growth in 2018 as the recovery takes hold in the non-energy sector. Good progress is being made in implementing fiscal consolidation.
"As growth gathers pace, policies should focus on completing the fiscal adjustment, while insulating the economy from future commodity price swings within a medium-term fiscal policy framework, and on creating an enabling environment for the non-energy sector as an engine of growth."
The IMF report said "Real GDP contracted at a slower pace of 2.6 percent in 2017, following the 6.1 percent drop in 2016 driven by energy sector shocks. The strong recovery in gas production in 2017H2 had knock-on effects on downstream industries, while oil production remained largely flat, at a historically low level."
The IMF report pointed out that "the weak non-energy sector dampened the overall growth, reflecting weak activity in construction, financial services, and trade; continued shortage of foreign exchange (FX) and slow implementation of public investment projects weighed on the sector.
"Headline inflation fell to historic lows of 1.9 per cent in 2017 on weak aggregate demand, and further to 1.1 percent y-o-y in April.
While remaining at relatively low levels, the unemployment rate rose to 5.3 percent in 2017Q2 from 4.4 percent in 2016Q2 (up from 3.3 percent in 2014Q2), with youth unemployment at an estimated 12 percent in 2017, compared with 7.9 percent in 2014.
The report continued: "the fiscal deficit reversed its rising trend of the past 7 years, registering a slightly lower overall deficit in FY2017. Despite higher energy prices, energy-related revenues remained flat, due in part to fiscal incentives.
"The significant reduction in spending by 2.2 percent of GDP implemented through cuts in spending on transfers and subsidies, goods and services, and capital investment was partly offset by the fall in non-energy revenues from weak economic activity.
"Borrowing and one-off sources (from the Heritage and Stabilization Fund (HSF), and asset sales) helped finance the deficit. Central government debt rose to 42 percent of GDP and public debt, including contingent liabilities, reached 61 percent of GDP, approaching the government’s soft target of 65 percent.
"The balance of payments remained weak, with outflows through the financial account offsetting the current account surplus. Financial buffers remained substantial, with HSF and sinking-fund assets at 30 percent of GDP and gross FX reserves at 9.4 months of imports at end-2017.
Despite all this, the article lV consultation report said "the Trinidad and Tobago economy is projected to grow at a modest pace as energy projects come onstream and the recovery takes hold in the non-energy sector. Near-term growth will likely be led by natural gas production with continued challenges in the oil sector.
"Gradual recovery in non-energy growth would help stabilize growth at 1.5 percent over the medium term. The fiscal deficit is expected to narrow to an average 4 percent of GDP as energy revenues rise, non-energy revenues recover, and spending falls with improved efficiency of transfers and subsidies.
"With one-off financing options diminishing over time, central government (public) debt is expected to reach 43 (64) percent of GDP by 2023. Despite projected current account surpluses, gross international reserves would fall over the medium term, though at a slower rate, with continued FX intervention under the current FX regime, absent a further increase in energy prices and a tighter fiscal stance."
The IMF however gave a note of caution to the T&T government, pointing out that the outlook was subject to a number of risks tilted to the downside in the near term: "Key risks include lower energy prices, delays in delivering energy-related projects on time, and further disruptions to output, pending completion of the oil and gas tax regime reform.
"Delays in the implementation of the ongoing fiscal adjustment and persistence of FX shortages may weaken market confidence, and adversely affect the country’s funding costs.
"Tightening of financial conditions could stress balance sheets and undermine the non-energy sector’s capacity to import and produce. Rising US rates and further US-dollar appreciation could worsen competitiveness and pressure the currency. A sharp rise in energy prices or implementation of a comprehensive medium-term macroeconomic strategy and supportive structural reforms provide upside risks.
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