(1) Recent Economic Developments

(1) Recent Economic Developments

(i) Macroeconomic indicators

1. 
   Total government revenue continues to be highly dependent on the petroleum sector. As such, government revenue as a proportion of GDP has fluctuated with global oil prices. After peaking at 35% of GDP in 2008, total revenue declined to 32.5% of GDP in 2010. Total expenditure and net lending as a proportion of GDP grew steadily, from 28% of GDP in 2005 to over 35% in 2010. As a consequence, a fiscal surplus of 2.5% of GDP in 2005 turned into a deficit of nearly 5% in 2009 before declining to a deficit of nearly 3% of GDP in 2010.
   
2. 
   The collapse of the insurance company CLICO in 2008 and the costs to the Government of addressing the financial and economic crises were estimated to be over 12% of GDP (Chapter IV(3)(i)(b)). If these costs were taken into account the deficit would be significantly higher. In light of depleting energy reserves, the non-energy deficit which nearly doubled from 11% of GDP in 2005 to 20% of GDP in 2010, is an even greater source of concern. As a result, public sector debt as a percentage of GDP, which had reached a low of 23% in 2008, is projected to be nearly 50% in 2011.⁴
   
3. 
   The Government has continued its efforts to increase tax revenue through better tax administration and compliance. Furthermore, to increase revenue collection the Government has offered a tax amnesty for years of income up to and including 2009.
   
4. 
   Recent expenditure growth has been driven by increased public sector wage expenditure and increased subsidy payments in respect of the inter-island ferry service and the petroleum subsidy. Capital expenditure is expected to continue rising as the Government implements its policy of diversification.⁵
   
5. 
   Exchange rate stability is one of the objectives of monetary policy in Trinidad and Tobago. The Central Bank intervenes in the foreign exchange market to maintain stability, resulting in the Trinidad and Tobago dollar being de facto pegged to the U.S. dollar. During the period under review, the nominal exchange rate fluctuated slightly, between TT$6.25/US$ and TT$6.35/US$. However, the real effective exchange rate appreciated due to higher domestic inflation relative to Trinidad and Tobago's major trading partners. This appreciation implies that Trinidad and Tobago's exports have become less competitive.⁶
   
6. 
   Inflation as measured by the retail price index (RPI) peaked at 12% in 2008 due to rising food prices, which are responsible for 18% of the consumer basket, and which rose by over 25% in 2008. As demand eased off in 2009 due to a contraction in the economy the RPI declined. However, in 2010, food prices rose by over 39% due to a drought in the country, while transport costs increased by 12%. As food prices declined, inflation eased in 2011, and was at 2.7% for January‑August 2011.⁷
   
7. 
   High global oil prices between 2005 and 2008 fuelled capital inflows into Trinidad and Tobago, resulting in excess liquidity in the banking system and rising inflation. In response, the Central Bank pursued a tight monetary policy to dampen credit growth and curtail inflationary pressures. The global financial crisis in 2008 resulted in the economy going into a recession. As a consequence the Central Bank has maintained an accommodative monetary policy since March 2009, which is geared towards stimulating economic activity and supporting growth. However, despite the easing of monetary policy and lower bank lending rates, private sector credit has not picked up. It appears that banks' lending criteria have become stricter and a general lack of confidence persists in the business sector resulting in subdued credit demand by the private sector.⁸
   

1. Heritage Stabilisation Fund

   1. 
      In 2000, the Government created the Interim Revenue Stabilisation Fund (IRSF) to provide a cushion against any unexpected drop in petroleum prices and strengthen the public sector savings effort. At the time of the last Review, the fund was awaiting formal establishment. The Heritage and Stabilisation Fund (HSF) was created in 2007through the passage of the HSF Act; it replaced the ISRF and all funds held in the latter were transferred to the new fund.
      
   2. 
      The objectives of the HSF are to invest surplus petroleum revenues so that public expenditure can be maintained when prices of crude oil and gas fall, and to provide a heritage for future generations. Deposits to the fund are made on a quarterly basis. If petroleum revenues in any quarter are 10% greater than the estimated revenues for that quarter in U.S. dollar terms, the excess is automatically deposited in the fund. If the excess revenue is less than 10% of the estimated revenue, then the Minister of Finance may issue a directive for any part of the excess revenue to be deposited in the fund. At end-March 2011, the HSF had a net asset value of US$ 3.8 billion and a quarterly income of US$ 46 million.⁹
      
   3. 
      On the other hand, if the realized annual petroleum revenue is 10% less than the estimated annual petroleum revenue, then 60% of the shortfall or 25% of the credit balance of the fund at the beginning of the year, whichever is less, may be withdrawn from the fund.¹⁰
      

2. Balance of payments

   1. 
      Trinidad and Tobago's current account surplus decreased from US$4.2 billion in 2005 to US$3.8 billion in 2010 (18.8% of GDP), reflecting a narrowing of the gap between gross national savings and gross domestic investment (Table I.3). The current account surplus had peaked at over 30% of GDP in 2008 on the back of rising international oil prices. The decline since then has come about due a decline in the trade surplus and reduced services receipts. The latter declined due to lower insurance receipts, owing to the collapse of Colonial Life Insurance Company and BAICO and an increase in investment income outflows on account of repatriation of dividends and profits by petro-chemical companies. On the other hand, the trade surplus more than doubled between 2005 and 2008 due mainly to rising international commodity prices, but fell in 2009 as commodity prices declined.
      

(US$ million)

b Refers to government lending to international bodies.

1. 
   The capital and financial account deficit increased from US$2.3 billion to US$3.4 billion in 2010. The deficit rose due to increased commercial bank and other outflows. As a result of the current account surplus declining and the capital and financial account deficit increasing, the overall balance-of-payments surplus declined from nearly US$2 billion in 2005 to slightly over US$ 400 million in 2010. Gross official reserves continued to rise, from US$3.9 billion in 2005 to over US$9 billion in 2010, representing over 14 months of import cover.
   

1. Developments in Trade and Foreign Direct Investment

   1. 
      In 2010, the share of merchandise exports in GDP was nearly 55%, down from over 60% in 2005. However ,in 2008, exports were equivalent to over 68% of GDP. The share of merchandise imports also declined during the review period from over 35% of GDP in 2005 to 32% of GDP in 2010. Furthermore, the services balance was nearly halved from 4% of GDP in 2005 to 2.1% of GDP in 2010.
      

(i) Composition of trade

2. 
   Despite efforts to diversify the economy, the dominance of fuels in Trinidad and Tobago's exports increased during the review period. In 2009, fuels accounted for nearly 76% of merchandise exports up from 71% in 2005 (Chart I.1), while the share of manufactures declined. The decline was due mainly to lower exports of chemicals (Table AI.1), due to the collapse of international methanol prices. However, within manufactures, exports of other transport equipment, such as special-purpose vehicles and floating docks increased during the review period.
   

1. 
   The share of primary products in total merchandise imports declined slightly between 2005 and 2009, from nearly 49% to 46%. Within primary imports, the share of agriculture and food imports rose, while the share of fuel imports declined, due to international commodity price changes. On the other hand, the share of manufactures in total merchandise imports rose due mainly to increased imports of power generating machines, gas generators, heat exchange units, and air and gas liquefiers (Table AI.2).
   
1. 
   
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