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 againregistering disappointing growth in 2012. Maintenance-related outages will continue tohamper the energy sector, but the non-energy sector should grow around 2½ 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 isexpected to grow to 2½ percent of GDP in fiscal year 2012/13, which provides broadlyappropriate support for growth, along with still-accommodative monetary policy.

Sustainable growth requires reconsidering fiscal policy. Fiscal policy should beplaced 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 itsenergy sector wealth well into the future is achievable by a combination of revenuereforms and current spending restraint. In particular, subsidies are on an unsustainablepath, with fuel subsidies particularly difficult to justify. This strategy should create spaceto ramp up development spending over time.

Progress in protecting against financial vulnerabilities should be sustained. Thepassage of a new Securities Act should be followed by legislative reforms in theinsurance, credit union, and pensions sectors. Key nonbank systemic financial institutionsshould be brought within the regulatory perimeter.

Structural reforms are needed to foster a diversified economic base. Achieving amore diversified base will require investment outside of the energy sector. This will, inturn, require structural reforms to increase the government's capacity to implement itsdevelopment budget, along with initiatives to improve the country's competitiveness inattracting private sector investment.