Caribbean & Central America - February 2011 (ISSN 1741-4458)

In mid-September, four months after taking power, Trinidad & Tobago's new government presented its first budget to parliament. The IMF has just concluded its 2010 Article IV consultation and passed a generally positive verdict on the government's actions. For the IMF, however, most of the risks appear to be on the downside.

Prime Minister Kamla Persad-Bissessar's People's Partnership government had the misfortune to come to power on the back of the first annual decline in GDP for 16 years. Trinidad & Tobago's economy recorded a decline of 3.5% in 2009, but with a small 0.6% advance in the final quarter. This advance has proved to be a chimera, and the IMF says the outcome for 2010 will be a completely flat 0.0%.

Finance Minister Winston Dookeran had 2.5% growth pencilled in for 2011 in his budget, but the Central Bank is now forecasting a less bullish 2.0%. However, the expectation is for the non-energy sector to show positive growth for the first time in three years.

The difficulty for Dookeran is that despite the slack economy and unemployment up to 7.8%, inflation at the end of 2010 was 10.4%. Growth is expected to pick up during 2011, but the IMF warned that the near-term risks were “tilted to the downside" due to “fragile confidence, the weak regional outlook, and global uncertainty". For the IMF, “even with the expected firming of energy prices, economic prospects over the medium term are projected to be weaker compared to the strong growth period preceding the economic crisis".

Faced with these downside risks, the IMF takes the view that the current accommodative monetary stance is appropriate, and it would even support additional interest rate reductions in the event of further delays in economic recovery. Nevertheless, it does want to see a reduction of public debt over the medium term and argues that this can be achieved by reversing the large increases in current expenditures seem during the boom years.

The Central Bank concurs with the IMF on monetary policy, with Governor Ewart S Williams saying on 14 January that the bank “sees further room for lowering the policy interest rate".

The Central Bank shares the IMF's concerns about the global and regional environment, but it also has more parochial concerns, particularly a possible delay in the resolution of the Clico (Colonial Life Insurance Company) crisis and on industrial relations. Governor Williams has been calling for a “social compact" comprising five elements:

• The government to implement the fiscal stimulus and reduce the arrears owed to contractors;
• The Central Bank to increase its intervention in the foreign exchange market “as needed";
• The business sector to operate with “trust" and to avoid “the tendency to warehouse foreign exchange";
• The banks to accept the need for a larger reduction in interest rates and banking spreads;
• “All parties" to contribute to the easing of the industrial relations climate and “generally help to restore confidence".