WASHINGTON, United States (CMC) — The International Monetary Fund (IMF) says the economy of Trinidad and Tobago is slowly recovering from a prolonged recession driven by energy supply shocks and low energy prices.

“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,” said the Washington-based financial institution in a statement on Friday after conclusion of the 2018 Article IV Mission.

“Good progress is being made in implementing fiscal consolidation,” it added. “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 said the economy shows signs of improvement from the second half of 2017, with return to positive growth expected in 2018 following two years of recession.

It said real gross domestic product (GDP) contracted at a slower pace of 2.6 per cent in 2017, following the 6.1 per cent drop in 2016 driven by energy sector shocks.

“The strong recovery in gas production in 2017 had knock-on effects on downstream industries, while oil production remained largely flat, at a historically low level,” the IMF said. “The weak non-energy sector dampened the overall growth, reflecting weak activity in construction, financial services and trade; continued shortage of foreign exchange and slow implementation of public investment projects weighed on the sector.”

It said headline inflation fell to historic lows of 1.9 per cent in 2017 on weak aggregate demand, and further to 1.1 per cent in April.

While remaining at relatively low levels, the IMF said the unemployment rate rose to 5.3 per cent in the second quarter 2017from 4.4 per cent in second quarter 2016, up from 3.3 per cent in second quarter in 2014, with youth unemployment at an estimated 12 percent in 2017, compared with 7.9 per cent in 2014.

The IMF said the fiscal deficit reversed its rising trend of the past seven years in Trinidad and Tobago, registering a slightly lower overall deficit in fiscal year 2017.

Despite higher energy prices, energy-related revenues remained flat in the twin-island republic, due in part to fiscal incentives, the IMF said.

It said significant reduction in spending by 2.2 per cent 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.

The IMF said borrowing and one-off sources from the Heritage and Stabilization Fund (HSF) and asset sales helped finance the deficit.

It said central government debt rose to 42 per cent of GDP and public debt, including contingent liabilities, reached 61 per cent of GDP, approaching the government’s soft target of 65 per cent. The IMF said the balance of payments remained weak, with outflows through the financial account offsetting the current account surplus.

But the international financial institution said the Trinidad and Tobago economy is projected to grow at a modest pace as energy projects come on stream and the recovery takes hold in the non-energy sector.

It said near-term growth will likely be led by natural gas production, with continued challenges in the oil sector.

However, the IMF said gradual recovery in non-energy growth would help stabilise 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, the IMF said.

With one-off financing options diminishing over time, it said central government public debt is expected to reach 43 per cent of GDP by 2023.

Despite projected current account surpluses, the IMF said gross international reserves would fall over the medium term, though at a slower rate, with continued foreign exchange intervention under the current foreign exchange regime, absent a further increase in energy prices and a tighter fiscal stance.

The IMF said 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 (foreign exchange) shortages may weaken market confidence, and adversely affect the country’s funding costs,” it said. “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,” it added. “A sharp rise in energy prices or implementation of a comprehensive medium-term macroeconomic strategy and supportive structural reforms provide upside risks.”

But the IMF said the relatively favourable circumstances in 2018 with stronger energy prices and low inflation provide “a window of opportunity to establish a medium-term adjustment strategy, to signal determination to resolve the challenges and complete ongoing reforms.”

The IMF recommended that the strategy focus on completing the adjustment, while insulating the economy from future commodity swings; and creating an enabling environment for the non-energy sector to be an engine of growth.

This growth should include improved FX access, business-friendly environment, diversification efforts, reduced crime, and “growth-friendly, efficiency-enhancing public investments.”