THE International Monetary Fund (IMF) is pressing authorities at the Central Bank of Trinidad and Tobago (CBTT) to start hiking its policy interest rate if it is serious about containing inflation which is surging above historically low rates since 2021.
The CBTT has been holding its repo rate at 3.5 per cent since March 2020, noting in its last monetary policy report that the decision was arrived at after taking "account of the signs of economic recovery alongside the rise in domestic inflation and interest rate differentials."
However, the IMF in its staff report, following its mission to the twin-island republic from March 1-14, said Trinidad and Tobago needs to start moving up the rates which have not changed in three years.
"Increasing the policy rate should be seriously considered to contain inflationary pressures and narrow the negative interest rate differentials with the US monetary policy rate," the IMF staff wrote in the concluding statement after its Article IV Consultations on Thursday.
"This would also help mitigate potential risks of capital outflows and reduce incentives for excessive risk taking that could threaten financial stability," the IMF continued.
The potential risk of capital flight which the IMF points to stems from the fact that with Trinidad and Tobago's repo rate at 3.5 per cent, it is less attractive to investors who can get a higher rate on US treasury securities which are priced at about 4.5 per cent. Smart money tends to follow higher yields.
On the inflation front, Trinidad and Tobago, which has maintained price increases at 1 per cent, 0.4 per cent and 0.8 per cent in 2018, 2019 and 2020, respectively, saw its consumer price index surging to 3.5 per cent in 2021 before more than doubling in 2022 to 8.7 per cent. Inflation is projected to slow down to 4.5 per cent by end 2023 and will continue declining with international prices.
But the price spikes seen over the last two years were driven by imported energy and food prices, domestic flooding and a capping of the fuel subsidy in 2022. TT Finance Minister Colm Imbert, in his budget presentation last September, announced fuel subsidies would be capped at TT$1billion (US$147.3 million), less than half the TT$2.6 billion (US$389.8 million) he said it would have required to cap the subsidies during the current fiscal year.
The IMF staff praised the decision saying it will improve the efficiency and the sustainability of the public accounts, but also said the Government must "continue providing targeted and temporary support to alleviate the rising living costs amongst the most vulnerable".
The fund also called on the Trinidad and Tobago authorities to loosen its control on the exchange rate and remove the restrictions on current international transactions. Encouragement was also given for the Government to provide sufficient foreign exchange to meet demand for all current international transactions.
"It would also help create a more conducive business environment for the private sector to invest and diversify the economy," the IMF said.
Trinidad and Tobago-based companies have been faced a currency crunch with a shortage of foreign exchange in that country for the past few years. Earlier this month, CBTT Governor Dr Alvin Hilaire said he doesn't see any ease in the shortage in the near term. Hilaire pointed out that the buffers provided by the country's Heritage and Stabilisation Fund (HSF) — a sovereign wealth fund — has helped it to weather the worst of the situation with US$1.8 billion withdrawn from the fund since 2020 to help with pandemic spending. The HSF, however, still held US$5 billion at the end of 2022.
Overall, the IMF said Trinidad and Tobago's economy is recovering. Gross domestic product — a measure of economic activity — expanded 2.5 per cent in 2022 and is expected to increase by a further 3.2 per cent this year after declining by 7.7 per cent in 2020 and 1 per cent in 2021.
It, however, said the balance of risks to growth is tilted to the downside
"Downside risks stem from potential disruptions to domestic oil and gas production; a sharper-than-expected global slowdown affecting energy markets, and global financial instabilities. On the upside, there is the potential for higher-than-expected energy production and prices, including from a new US licence to Trinidad and Tobago to develop a major gas field in Venezuela."
That deal with Venezuela refers to the development of the Dragon offshore gas field which has been stalled for years due to US sanctions. Trinidad and Tobago's Energy Minister Stuart Young said last week that he will be visiting Caracas this month to hold talks aimed at moving the project forward.
The United States in January green-lit the project after lengthy appeals by Trinidad and some Caribbean neighbours. The two-year authorisation to Trinidad came among several by President Joe Biden's Administration that have eased some sanctions on Venezuela.
Dragon holds up to 4.2 trillion cubic feet of natural gas. Trinidad needs the fuel to boost its liquefied natural gas (LNG) and petrochemical industries. A portion of the country's Atlantic LNG export facility has been idled due to a lack of gas. Jamaica is expected to benefit from the facility though the details are yet to be worked out.
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