The International Monetary Fund (IMF) has warned that Trinidad and Tobago will need stricter control of government spending and higher interest rates to maintain its fixed currency, as reserves fall and the government struggles to narrow its wide budget gap.

In its latest review of the country’s economy, the IMF said defending the exchange rate has required repeated sales of US dollars by the central bank, contributing to a steady decline in foreign reserves. Gross official reserves have fallen from US$6,880 million in 2021 to US$5,369 million last year and are projected to drop further to US$4,607 million in 2026 — about 5.4 months of import cover.

Economic growth remains modest with the IMF estimating that the economy expanded by 0.8 per cent in 2025. It expects growth of 0.7 per cent this year before strengthening as new energy projects, including the Manatee gas development, come on stream.

While reserves remain above traditional adequacy benchmarks, the Fund said keeping the currency steady will require a tighter overall policy approach. This includes reducing the gap between government spending and income and raising interest rates to narrow the difference between Trinidad and Tobago’s borrowing costs and those in the United States. The central bank has kept its main policy rate unchanged at 3.5 per cent since 2020, even as US rates have risen.

The government is targeting an overall fiscal deficit of 2.2 per cent of Gross Domestic Product (GDP) this year. IMF staff, however, project the shortfall will remain closer to 5 per cent under current policies, broadly in line with last year’s 5.5 per cent deficit.

Meeting the official target would require additional measures equivalent to about 2.8 per cent of GDP, the Fund said. Instead, it suggested aiming for a deficit of 3.5 per cent this year — still a significant adjustment — to place public debt on a firm downward path while limiting the impact on growth.

Public sector debt has climbed to 84 per cent of GDP, up from 82 per cent a year earlier, while central government debt stands near 68 per cent. The IMF said further steps are needed to broaden the tax base, reduce untargeted subsidies and improve the performance of state-owned enterprises.

Foreign exchange shortages have been a recurring issue for businesses reliant on imports. The IMF noted that continued intervention to supply US dollars can limit short-term exchange rate movement but gradually reduces the country’s financial buffers.

As an alternative, the Fund said allowing the exchange rate to move more freely could ease pressure on reserves and allow fiscal adjustment to proceed more gradually — by about 0.4 per cent of GDP per year over the next five years. Greater flexibility, it said, would help the economy adjust by encouraging exports and restraining imports, though it could bring short-term volatility.

Inflation is around 2 per cent, unemployment is below 5 per cent and the banking system is described as well capitalised and resilient. Trinidad and Tobago also retains access to international capital markets. In January, the government issued a US$1 billion 10-year bond that was 2.5 times oversubscribed, although ratings agencies have recently revised their outlooks to negative.

The IMF said keeping the currency fixed is achievable, but doing so will require firmer control of public finances and higher interest rates to prevent further reserve losses and stabilise debt. Allowing greater exchange rate flexibility, it added, would reduce some of that pressure but shift more of the adjustment onto the currency itself.