Galloping public debt is a serious cause for concern

Anticipating recovery in oil and gas production, the International Monetary Fund (IMF) is projecting growth for Trinidad and Tobago of 5.7 per cent and headline inflation of 2.4 per cent in 2022.

These projections reflect the findings of the recently concluded Article IV consultations, which projected a decline in real Gross Domestic Product (GDP) of one per cent for 2021. However, the inflation rate of 2.2 per cent as at July 2021 remains a data point of interest.

In its latest Article IV consultation, the IMF reports that at 10.1 per cent of GDP, Trinidad and Tobago’s overall fiscal deficit in financial year 2021 remained high due to continued weak revenue performance. As a result of the large deficits and the deep GDP contraction, central government debt rose sharply from 45.4 per cent in financial year 2019 to 66 per cent of GDP in financial year 2021.

Big jump in public debt surpassing government’s target

Public debt rose to 87 per cent of GDP, significantly surpassing the government’s soft public debt target of 65 per cent of GDP, which is becoming a serious cause for concern. The fiscal deficit is projected to narrow to 7.5 per cent of GDP in financial year 2022, reflecting a combination of higher revenue mobilisation and modest spending cuts.

Over the medium term, the fiscal deficit is projected to gradually narrow and reach balance by financial year 2027. Central government debt will peak about 69 per cent of GDP in financial year 2023 and thereafter gradually decline.

Trinidad and Tobago has faced unprecedented challenges in 2020-21 with the combined effects of COVID-19, energy production cuts and price shocks pushed the economy further into recession. The government’s decisive policy response has helped contain COVID-19’s spread, protect lives and livelihoods and pave the way for a strong recovery.

However, the IMF points to some immediate priorities including accelerating vaccinations and supporting the economic recovery.

”Once the recovery is firmly in place, policy attention should focus on reducing public debt levels and rebuilding fiscal buffers, supported by a credible fiscal framework,” the IMF asserts.

The Central Bank of the twin-island republic, the IMF says, should remain vigilant to any buildup of financial vulnerabilities. Structural reforms remain vital to support sustainable and inclusive growth.

Unprecedented Challenges in 2020-21

The IMF points out that COVID-19, energy production cuts and weak global demand derailed an incipient recovery. Stringent COVID-19 containment measures severely impacted non-energy domestic activity.

The IMF reports that, “energy production declined significantly in 2020 and further in early 2021 due to unanticipated maintenance activity in some energy facilities and the closure of several petrochemical plants. Combined with weaker global demand and the drop in energy prices in 2020, these factors substantially lowered energy exports and revenues.”

Consequently, real GDP contracted by 7.4 per cent in 2020 and is estimated to further contract by one per cent in 2021. After narrowing in 2020, the current account surplus largely rebounded in 2021. Inflation remained mostly subdued during 2020-21, though the recent surge in international food and energy prices has pushed it up to 2.2 per cent by July 2021.

While the fiscal deficit is expected to narrow, public debt will remain high. The fiscal deficit is projected to narrow to 7.5 per cent of GDP in financial year 2022, reflecting a combination of higher revenue mobilisation and modest spending cuts.

Over the medium term, the fiscal deficit is projected to gradually narrow and reach balance by financial year 2027. Central government debt will peak at about 69 per cent of GDP in financial year 2023 and gradually decline, while public debt would remain above the soft target of 65 per cent of GDP over the projection horizon.