Home' Trinidad and Tobago Guardian : August 8th 2013 Contents BG4 | COVER STORY
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 2013 • WEEK TWO
The International Monetary Fund (IMF) has
described T&T s fuel subsidies as "difficult to
justify" in a report that says the local economy
is "poised for a most recovery in 2013" but which
notes a US$700 million decline in the country s
foreign reserves between April and December last year.
The IMF staff report on T&T, which is dated May 22, follows
the Article IV consultations held earlier year. The staff report
should have been published in June but it has not been because
the IMF "has not received a communication from the (T&T)
authorities indicating that they consent to the Fund s publication
of this paper."
The T&T authorities had notified the Fund that "their
explicit consent is required prior to the publication of board
documents on T&T."
While Finance Minister Larry Howai has not authorized the
publication of the staff report, he seems to have adopted the
IMF s position on the issue of fuel subsidies (See story on
In the report, the IMF staff said that T&T s fuel subsidies
"are difficult to justify in view of their budgetary cost, regres-
sivity and contribution to traffic congestion."
Regressivity refers to taxes that have a greater impact on
low-income people than those earning high incomes and the
IMF notes that a "blanket subsidy on fuel prices leads to
higher income brackets of the population receiving a more
than proportional share of the subsidy."
The report quotes a paper done by UWI economist Justin
Ram at a conference at the St Augustine campus in June 2012
that 45 per cent of direct and indirect benefits of the fuel sub-
sidies are enjoyed by the richest segment of the population,
compared with 4 per cent going to the poorest.
The IMF also notes that generalized subsidies cause "pro-
ductivity-dampening traffic congestion," and that T&T s esti-
mated 700,000 vehicles, or an average of about one for every
adult, causes "frequent traffic congestion in urban areas and
long commuting hours."
The IMF recommended that T&T "should commit to a firm
programme of removing the fuel subsidies over time, drawing
on the increasing store of global experience in this area."
The institution noted that the 2013 budget allocation for
the fuel subsidies had tripled from the previous year to $4.5
billion, which is about 2.75 per cent of the country s gross
domestic product (GDP).
The total allocation to transfers and subsidies in the current
2013 fiscal year is $29 billion, equal to 17.3 per cent of GDP.
In the report, the T&T authorities are reported as agreeing
that subsidies and transfers need to be reined in, "but cautioned
that this would be done over time to ease adjustment costs."
Further, according to the IMF: "The authorities expressed
concern that overly rapid removal of fuel subsidies risked
increasing inflation expectations, and it would be better to
remove them over a medium-term horizon to minimize this
In a paragraph in which it noted that in T&T "subsidies
and transfers continue to claim a high and rising share of
expenditure and remain very broadly targetted," the Fund
called on Government to rationalize "the panoply of employ-
Some of these programmes overlap and "may be undermining
labour force competitiveness and contributing to underem-
ployment," according to the IMF.
In a possible nod to the reintroduction of the property tax,
the IMF said: "There is also ample scope to improve the effi-
ciency and buoyancy of revenue collection and the authorities
should take advantage of the opportunity provided by the
forthcoming budget to introduce revenue measures that will
broaden the revenue base and improve the progressivity of
In general, the IMF advocates that T&T put its fiscal policy
in a long-term context, by reducing expenditure and increasing
revenue. This would allow the country to save for the future
"while improving equity by better targeting of current expen-
ditures towards the most vulnerable segments of society."
According to the IMF, the main policy elements of long-
term fiscal policy should be tax reform that raises non-energy
revenue by 3.2 per cent of GDP (equal to about $5.12 billion)
over five years as well as a gradual reduction and better targeting
of transfers and subsidies (for example on fuels) on the order
of 3 per cent ($5 billion) by 2018.
The tax reform, the IMF said, "could include" a simplification
of the value-added tax (VAT) that rationalizes exemptions
without a rate increase, "a phased in property tax reform and
a revision of the personal and corporate income taxes to mod-
ernize and simplify the schemes to make them more progressive
while eliminating multiple exemptions and deductions accu-
mulated over time."
In addition, the IMF argues that for the local economy to
grow, there needs to be more public investment, particularly
in the non-energy sector.
Future growth in the T&T economy will depend on the
country introducing structural reforms, which "will be needed
to unlock the country s economic potential and foster diver-
sification beyond the narrow resource base on which the coun-
try s prosperity is currently based."
The IMF recommends that structural reforms "need to be
at the core of actions to increase T&T s competitiveness." Such
reforms are needed to lay the groundwork for both the public
and private sector investment that will be needed to develop
the non-energy sector as a key partner in the T&T economy,
according to the IMF staff report.
"Given the need for a more effective public service to imple-
ment the Public Sector Investment Programme, great priority
should be accorded to mordenizing and rationalizing hiring
practices and streamlining overlapping institutions and pro-
grammes," according to the staff report.
The IMF mission to T&T welcomed the initiatives to improve
the country s competitiveness rankings and it called for "con-
sideration to be given to implementing best-practice legislation
in public procurement, to enhance transparency and competition
and insolvency frameworks to provide structured and orderly
The IMF reported that T&T s gross official foreign reserves
remained strong at US$9.2 billion at the end of 2012, which
was equivalent to 12.5 months of imports of goods and non-
factor services. But the institution also noted that the reserves
fell by some US$700 million from their peak in April 2012.
"Staff project a slight further erosion of the current account
surplus in 2013 as the recovery in energy exports is more than
offset by higher fuel and non-energy imports."
Secret IMF report:
Fuel subsidies wasteful, benefit rich
On the Clico issue, the IMF states that while
"challenges remain," a final resolution to the problems
stemming from the insurance companies collapse in
January 2009, "is in sight."
The institution noted that the Government had
achieved final settlement with most former
policyholders, apart from a small number that have
successfully sued the Government for full repayment in
the lower court, which the State has appealed.
If the case is not reversed on appeal, the net cost to
the Government is expected to be around $2 billion.
On the specific issue of the Note before Cabinet to
ensure that the State is repaid the $19.6 billion that has
been spent so far on bailing out CL Financial, Clico's
parent company, the IMF noted: "Complex negotiations
are ongoing with shareholders to recover value from
Clico's assets, but it is hoped these will be resolved by
mid year, and there are still hopes that most of the
costs of the bailout of Clico can be eventually
Also related to the Clico issue is the country's debt,
with the gross non-financial public sector debt
increasing by six percentage points of GDP in 2012 to
39 per cent of GDP (about $62.4 billion). Nearly all of
the 2012 increase in debt "was due to the issuance of
bonds to compensate former policyholders of Clico, a
failed insurance company. It is expected that half of the
Clico debt should be retired in 2013 as policyholders
convert the bonds to equity holdings in former Clico
assets currently held by the government."
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