Trinidad and Tobago faces the challenges of managing an energy-based economy

• Author: Michael Da Costa
• Position: IMF Western Hemisphere Department
• Pages: 275-276

Page 275

The Trinidad and Tobago economy is the largest among member countries of the Caribbean Community (CARICOM), with a gross domestic product in 2000 of almost $8 billion.

Since the discovery of petroleum in the 1950s, the relative importance of agriculture has declined, while the role of the energy sector has increased markedly. This latter sector--which comprises oil, liquefied natural gas (LNG), and LNG-based industries, such as methanol and ammonia--accounted for about 40 percent of GDP at peak oil prices in 1980, but now contributes about one-fourth of total economic activity and government revenue and 80 percent of merchandise exports.

The crisis of the 1980s

The sharp fall in oil prices in the mid-1980s triggered a recession that spanned virtually a decade. Between 1982 and 1993, real GDP declined cumulatively by more than 25 percent, while the average GDP per capita fell from $7,000 to $3,600; international reserves plummeted from $3 billion to US$200 million; and the external debt rose from 13 percent of GDP to almost 50 percent, reflecting the weakening of the public finances. In addition, unemployment rose from 10 percent to a peak of near 25 percent in the late 1980s, before falling back to 19 percent in 1993; spending on poverty alleviation and social development was cut back; and emigration of skilled labor rose sharply.

The authorities sought to tackle this crisis through a combination of financing, adjustment, and reform under programs that were supported by the IMF, the World Bank, and the Inter-American Development Bank. Adjustment measures intensified beginning in 1988 and included adjustments of public utility tariffs; cuts in public expenditure, including temporary wage cuts; and increases in interest rates. In addition, to help correct the appreciation of the currency by about twothirds, the government implemented two devaluations in 1985 and 1988 and, in 1993, floated the exchange rate. The result was a rate of TT$5.8 per U.S. dollar by end-1993. The pace of reform accelerated in the early 1990s, with the further liberalization of the exchange and trade systems, privatization, and tax reforms--including a simplification of the income tax and the introduction of a value-added tax (VAT).

Recovery in the mid-1990s

The adjustment measures and reforms went a long way toward stabilizing the economy and...