Economy shrinks 4.5 percent

Monday, December 19, 2016 - 07:30

A new report from the Economic Commissioner for Latin America and the Caribbean (Eclac) estimates that the T&T economy declined by 4.5 per cent this year.

This follows contractions of 0.6 per cent and 0.5 per cent in 2014 and 2015, respectively.

Eclac said: "Continued natural gas supply shortages, maintenance shutdowns and weak energy prices contributed to the energy sector’s deterioration, while linkages with that sector pulled down the non-energy sector.

The current account deficit widened as a result of reduced goods exports, while foreign direct investment saw a modest recovery.

According to the report, Government’s fiscal deficit expanded to 4.2 per cent of GDP. In response, several adjustments were made to compensate for lost energy revenues, including several new tax initiatives.

It continued: "In monetary policy, the central bank repo rate was left unchanged in 2016 and the exchange rate against the United States dollar was allowed to weaken.

Unemployment rose to 4.4 per cent in the second quarter of the year as the slowdown took hold.

Eclac said the estimated deficit is an increase on the 1.5 per cent deficit of fiscal 2014/2015 and had been originally estimated at 1.8 per cent of GDP but worsened because of lower energy revenue.

"While the government managed to increase non-tax revenue by 18 per cent—largely as a result of repayment of past lending—tax revenue fell by 31 per cent because of a 90.3 per cent drop in the contribution from oil companies.

"The budget for fiscal 2016/2017, which is based on an estimated oil price of US$ 48 per barrel and a gas price of US$2.25 per MMBtu, predicts a deficit of 3.9 per cent of GDP," the reported stated.

The report noted that measures had been implemented to increase revenue from other sources, including reinstatement of property tax, a new income tax bracket and a 7 per cent tax on online shopping.

"As a result of the contracting economy, in 2016 the Central Bank of Trinidad and Tobago kept the repo rate at 4.75 per cent, where it had been since December 2015.

"Although the bank raised this rate several times over 2015, commercial banks’ average lending rates declined over the year before increasing by 0.29 percentage points from December 2015 to June 2016," the Eclac report continued.

" This lag in monetary policy transmission may be due to the banks being supplied with enough resources from excess liquidity in the banking system without having to access central bank repo facilities."

Eclac also noted that the Central Bank had allowed the exchange rate to "slowly depreciate after maintaining a quasi peg for about 20 years."

"The official United States dollar selling rate weakened by 6.1 per cent between October 2015 and October 2016, from TT$6.3627 to TT$6.7507 per US$1.

"As a result of the slowdown in the economy, the Central Bank sold 44 per cent less foreign exchange to authorised dealers between January and October 2016 than in the same period the previous year.

"However, foreign exchange remains scarce, and many banks have resorted to rationing United States dollars to customers."

Eclac said effect of the economic slowdown has manifested in the economy’s labour force statistics.

The unemployment rate rose from 3.5 per cent in the fourth quarter of 2015 to 3.8 per cent in the first quarter of 2016 and then to 4.4 per cent in the second quarter.

"Unemployment in the oil and gas sector, which had increased to 8.3 per cent by the fourth quarter of 2015, fell to 3.1 per cent in the second quarter of 2016, largely because of workers leaving the sector.

"In the most recent estimate, unemployment was highest in the construction sector (8.6 per cent) and lowest in the agriculture sector (1.0 per cent)."