Trinidad and Tabago Economic Report for 2006

TRINIDAD and TOBAGO 1. RECENT ECONOMIC PERFORMANCE A. Overview Growth in Trinidad and Tobago accelerated to 12% in 2006 from 8% in 2005. As in previous years, the energy sector provided most of the economic growth momentum, with output growing by 20.6%. The commissioning of a fourth liquid natural gas (LNG) train and the establishment of another large methanol plant in late 2005 were major contributors to increased energy sector output in 2006. In the non-energy sector, growth slowed to 6.5% from 8.8% in 2005 because of a fall-off in services sector activity. The main contributors to non-energy sector growth in 2006 were construction and manufacturing. In manufacturing, output increased because of exceptional growth in the food, beverages and tobacco sub-sector. Output growth in construction slowed to 14.5% but remained significantly above the sector’s trend growth rate. In the agricultural sector, the recovery following steep declines in 2003 and 2004, after the closure of Caroni (1975) Ltd., did not carry through into 2006. As a result, output from the agricultural sector declined marginally, compared with strong growth of 9.7% in 2005. Inclement weather during the first quarter of the year restricted sugarcane and citrus production, and was partly responsible for this decline. Inflation was 7.9% during the first nine months 2006, compared with 6.9% during the same period in the previous year. This increase in the rate of inflation was caused by higher prices for food and non-alcoholic beverages. To the end of September 2006, the year-onyear increase in the food and non-alcoholic beverages sub-index was 27.4%. Preliminary data for the first half of the year show that the rate of unemployment fell to 7.2%. As a result, labour market conditions tightened in some sectors of the economy, especially construction. Trinidad and Tobago Liquidity in the financial system remained high throughout the first nine months of the year despite interest rate increases by the central bank. Commercial bank rate increases remained below the upward movement by the central bank. On the external account Trinidad and Tobago reported an overall balance of payments surplus of $1.6 bn in the first 9 months of the year. As a result, the net international reserves rose to $5,248.9 mn, the equivalent of 9.3 months’ of imports of goods and services. B. Sectoral Performance Energy Energy sector output grew by 20.6% in 2006. This growth was attributable mainly to exploration and production (16.9%), refining, including LNG (37.4%) and petrochemicals (15%). The output of crude petroleum rose by 4% during the first eight months of the year to 36.1 mn barrels from 34.7 mn barrels for the same period in 2005, with over 80% of production coming from offshore fields. Higher crude oil and natural gas prices in 2006 relative to the previous year encouraged petroleum companies to step up exploration. Natural gas output expanded by 17.1% during the period October 2005 to May 2006 to 25.7 mn cubic metres. The increase in output resulted from the expansion of the Atlantic LNG facilities. Train IV came on stream in the final quarter of 2005 and increased total capacity at Atlantic LNG to 15.1 mn tonnes a year, making Trinidad and Tobago the fifth largest LNG producer. An estimated 80% of Trinidad and Tobago’s LNG output is exported to the United States. In the petrochemicals sub-sector, the expansion in output was driven mainly by methanol production. The completion of a 5,000 tonne per day capacity plant in the final quarter of 2005 was responsible for the increase in methanol production. Output and exports of CDB Annual Economic Review 2006 89 methanol increased by 25% and 29% during the period October 2005 to May 2006 to 4.1 mn tonnes. Over the same period, production of urea increased by 12.4% to 499,000 tonnes but exports fell by 22.3% to 490,000 tonnes. Output of ammonia declined by 0.5% to 3.4 mn tonnes, but exports increased by 2.9% to 4.2 tonnes. Manufacturing In the manufacturing sector, output increased by 11.8% in 2006, which was marginally above the growth rate in 2005. This growth was driven by an upturn in demand from export markets, including those in the CARICOM region. The three largest manufacturing sub-sectors increased output during the year: food, beverage and tobacco (19%); chemicals and non-metallic materials (1.3%); and assembly type and related industries (11.1%). In the food, beverages and tobacco sub-sector, the growth was attributable to an expansion in the production of fruit and vegetable products and alcoholic and non-alcoholic beverages. Output growth in the chemicals and non-metallic minerals sub-sector was constrained by a shortage of aggregates that restricted production of concretebased products. The other manufacturing sub-sectors, increased output, but growth was restrained by greater extra-regional competition. Agriculture Agricultural output weakened in 2006, falling by 0.6% compared with growth of 9.7% in 2005. In the sugar sub-sector GOTT established the Sugar Manufacturing Company Limited (SMCL) to replace Caroni (1975) Limited, which was closed in 2004, to carry out milling and sugar refining activities. Production of sugar rose marginally in 2006 to 34,910 tonnes because the crop was affected by inclement weather during the first quarter. Exports of sugar to EU, through preferential arrangements, during the first six months of the year rose by 49.8% to 34,750 tonnes and earnings by 58.9% to $32.6 mn. On the domestic market, refined sugar sales fell by 4% to 52,312 tonnes. During the first half of the year, SMCL imported raw sugar as feedstock for its sugar refinery. The production of cocoa and coffee fell by 81.4% and 44.3%, respectively, in 2006 because of unfavourable weather conditions. Elsewhere in the agricultural sector, production was mixed, with increases in rice, root crops and copra. Vegetable production was also mixed, even though there was an overall increase of 3% in output. Citrus output continued to recover but was affected by unfavourable weather conditions during the first quarter. In the livestock and dairy sub-sectors, except for pork, production declined, especially in the dairy sub-sector. 90 CDB Annual Economic Review 2006 Tourism Value-added by hotels and guesthouses declined in 2006 for the second consecutive year. During the first six months of the year, stay-over arrivals fell marginally to 223,732 from 225,992 for the same period in 2005. Stay-over arrivals rose from the USA (0.6%), Canada (3%) and the rest of the world, except Europe, (0.6%). However, an 8.2% decline in stay-over arrivals from Europe was more than sufficient to offset these increases. Over the same period, the number of cruiseship passenger arrivals declined relative to the same period in 2005, reflecting a reduction in services to the Southern Caribbean by cruise lines seeking destination repositioning as well as to control operational costs. Construction The construction sector grew by 14.5%, increasing its contribution to GDP to 8.5%. However, growth in 2006 was less than during 2005 because output was restricted by shortages of aggregates and other building materials. In 2006, the sector’s growth was driven mainly by several large public sector projects, including the Port of Spain Waterfront Complex, the Government Office Complex in downtown Port-of-Spain, the Brian Lara Multi-purpose Sporting Complex, and the Government Housing Development Programme. Available evidence suggests that labour shortages were occurring in almost all occupations within the sector. As a result, significant increases were seen in both skilled and unskilled labour rates. C. Prices, Wages and Employment During the first nine months of 2006, the rate of inflation increased to 7.9%, compared with 6.9% during the corresponding period in 2005. On a year-on-year basis, the rate of inflation to the end of September 2006 rose by 9.6%. This rise in the rate of inflation started in 2004, when prices rose by 5.6%, from 3% in 2003, and has continued to gain momentum. The main impetus since 2004 has been food prices, which increased by 20.6% in 2004 and 22.6% in 2005. In recent years, production volumes of many important domestic agricultural products have been less than anticipated because of flooding, labour shortages, and praedial larceny. In many cases, shortages in supplies have been met by regional and extra-regional imports. However, supplies from regional and extra-regional sources have been obtained at higher prices than from domestic producers. Excluding the rise in food prices, the rate of inflation would have been 2% in 2004 and 2.7% in 2005. On a year-on-year basis, the food and non-alcoholic beverages sub-index to the end of September 2006 rose by 27.4%. If the food and non-alcoholic beverages sub-index is excluded, the rate of inflation would fall to 3.9%. Trinidad and Tobago Preliminary data to the end of the first half of 2006 showed that the rate of unemployment had declined to 7.2% from 8% for the same period a year earlier. The services sector generated the largest number of new jobs, with the majority being created in the construction, finance, insurance and real estate, and distribution sub-sectors. Unemployment is now at a historic low, and many firms are finding it difficult to recruit skilled personnel on the domestic market. D. Fiscal Policy and Debt Operations Central Government’s revenues and expenditures during FY 2005/06 indicate surpluses on recurrent and overall accounts of $933.6 mn and $92.6 mn. In the previous fiscal year, both recurrent and overall balances also reported surpluses. During FY 2005/06, Central Government transferred $504.3 mn into the Interim Revenue Stabilisation Fund (IRSF), causing the balance to increase to $1,373.2 mn (7.2% of GDP). The authorities introduced legislation to convert the IRSF into a Heritage and Stabilisation Fund (HSF) after the end of the fiscal year. The FY 2006/07 budget estimates were based on assumptions about the international price of oil, GDP growth and the rate of inflation. According to the Budget Statement, “experts expect the international oil prices to remain in excess of $60 a barrel over the next 3 to 5 years.” Real GDP was projected to increase by 6.2% and inflation to moderate to 7%. Based on an estimated crude oil price of $45 a barrel and a notional net back Henry-Hub gas price of $3.50 per million british thermal unit (MBTU), GOTT’s total revenue (including grants) is projected to be $5,605.7 mn in FY 2006/07, down from $6,174.2 mn in FY 2005/06. The estimated international oil price used to make the revenue and expenditure projects was considered to be conservative, since the price of the benchmark West Texas Intermediate crude oil was $58 a barrel at the time. On this basis, the authorities expect to make a significant contribution to the HSF in FY 2006/07. Of the total projected Central Government revenue (including grants) of $5,605.7 mn, oil was expected to provide $2,431.9 mn. Non-oil related revenue was projected to decline to $3,173.8 mn. Central Government’s total expenditure and net lending was projected to decline to $5,601.1 mn in FY 200607 from $6,072.3 mn in the previous Fiscal Year. This reduction in expenditure was attributable to a decline in transfers and subsidies to $2,534.7 mn. Expenditure on wages and the allocation for the PSIP was projected to increase by 16.3% and 64%% to $962.1 mn and $542.6 mn, while that of the infrastructure development fund Trinidad and Tobago (IDF) was projected to decline to $477.5 mn. The Central Government has pursued a debt management strategy aimed at reducing external debt and debt service payments. In pursuing this strategy the authorities have refinanced high interest rate loans and lengthened the debt maturity structure. At the end of FY 2005/06, gross public sector debt increased by 4% to $5,964.5 mn (32.6% of GDP). Central Government’s domestic debt declined to $1,710.5 mn in FY 2005/06. Similarly, Central Government’s external debt declined to $1,306.2 mn. Central Government’s contingent liabilities, however, increased by 13.2% to $2,813 mn (15.4% of GDP). This increase in Central Government’s contingent liabilities was attributed to borrowing by state-owned enterprises and statutory bodies to upgrade infrastructure and to cover excess operating costs. Central Government’s debt service declined to $337.6 mn in FY 2005/06 from $710.1 mn in FY 2004/05. E. Financial Sector Liquidity in the financial system remained high during the first nine months of the year, even though the Central Bank had increased its repurchase rate in increments of 25 basis points to 8% from 6% at the start of the year. Because of the increases in the Central Bank’s rate, the commercial banks also raised their prime rates to 11.5% from 9.75% at the beginning of the year. However, because of the high liquidity in the commercial banks, the increase in the prime rate was not to the same extent as the increase in the repurchase rate. The weighted average loan rate of the commercial banks rose by 45 basis points to 9.35% from 8.9% at the beginning or the year, while the weighted average deposit rate increased by 27 basis points, causing the spread to widen. Monetary aggregates grew rapidly in 2006, reflecting buoyant conditions in the domestic economy, high liquidity in the commercial banking system and accelerating inflationary conditions. The rate of increase in narrow money supply (Ml), on a year-onyear basis to the end of May 2006, increased by 23.2% to $1,697.6 mn, compared with an increase of 29.5% for the corresponding period in 2005. This growth in Ml reflected increases in both currency with the public and demand deposits. Over the same period, the growth in M2 increased by 29.5% to $4,460.7 mn. Throughout the first nine months of the year the Central Bank engaged in active open-market operations to tighten monetary policy by absorbing commercial banks’ liquidity and reducing their capacity to extend CDB Annual Economic Review 2006 91 credit. The Central Bank also increased its interventions in the foreign exchange market, absorbing $149.2 mn in liquidity through foreign exchange sales, compared with $63.9 mn during the first nine months of 2005. At the end of 2005, the Central Bank introduced a compulsory deposit facility for the commercial banks to reduce the excess liquidity in the banking system. The commercial banks had to deposit $159.5 mn into a compulsory interest bearing account at the Central Bank. In June 2006, commercial banks were required to make a similar deposit of $79.5 mn into the Central Bank. However, these measures were not enough to absorb excess liquidity, and in September 2006, the Central bank introduced a secondary reserve requirement of 2% of prescribed liabilities. The commercial banks’ secondary reserves carried an interest rate of 360 basis points below the repurchase rate. Despite the Central Bank’s effort to tighten commercial banks’ liquidity, the rate of growth in private sector credit on a year-on-year basis to the end of May 2006 increased by 24.2% to $4,367.2 mn. Commercial banks’ credit to the public sector increased by 11% to $575.2 mn. F. External sector On the external account, Trinidad and Tobago recorded a balance of payments surplus of $1.6 bn to the end of September 2006. Its net international reserves increased to $5,248.9 mn, the equivalent of 9.3 months of imports of goods and services. Data for the first half of the year indicated that the current account surplus increased to $3,340.1 mn. This surplus on the current account of the balance of payments was driven mainly by increases in exports of fuels, lubricants and petrochemicals. Total exports rose by 46.8% to $6.5 bn, while imports rose by 22.6% to $2,268.3 mn. The surplus on the merchandise account was partly offset by a deficit on the capital and financial account. As a result, the overall balance of payments surplus for the first six months of 2006 increased to $1,270.5 mn from $634.4 mn for the same period in 2005. With the projected growth in crude oil and natural gas outputs, the energy sector is expected to continue to be the primary driver of economic growth over the medium term. As a result, one of the Government’s major policy objectives is (and has been) to diversify the economy both within and outside the energy sector to create greater linkages. All new downstream natural gas projects must include a local value-added element. In addition, is the authorities are emphasising investment opportunities along the entire LNG value chain, and plan to expand iron and steel production and to enter the aluminium smelting industry. The agriculture sector is seen as being able to make a more significant contribution to economic and social development, while at the time ensuring national food security. The authorities intend to revitalise the sector and make it more competitive by developing largesized farms and by providing conditions to encourage farmers to merge small plots into larger units. Each of the large farms will be at least 100 acres, to promote large-scale production, and will be either publicly owned or a public-private sector joint venture. These large farms will be used to increase food production. Emphasis will be placed on improving access roads, drainage, irrigation and water management systems and providing support to farmers in research and development, agro-processing and marketing. In the manufacturing sector, several initiatives have been undertaken to ensure the sector preserves its competitiveness. These initiatives include building a technology park at Wallerfield, modernisation of existing industrial parks, restructuring the Port Authority of Trinidad and Tobago, introducing a degree programme in Entrepreneurship and Innovation at the University of Trinidad and Tobago (UTT) and setting up a Research and Development Fund (RDF) for technological innovation to support local research. The active promotion of small and medium-sized enterprises is another element of the diversification strategy. In FY 2006/07, the authorities intend to increase the entry level for funding from the National Enterprise Development Company (NEDC) to $15,910 from $7,955. Individuals who have completed repaying their first loan from the NEDC will be eligible for a second loan of up to $39,775. The Government continues to pursue initiatives aimed at increasing the tourism sector’s contribution to GDP and employment creation. In 2005, the Tourism Development Company Limited was established, dedicated to developing the country’s tourism product, and to the international marketing of Trinidad Trinidad and Tobago 2. MAJOR POLICY ISSUES A. Economic Diversification The energy sector continues to play a pivotal role in Trinidad and Tobago’s economy, accounting for over 40% of GDP, 70% of exports of goods and services and 35% of Central Government’s recurrent revenue. 92 CDB Annual Economic Review 2006 and Tobago. To support expanding the sector, the Government aims to increase the hotel room stock, strengthen the regulatory framework, brand Trinidad and Tobago as a preferred tourism destination and increase airlift into the country. With the refurbishment programme at one of the major hotels in Port of Spain slated for completion in FY 2006/07 and two new hotels, expected to be completed in time for the 2007 tourism season, the accommodation inventory will be significantly increased in the coming year. B. Maximising Revenue from the Energy Sector In future, government revenue from the energy sector will be mainly driven by natural gas production. As a result,the authorities undertook a comprehensive review of the petroleum tax regime to set up a mechanism to maximise revenue from the sector. The first phase of this process, in 2005, involving the taxation of oil, was limited to taxing income gained from oil production through a petroleum profits tax, a supplementary profits tax and an unemployment levy. In the second phase, income gained from producing natural gas was taxed and the fiscal regime amended to encourage exploration and development activity. Economies with a dominant high income generating sector tend to suffer from so-called “Dutch Disease” effects. This happens when large increases in the international price of the product, or sharp increases in product earnings, precipitate an appreciation in the real exchange rate, or push wages and prices up, with adverse effects for the viability of other sectors. The authorities in Trinidad and Tobago need to pay particular attention to the potential for damage to the prospects of other sectors through the excessive monetisation of the proceeds of energy exports. In FY 1999/2000, the authorities set up an Interim Revenue Stabilisation Fund (IRSF) to save part of the windfall tax revenues derived from the energy sector. Later, in FY 2004/05, it was decided decided to retire the IRSF and set up a Heritage and Stabilisation Fund (HSF). The objectives of the HSF were to sustain public expenditure capacity through periods of revenue downturns stemming from declines in oil and gas prices; sustain public expenditure after revenue begins to decline because of depletion of oil and gas resources; and undertake strategic and tactical investments necessary to advance the transformation and economic diversification of the economy. Legislation to set up the HSF to replace the IRSF will be introduced in FY 2006/07. The HSF is expected to provide the Government with an institutional mechanism to reduce the vulnerability Trinidad and Tobago of its finances to sudden changes in energy prices and to save some of the revenue for future generations. The Government intends to save a sizeable part of the added revenue earned from higher energy prices abroad. C. Infrastructural Services To achieve Vision 2020, GOTT recognises that standards and delivery of essential infrastructural services must be improved. GOTT has undertaken several initiatives to this end, including: undertaking a comprehensive national transportation study; carrying out a comprehensive drainage and flood control programme; improving power generation; and substantially upgrading the water supply system. However, for several years, the pace of implementation of the PSIP has been less than satisfactory. To speed up the process, in FY 2005/06, GOTT set up several State-owned Special Purpose Enterprises (SSPEs) to manage and carry out infrastructural projects. GOTT will also be placing an increased emphasis on private sector participation in the ownership and operation of infrastructural services. Transportation bottlenecks are causing many problems for the travelling public. GOTT is committed to reducing vehicular congestion in the short-term, while developing a long-term strategy to modernise the transportation system. In FY 2006/07, GOTT’s priority for road transportation will be to improve the East-West and North-South corridor roads to increase capacity and safety. Work to be undertaken will include building interchanges, overpasses at key intersections, new highways and improvements to access roads, among other things. Besides building new roads and repairs and maintenance, GOTT intends to provide the Public Transportation Service Corporation (PTSC) with more resources to buy new buses and improve the reliability and effectiveness of its services. GOTT will also be considering the feasibility of introducing a water taxi service between Port of Spain and San Fernando. GOTT has also indicated an intention to set up a rapid transit rail service along the East-West and North-South corridors. In air transportation, GOTT will focus its efforts on improving the infrastructure at the Piarco and Crown Point International Airports. In FY 2006/07, the Port Authority of Trinidad and Tobago will continue to restructure its operations to improve productivity and efficiency. For many years, regions of Trinidad and Tobago have suffered regularly from flooding. In FY 2006/07, GOTT will be undertaking programmes to upgrade and develop CDB Annual Economic Review 2006 93 the country’s drainage systems to meet ecological needs, settlement patterns and mitigate flood hazards. The National Infrastructure Development Company will be implementing several programmes in FY2006/07 aimed at mitigating flooding. Many of Trinidad and Tobago’s electricity generation plants are old and in need of replacement. In FY 2006/07, GOTT plans to build a new power generation plant at Point Lisas. To better utilise natural gas, GOTT will change all of its power generation facilities to combine cycle plants. This would allow all waste heat from the primary generating gas turbine to be more efficiently utilised. D. Technology For Trinidad and Tobago to achieve developed country status by 2020, it needs to develop its own indigenous technological base. In 2004, GOTT set up a permanent Local Contents Committee with responsibility for developing specific policies and strategies to ensure the transfer of technology and improve skill levels in the energy sector. To complement this move, GOTT has set up Evolving Technologies (E-Teck), which is involved in developing new technologies and business and trade expansion activities. E-Teck is mandated by GOTT to set up the Wallerfield Industrial and Technology Park, the University of Trinidad and Tobago (UTT) and develop the country’s industrial and technological base. To reduce the cost of broadband services and to make access to wireless internet services cheaper and available nationwide, GOTT intends to exempt telecommunications equipment needed for internet and broadband services from import duties and valueadded tax of two years starting in FY 2006/07. E. Human Resource Development Trinidad and Tobago’s economy has been moving away from low value-added, labour-intensive industries to activities needing higher skill levels. GOTT recognises that a high-level of education is necessary for continued economic development and is revamping its education system to ensure quality education from pre-primary to the tertiary levels. To achieve this, GOTT has embarked on a comprehensive programme to create a seamless system from early childhood through to the tertiary level. The idea is to create a culture where education can be seen as a lifelong pursuit, to not just improve job possibilities, but to help individuals to expand their horizons. GOTT intends to achieve universal early childhood care and education by the end of 2010. Currently, 72% of children in the age group 2-4 years old are enrolled in early childhood and childcare centres. To achieve universal early childhood education will require GOTT building and staffing over 600 centres between 2007 and 2010. At the primary and secondary levels, GOTT’s objective is to improve educational quality and relevance. In collaboration with other stakeholders, GOTT has started to modernise the curriculum at primary and secondary levels. At the tertiary level, GOTT set up the UTT in FY 2004/05. Initially, UTT’s focus was on programmes in engineering and technology, research, innovation and entrepreneurship and humanities. Over the next few years, GOTT intends to expand the number of courses offered by UTT. In 2006, UTT expanded its enrolment capacity by incorporating several colleges that were formally part of the College of Science, Technology and Applied Arts of Trinidad and Tobago (COSTAATT). In FY 2006/07, COSTAATT will concentrate on health sciences, modern studies, art and culture and languages to help the transfer of its graduates to UTT and the University of the West Indies (UWI) to complete first-degree programmes. COSTAATT will also be renamed the Community College of Trinidad and Tobago. In FY 2005/06, GOTT introduced free tertiary education at UTT, all UWI Campuses for citizens of Trinidad and Tobago, and all accredited private education institutions in Trinidad and Tobago. To help students with special financing needs, GOTT launched the Higher Education Loan Programme (HELP) in June 2006. HELP replaced the Student’s Revolving Loan Fund and the University Student’s Guarantee Loan Fund. Under the HELP programme, students studying in Trinidad and Tobago can get loans of up to $3,990 a year for three years and $11,970 a year for 3 years if studying outside of Trinidad and Tobago, but within CARICOM. GOTT’s objective is to increase the participation rate in post-secondary and tertiary education from 40% to 60% by 2015. GOTT has been reforming its health care system for several years to create a more client-centred operation that is focused on primary health care. In FY 2006/07, GOTT will continue to expand primary health care facilities by building new health centres. In addition, GOTT will also continue to expand and upgrade the country’s secondary health care facilities, including the Point Fortin and Scarborough hospitals and a new wing at the San Fernando General Hospital. In FY 2006/07, work will start on a new Central Trinidad Hospital for in and out patients. GOTT will also be undertaking reviews Trinidad and Tobago 94 CDB Annual Economic Review 2006 of the San Fernando General Hospital and the Mount Hope Medical Complex in the coming year. In February 2006, UTT and Johns Hopkins Medical International signed a six-year agreement for providing services with respected to health sciences for UTT and GOTT. The Port of Spain General Hospital Replacement Facility will be used as a medical campus to provide medical education, training and clinical research. More recently, GOTT has placed heavy emphasis on promoting healthy lifestyles, and is committed to telling the public about the risks involved in smoking tobacco and drinking excessive alcohol. In addition, GOTT will be intensifying its national HIV awareness campaign in FY 2006/07. The programme for providing anti-viral and anti-fungal drugs to people with HIV/AIDS will be expanded. F. Poverty Despite the robust economic growth experienced over the past decade and a significant decline in unemployment, the 1997/99 and 1997/98 household budget survey showed that 24% of the Trinidad and Tobago population was poor and lived below the poverty line, and that 11% lived below the minimum dietary consumption level. The poverty assessment pointed out that many active participants in the workforce earned low wages. These individuals can be classified as the working poor. To improve the situation of the working poor, GOTT increased the minimum hourly wage to $1.44 in 2005. To provide extra relief to low-income taxpayers, GOTT also increased the personal allowance on the income tax to $9,575 in 2006. GOTT is concerned about the welfare of the elderly, and over the years have introduced several measures designed to improve living conditions. GOTT also recognises that inflation has eroded the real disposable income of people on fixed incomes in recent years. Between FY 2001/02 and FY 2005/06, GOTT increased the old-age pension by 60% to $183.50 a month. Senior citizens also have access to free medical care and bus passes. In 2005, rising food price inflation adversely impacted on the poor. As a result, GOTT set up a sub-committee to develop recommendations for addressing the problem of rising food prices and its impact on low–income households. The sub-committee recommended a targeted conditional cash transfer programme designed to give recipients the ability to buy basic food items on an approved list as a temporary measure. This cash Trinidad and Tobago transfer system was to run in tandem with skills training for recipients to help them to move off the programme. The first phase of the programme was launched in July 2006, which involved issuing debit cards. The second phase, involving the distribution of smart debit cards, will be carried out in FY 2006/07. Crime In 2006, GOTT achieved some successes in its fight against crime and violence, but the crime rate is still unacceptably high. The levels of violent crime and kidnappings are of serious concern to GOTT. If not successfully addressed the crime situation could undermine the country’s recent social and economic achievements. It is thought that the escalation in crime is partly a result of the large volumes of illegal drugs transiting the region, and the increasing number of guns finding their way into the country. In particular, the growth in gang activity and the domestic drug trade are blamed for the high murder rate. Since the 1990s, the crime situation has been complicated by an influx of criminal deportees. Other contributory causes include unemployment, increasing income inequality and the progressive marginalisation of males who fail to meet prescribed educational standards. Over the past 18 months, GOTT has taken several initiatives which are aimed at transforming the police force. These actions included re-establishing the homicide bureau, increased training in modern police techniques, setting up an incident coordination unit in the Ministry of National Security to deal with kidnapping and restructuring the police complaints unit to improve accountability and remove corruption in the police force. In 2006, legislation was passed to prevent persons accused of kidnapping offences to obtain bail. GOTT will also be reviewing the Proceeds of Crime Act to ascertain its effectiveness. A substantial share of illegal drugs intended for North America and Europe is thought to be trans-shipped through Trinidad and Tobago and the wider Caribbean. To prevent drug importation and trans-shipment, in FY 2006/07, GOTT will be installing radar systems and instituting marine patrols to conduct drug interdiction and anti-smuggling operations. Fast inshore patrol boats and armed helicopters will support offshore patrol boats. G. Environment Of paramount importance in GOTT’s strategy to transform Trinidad and Tobago into a developed country by 2020 is the preservation and conservation of the environment. An appropriate institutional and CDB Annual Economic Review 2006 95 legal framework for protecting and conserving the environment is being put in place. Major initiatives being undertaken by GOTT include updating of the National Environmental Policy; enactment of subsidiary legislation about environmentally sensitive areas and species; and the issue of certificates of environmental clearance.The Community Enhancement and Protection of the Environment Programme is also making a significant contribution to improve the environment. allocated $156.7 mn. Development pillars Governing Effectively and Innovative People were allocated $117.8 mn and $109.2 mn, respectively. The fifth development pillar, Competitive Business was allocated $39.8 mn. Of the original allocation, $367.1 mn (60.5% of the PSIP) was to be financed by the IDF. Projects to be financed by the IDF were to be implemented by SPSEs, which were established to help Ministries of Government without the capacity to implement large projects. A total of $239.4 mn of the PSIP was to be financed by Central Government through its fiscal accounts. Following a review of expenditure by the various ministries and departments, GOTT revised the PSIP allocation upwards to $838.1 mn, with emphasis being placed on health, education, housing, roads and bridges, information communication, trade, public and land administration and citizens’ security. As a result of the upward revision of the PSIP allocation, expenditure on the various pillars of development were as follows: Caring Society $242.9 mn (29%); Sound Infrastructure and Environment $239.7 mn (28.6%); Innovative People $134.4 mn (16%); Governing Effectively $131.4 mn (15.7%); and Competitive Business $89.9 mn (10.7%). C. Financing of the FY 2005/06 PSIP In FY 2005/06,reliance was shifted to the IDF for domestic financing of the PSIP. IDF comprises infrastructural projects and programmes selected by Ministries and Departments to be managed by SPSEs. The IDB was the largest source of external financing, providing $46.7 mn for health education, housing, roads, information communications, trade, public and land administration and citizen security. EDF, with $1.7 mn, was the main source of grant funding which will be used to assist in poverty alleviation. IDB also provided $0.5 mn in grants to finance the strengthening of security at the airport and modernise the telecommunication sector. The World Bank provided a loan of $5.6 mn to finance the HIV/AIDS Prevention and Control and the Postal Sector Reform projects. CDB provided $0.5 mn to finance the Buccoo Integrated Community Facility and the Institutional Strengthening of the Tobago House of Assembly. D. Supplementary PSIP FY 2005/06 GOTT’s policy, which is consistent with its Vision 2020, is to invest in strategic sectors of the economy and in certain industries in which the private sector is either unwilling or unable to invest. These investments are not intended to be long-term in nature, and will be divested at an appropriate time. In this way, GOTT sees itself as a 3. PUBLIC SECTOR INVESTMENT PROGRAMME A. Developmental Objectives GOTT’s Vision 2020 is to create an environment where all citizens can enjoy an enhanced quality of life in the areas of health, housing and personal security comparable to the highest standards obtained in developed countries. To achieve this standard of economic, social, environmental, technological and institutional development by 2020, GOTT has established five development pillars: developing innovative people; nurturing a caring society; governing effectively; enabling competitive businesses; and investing in sound infrastructure and the environment. These five development pillars form the basis for the Vision 2020 draft National Development Plan (NDP). Underpinning the development pillars are issues relating to culture, diversity and population. However, given the changing local, regional and international landscapes, GOTT can no longer be seen as the main driver of economic development because no single stakeholder has enough critical mass to support the development effort required for Trinidad and Tobago to achieve developed country status by 2020. In FY 2006/07, GOTT adopted a new approach to the preparation of the PSIP to achieve a closer alignment with the NDP. GOTT intends to place greater emphasis on the monitoring and management of the PSIP to achieve development outcomes and the realisation of policy objectives. An additional feature of the FY 2005/06 PSIP was the reintroduction of the Infrastructure Development Fund (IDF) as part of the financing mechanism for the PSIP. B. Composition of the FY 2005/06 PSIP The total budgeted PSIP for FY 2005/06 was originally allocated $606.4 mn, of which $182.9 mn, the largest allocation, was to the development pillar Caring Society. The second largest allocation was for the development pillar Sound Infrastructure and Environment, which was 96 CDB Annual Economic Review 2006 Trinidad and Tobago facilitator who will eventually allow for greater private sector participation in the economy. Through the stateowned enterprise sector, GOTT will implement many of its strategically important projects. Given the increasing role being taken in the country’s capital formation by the state owned enterprises, GOTT decided to introduce the supplementary PSIP in FY 2004/05. In FY 2005/06, expenditure on the supplementary PSIP was $816.2 mn, with expenditure on the energy sector totalling $543.1 mn. The main energy sector projects included the cross-island gas pipeline and the Beachfield Upsteam Development Project. Other important areas of investment included education, housing, infrastructure and national security. E. Composition of the FY 2006/07 PSIP The FY 2006/07 PSIP is budgeted to total $1,020.2 mn and will continue to be financed by Central Government and IDF. The Central Government will provide $542.6 mn, with the IDF providing the remaining $477.6 mn of the overall allocation. As in the previous FY, the main areas of focus will be education, health, housing, governance, institutional development, public safety, transport and water and sewage. The largest share of the allocation will be to Caring Society (28.8%) followed by Sound Infrastructure and Environment (27.5%), Competitive Business (15.4%), Governing Effectively (14.6%) and Innovative People (13.7%). F. Financing of the FY 2006/07 PSIP Domestic resources will be used to finance the largest portion of the FY 2006/07 PSIP. Domestic financing will provide an estimated $956.4 mn, or 93.7%, of total expenditure on the PSIP. External sources will provide the remaining $63.8 mn, with IDB providing $54.9 mn. Funds provided by the IDB will be used to finance projects in the education, health, housing, transportation, information and communications, trade, public and land administration and citizen security. The World Bank will provide $5.0 mn, which will be used to support the continuation of the HIV/AIDS Prevention and Control Project and the closing of the Postal Sector Reform project. CDB will provide $3 mn to be used in the development of the Buccoo Integrated Community Facility Project and Institutional Strengthening of the Tobago House of Assembly. Grant funding will total $3.4 mn, with the EDF providing $3 mn, which will be used for poverty alleviation, small business development, institutional strengthening of the public sector and HIV/AIDS prevention and control. IDB will provide $0.3 mn in grant funding Trinidad and Tobago for the establishment of a legal framework for secure transactions in moveable property and the modernisation of the telecommunication sector. G. Supplementary PSIP FY 2006/07 Projected expenditure on the supplementary PSIP is expected to total $1,384.5 mn, with the energy sector accounting for $762.4 mn. In the FY 2006/07 supplementary PSIP the Housing Corporation and Urban Development Corporation of Trinidad and Tobago (UDeCOTT) and National Insurance Property Development Company (NIPDEC) are projected to spend $246.4 mn on the construction and refurbishment of government buildings. In addition, several SPSEs which were set up to assist Ministries that did not have the institutional capacity to manage large projects will be undertaking projects in FY 2006/07 in areas such as education and training, housing and settlements and public order and safety. 4. MEDIUM-TERM ECONOMIC PROSPECTS Trinidad and Tobago’s medium-term prospects are favourable, with the economy expected to grow by over 6% a year between 2007 and 2014. Increased output of crude oil, natural gas and petrochemicals will be the main sources of to economic growth. In the non-energy sector, growth will continue to be favourable, particularly in the construction sector, which will be boosted by GOTT’s expenditure on infrastructure development. Elsewhere in the non-energy sector, the outlook for financial services, tourism and telecommunications are also favourable. This growth in economic activity is likely to cause labour market conditions to tighten considerably. At present, some sectors of the economy, particularly construction, are experiencing labour shortages. In the non-energy sectors it is likely that the rapid rate of growth in the energy sector will have an adverse effect on output. The sectors most likely to be affected would be agriculture (despite GOTT’s actions to revitalise the sector) and the clothing and furniture sub-sectors in manufacturing. Controlling the rate of inflation will be the most difficult economic issue facing GOTT over the medium term. If GOTT is unable to reduce the rate of inflation, the implications for long-term economic development will be serious. Of concern will be the likely impact on GOTT’s diversification efforts. GOTT projects the annual rate of inflation to fall to 7% in 2007 and 5% in 2008. However, the rate of public expenditure in a context 97 CDB Annual Economic Review 2006 of supply tightness for some inputs and consumption products may not permit the realization of these expectations. The public sector debt, as a percentage of GDP, is expected to continue to fall and the foreign reserve position to improve considerably, provided international oil prices remain at over $50 a barrel. Over the medium term, the key challenge facing GOTT will be how to strengthen its policy framework to ensure sustainable long-term growth and social progress. Clearly, macroeconomic stability will be essential, and the key factor in ensuring this stability will be a sound fiscal position and control of inflation. GOTT needs to exercise expenditure prudence over the period ahead. 98 CDB Annual Economic Review 2006 Trinidad and Tobago