Energy surge fuels economic growth

The September 2003 Monetary Policy Report from the Central Bank of Trinidad and Tobago has revealed buoyant economic growth in the first half of 2003, the result of a surge in energy sector output, low inflation, a strengthening external position and a better than anticipated fiscal outcome. The local economy, the report stated, has remained relatively resilient against a backdrop of geopolitical tensions following the quick cessation of military conflict in Iraq and the apparent containment of the Severe Acute Respiratory Syndrome (SARS). Regionally, it continued, there have been indications of modest improvement in Caricom, particularly in the traditional tourist destinations, as well as promising signs of a return of macroeconomic stability in Latin America after the unusual economic and financial stress of last year.

In Trinidad and Tobago, real GDP rose by a little over 2.5 percent in the first six months of 200. Higher production of LNG, crude oil and petrochemicals contributed to an expansion of nearly 11 percent in real output in the energy sector. However, the weak global recovery and the economic difficulties in the regional economies continued to negatively affect the performance of the non-energy sector, which grew at a marginal 0.2 percent. This also seemed to have affected domestic employment generation, the report said. It went on to note that growth continued to take place in a low and stable inflationary environment. In the 12 months to April 2003, headline inflation rose by 4.2 percent, compared with the four percent increase for the year ending April 2002. Food prices rose by 12.3 percent, reflecting the volatility in prices of agricultural produce, poultry and flour. Core inflation, which removes the effects of extreme movements in food prices, slowed to 2.5 percent in the 12 months to April 2003, from an increase of three percent in the year to April 2002.

On the external front, net international reserves at the close of September 2003 amounted to US $2,196 million, covering in excess of six months of prospective imports of goods and non-factor services. Preliminary estimates suggest that the central government achieved a surplus of $562 million (0.8 percent of GDP) on its operations for the fiscal year 2002/2003, compared with the original budgeted estimate of an overall deficit of $619 million or one percent of GDP. Of this surplus, $497 million was transferred to the Revenue Stabilisation Fund (RSF). During the course of fiscal 2003, the financial system experienced relatively high levels of liquidity, generated mainly by net domestic fiscal injections by the central government. Net budgetary injections rose to $3.2 billion in fiscal year 2003, compared with just over $1.3 billion in the previous fiscal year. Delays in the issue of central government bonds to refinance the redemption of callable bonds also contributed to the liquidity build-up, particularly towards the middle of 2003. However, liquidity conditions eased somewhat from early July, as the central government refinanced a total of $2 billion in high-cost debt on the domestic bond market.

The Central Bank stepped up open market operations, which were supported by interventions in the foreign exchange market. The Bank sold US $241 million to the commercial banks in the first half of 2003 and another US $39 million in its latest rounds of interventions in July and August. Movements in short-term domestic interest rates typically mirrored the easier liquidity conditions and maintained the overall declining trend observed since the start of the year. Commercial bank credit to the private sector remained sluggish, increasing by only 1.5 percent in June 2003 on a year-on-year basis, compared with a rise of 4.7 percent in the 12 months to June 2002. Given the weak performance in the non-energy sector, stagnant domestic credit growth and low inflation, the Central Bank judged that an adjustment in its monetary policy stance was appropriate. After keeping its policy rate unchanged for almost a year, the Bank lowered its repo rate by 25 basis points to five percent on September 4, 2003. Other operating interest rates also fell by a similar 200 points , the discount rate which is set at 200 basis points above the repo rate, declined to seven percent, while the special deposit rate, which is set at 200 basis points below the repo rate, fell to three percent.