IMF calls for more forex flexibility
The International Monetary Fund (IMF) has recommended that the Central Bank deal with recurring foreign exchange shortages in the country by adding more flexibility to the system.
In its latest country report on T&T, the IMF said while there is “no concrete evidence of either a parallel market or arrears on foreign exchange”, the Central Bank recently had to see foreign exchange to clear the market. It said a recurrence of the shortages, which impose unnecessary economic costs, “could indicate the existence of an exchange restriction.”
The agency also said while structural reforms are underway in the country, more are needed to foster a diversified economic base. It added that financial sector reform is advancing, including expanding the Central Bank’s regulatory perimeter to “systemically important non-bank financial institutions.”
“Recent streamlining of regulations that have hampered business activity is welcomed, but needs to be further advanced. Government operations are increasingly hamstrung by a poorly functioning civil service. Perceptions of corruption can be reduced by adopting a transparent procurement process,” the IMF said.
“Programmes that mask underemployment should be replaced with more effective training. Growing statistical shortcomings have rendered the conduct of surveillance ever harder, and must be addressed.”
The agency also recommended that the Central Bank carefully consider how to tighten the monetary stance given high excess bank liquidity. It said sustainable growth requires re-configuring fiscal policy but conceded that “this will be challenging for the time being in view of national elections due in 2015.”
“Ad hoc measures should be replaced with policies that durably improve non energy-based revenues and spending. The proceeds from extracting non-renewable resources should be saved and invested as a stepping stone to lasting prosperity. “Fuel subsidies need to be curtailed and social programmes rationalised. Non-energy sector tax bases should be broadened and tax expenditures limited. Greater flexibility is needed in the foreign exchange market.”
According to the IMF, the T&T economy is embarking on sustainable growth but still faces the challenge of boosting long-run growth by structural reforms and re-orienting fiscal policy.
It said: “Supply-side slowdowns in the energy sector are ending, while available evidence suggests non-energy growth is robust and economic slack is being used up. Non-energy growth should settle around a long-term two to two-and-a-half per cent per annum rate, while new energy sector investment may begin to bear significant fruit over the medium term.” The IMF also reported a downward trend in headline inflation and said core inflation remains moderate but domestic risks “are to the upside.”