Document of

The World Bank

FOR OFFICIAL USE ONLY

I-ALa. 3 156 2 le- Report No. P-5120-TR

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED

STRUCTURAL ADJUSTMENT LOAN

IN AN AMOUNT EQUIVALENT TO US$40 MILLION

TO

REPUBLIC OF TRINIDAD AND TOBAGO

NOVEMBER 21, 1989

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Trinidad and Tobago Dollar (TT$)US$1.00 = TT$4.25TT$1.00 = US$0.23

GLOSSARY OF ABBREVIATIONS

BWIA British West Indies AirwaysCARICOM Caribbean CommunityCCFF Compensatory and Contingency Financing FacilityCDB Caribbean Development BankCET Common External TariffCFF Compensatory Financing FacilityCGCED Caribbean Group for Cooperation in Economic

DevelopmentCIF Cost, Insurance and FreightDFC Trinidad auid Tobago Development Finance CompanyEDC Export Development CorporationEXIH Bank Export-Import BankGDP Gross Domestic ProductGNP Gross National ProductIBRD International Bank for Reconstruction and DevelopmentICB International Competitive BiddingIDB Inter-American Development BankIDC Industrial Development CorporationIFC International Finance CorporationIMF International Monetary FundISCOTT Iron and Steel Company of Trinidad and TobagoHIGA Multilateral Investment Guarantee AgencyHTBE Methyl Tertiary Butyl EtherNHMC National Hospital Management CompanyNSR National (Secondary Roads) Development CompanyPSIP Public Sector Investment ProgramRSU Restructuring Support UnitSAL Structural Adjustment LoanSNC School Nutrition CompanySOE State-Owned EnterprisesSSU Social Sectors UnitTAL Technical Assistance LoanTCL Trinidad Cement LimitedTELCO Telephone Company of Trinidad and TobagoT&T Trinidad and TobagoT&TEC Trinidad and Tobago Electricity CommissionTTMC Trinidad and Tobago Methanol CompanyUNCTAD United Nations Conference on Trade and DevelopmentVTEP Voluntary Termination of Employment PlanWASA Water and Sewerage Authority

FISCAL YEAR

January 1 - December 31

FOR OMCIL USE ONLY

TRINIDAD AND TOBAGO

STRUCTURAL ADJUSTHENT LAN

Table of Contents

Page No.

LOAN AND PROGRAM SUHMARY ....................................... i

PART I. THE ECONOMY. 1

Background .1Economic Performance. 2Government Response to the Crisis. 4Key Adjustment Issues. 5

PART II. THE GOVERNMENT' S MEDIUM-TERM PROGRAM. 6

PART III. THE STABILIZATION PROGRAM WITH THE DMP .............. 8

The Stabilization Program . ..................... 8Collaboration with the IMF ...................... 10

PART IV. THE REVORM PROGRAM UNDER THE PROPOSED SAL .10

A. Public Sector Resource Mobilizationand Allocation . .10- State Enterprises .11- Public Utilities .13- Public Sector Jnvestment Program .14

B. Incentive Framewok . .15- Trade Regime .15- Other Export Incentives .20- Investment Incentives .21

C. Social Dimensions of Adjustment . .22

PART V. MEDIUM-TERM PROSPECTS AND FINANCING REQUIREMENTS.... 24

Growth and Balance of Payments Prospects 24External Capital Requirements .26Creditworthiness and Risk .27

PART VI. THE PROPOSED LOAN .28

Loan Amount and Cofinancing .28Procurement, Disbursement and Audit .28Benefits and Risks .29

PART VII. COUNTRY ASSISTANCE STRATEGY AND BANK OPERATIONS ..... 30A. Bank Group Assistance Strategy and

Operations ................................ 30B. Burden Sharing .............................. 32

PART VIII. RECOMMENDATION ...................................... 33

This document has a restricted distribution and may be used by recipients only in the perfcrtnanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorizatioitI

I. Economic and Social Indicators, Balance of Paymentsand External Debt ................................. 34

II. Status of Bank Group Operations ..................... 43III. Supplementary Loan Data ............................ 44

IV. Background and Focus of the Hedium-tetm AdjustmentProgram ........................................... 46

V. Coverage of IMF and Bank Programs ................... 57VI. Creditworthiness Analysis ........................... 58VII. Statement of Development Policies ................... 61VIII. Policy Matrix .............................................. 72IX. Production Coverage of Import Negative List ......... 83X. Summary of Technical Assistance for Program

Implementation .87

MAP IBRD 20573R

TRINIDAD AND TOBAGO

STRUCTURAL ADJUSTMENT LOAN

LOAN AMD PROGRAM SUMMARY

Borrowers Republic of Trinidad and Tobago.

Amount: US$40.0 million equivalent.

Term:s Payable in 15 years, including a graceperiod of 5 years, at the standard variableinterest rate.

Cofinancing: The Export-Import Bank of Japan isconsidering cofinancing the operation. Itis expected to provide US$40 millionequivalent in support of the Government'sstructural adjustment program.

Program Description: The proposed loan would support theGovernment's structural adjustment programby addressing selected areas of policy thatare key to growth. The program aims atraising the efficiency of public sectormanagement, removing the allocativeinefficiencies produced by the prevailingrestrictive trade regime, and providing thesocial underpinnings for the sustainabilityof the adjustment process. Specifically,the loan would support a reform programencompassing: (i) public sector resourcemobilization and allocation: stateenterprise restructuring and divestiture,efficiency improvements and tariffincreases in the public utilities andstrengthening the management of publicsector investment; (ii) improving theincentive framework, particularly the traderegime and investment incentives; and(iii) strengthening the Government's socialsector policies and programs, includingameliorating the social impact of theadjustment and maintaining an adequatesocial safety net. The loan would bedisbursed against general imports excludingspecific items.

Estimated Disbursements: The proceeds of the loan would be disbursedin two tranches: the first of US$20million equivalent upon loan effectiveness,and the second of US$20 million equivalentfollowing a satisfactory review of programimplementation. The review would beconducted about 10 months aftereffectiveness.

(ii)

Risk8s The principal ritks affecting the successof the program are: (i) the social andpolitical pressures stemming from the sharpadjustment to date whichb if intensified,could derail the program -- while theGovernment is sensitive to the likelyadverse social impact in the short run, ithas demonstrated a strong commitment to theadjustment program, and is taking steps toameliorate the social impact to the extentpossible; (ii) a lack of implementationcapacity and weak investment response tothe improved incentive environment coulddelay the projected supply response --sdpport through the proposed TechnicalAssistance Loan would strengthenimplementation capacity; and(iii) unexpected adverse internationalprice developments could intensify the needfor a more rapid adjustment, creatingfurther social pressures -- current Bankprojections of international prices forTrinidad and Tobago's exports do notenvisage abrupt adverse changes.

MAP: IBRD No. 20573R

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTREPORT AND RECOMMENDATION OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORS ON APROPOSED STRUCTURAL ADJUSTMENT LOAN TO

REPUBLIC OF TRINIDAD AND TOBAGO

1. I submit the following report and recommendation on a proposedloan in an amount of US$40 million equivalent to the Republic of Trinidadand Tobago in support of the Government's structural adjustment program.The loan would have a term of 15 years including five years of grace, withinterest at the standard variable rate. The Export-Import Bank of Japan isconsidering cofinancing the operation. It is expected to provide US$40million equivalent for the program.

2. The proposed SAL will be complemented by the proposed TechnicalAssistance Loan submitted for your approval under separate cover. Togetherthey would be the first Bank operations in Trinidad and Tobago (T&T) since1979. The country was graduated from Bank lending in February 1984. Insubsequent years, the Bank provided non-reimbursable technical assistance.Largely as a result of falling petroleum output and prices, Bankprojections showed per capita GNP declining below the graduation thresholdby FY90. In response to a request by the Government, the Bank decided toresume lending in the context of an appropriate macroeconomic framework,with a view to supporting structural adjustment until such time as thecountry's per capita income and access to capital markets improve (ref.Board Memorandum "Possible Resumption of Bank Lending to Trinidad andTobago' of August 5, 1988, SECM88-924).

PART I - THE ECONOMY

3. An economic report entitled "Country Economic Report, Trinidad andTobago" (Report No. 7139-TR, dated April 18, 1988) was distributed to theExecutive Directors on May 3, 1988. Annex I contains the basic countrydata.

Background

4. The structure and performance of T&T's economy have been linkedclosely to the fortunes of oil. Even prior to 1973, the island economy wasdominated by the oil sector, which represented one-fifth of domestic valueadded. The economic policies pursued favored an inward-looking type ofdevelopment. Manufacturing, other than oil refining, was heavily dependenton protection and was relatively uncompetitive. Production and consumptionsubsidies that fueled domestic demand also supported inefficient productionstructures in the non-oil sectors. These policies increased the country'sdependence on and allocation of resources to the oil sector, andsignificantly diminished the potential for diversification. On thestrength of its petroleum resources, however, the country was able toattain a high standard of living, including relatively high levels andquality of educational and social services. GNP per capita reachedUS$6,920 in 1982, ranking T&T high among the upper middle income eevelopingcountries. Since then, however, as oil prices declined, GNP per capitadropped to US$3,350 in 1988.

5. T&T has enjoyed a stable Government ever since the transition fromcolonial rule. In 1986, a democratically elected Government took office,

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facing an economy with recurring negative growth, burgeoning unemploymentand significant distortions.

Economic Performance

6. Table 1 below presents a quantitative picture of economicdevelopments since 1970 and related external and domestic factors. It alsopresents the thrust of the adjustment program discussed in Parts II-V. In1970-73, real GDP growth averaged 3Z annually, underpinned by petroleumexports. Expansionary fiscal and monetary policies generated balance ofpayments current account deficits approximating 10? of GDP. However,sizeable net capital inflows, primarily on private account, financed thesedeficits. During 1974-82, the two surges in oil prices enabled Trinidadand Tobago to reap impressive gains in incomes, employment, public revenuesand foreign exchange. Real GDP grew at an annual average rate of over 62,and the increase in oil earnings produced large fiscal and balance ofpayments surpluses. Central government savings averaged 18? of GDP andgross foreign exchange reserves averaged ten months of rapidly increasingimports.

7. Fiscal and monetary policies during these years accommodated theoil based expansion. After an initial cautious saving of surplus earningsabroad, the Government embarked upon a rapid increase of capitalexpenditures in heavy industry and infrastructure, at times with inadequateassessment of financial and economic returns. In response to a deliberatepolicy of spending and distributing what appeared to be, at the time,continuing and long-lasting gains, nearly half the windfall wound up inconsumption which, encouraged by subsidies, grew at a faster rate than GDPthroughout the decade. The Government's investment and redistributivepolicies resulted in an overextended public sector. State enterprises andother governmental agencies mushroomed and government subsidies and currenttransfers grew from 3Z of GDP in 1977 to 16Z of GDP by 1983 (US$110 millionto US$1285 million). The monetary base expanded at a 25? annual rate, 30?faster than in the pre-boom years, and inflation reached 17?. Theconsequent real appreciation of the currency, coupled with a complex arrayof subsidies, price controls, import protection and the expansion of thepublic sector undermined agriculture, manufacturing and tourism. As aresult, the share of the non-oil tradable sectors relative to non-oil GDPdeclined, from 21Z in 1970 to 16? in 1980.

8. The economic setback began in 1983 when falling oil pricescompounded a domestic trend of falling petroleum output from depleted oilwells. she petroleum sector's output shrank sharply. Since 40? ofgovernment revenues derived from oil, and since public sector spendingunderpinned growth in the non-oil economy, these developments triggered adramatic decline in economic performance. Real GDP fell annually for thenext six years, culminating in a decline of about 7% in 1987 and a further4.6? in 1988. The oil price decline, coupled with the evolution ofinternational prices and exchange rates, led to a severe deterioration inthe country's terms of trade of about 40Z between 1980 and 1987. Theadverse terms of trade effect was equivalent to annual losses of 3-4Z ofGDP in 1981 and 1982; 7-8? in 1983-84-85, 0l in 1986, and 13Z in 1987.

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TABLE It TRINIDAD AND TOA60 ECONOMIC PERFORMANCE AND ADJUSTMENT, 1970-97

Early 70's toearly so's Early to aid-Bos Economic Program

Oil Led Oil Setback Policy Further Beginning Deepening Full AdjusteentGrowth Boom Concern Setback Adjustment Adjustment -------------------

197(-73 1974-82 1983-85 1985 1996 1907-68 1989-90 1991-93 19N4-9?

1. Performance Indicators 1/

Average Growth Rates

GDP. constant prices 3.1 6.5 -5.2 -4.4 -3.3 -6.0 -1.0 2.3 3.7Exports, G&NFS (constant TT$) 4.6 0.8 -2.0 -1.3 0.8 1.1 4.0 2.4 3.9

Petroleus 150.2 2.9 1.8 11.2 -5.5 -3.6 0.1 -0.4 4.5Petroleue Products -20.1 -3.8 2.2 -1.2 -14.8 0.4 -1.7 -0.4 2.3Petrochemicals 2/ -20,3 15.6 38.2 26.6 5.3 7.4 4.6 7.9 3.9Oanufactured Goods 3/ -0.2 2.5 -3.5 -13.1 35.8 14.4 7.9 8.0 10.0

lports G&NFS (constant T111 6.u 14.1 -13.2 -13.3 -3.2 -20.6 2.3 2.1 5.1Retail Pnrce Index (annual average) 9.4 14.4 12.6 7.7 7.7 9.3 4.9 12/ 4.4 4.4

Average Rate (percent?

Current Account/6DP -9.9 4.5 -6.7 -2.5 -15.8 -5.3 -4.0 -2.6 1.0Year-end Gross Reserves (USSeln.) 4/5/ 56.2 1721.3 1420.0 1011.0 395.0 127.2 231.6 291.4 500.6months of Imports, 6&NFS 1.2 10.1 5.8 4.5 2.0 1.1 1.4 1.5 2.0Debt Service Ratio 3.5 3.7 9.8 9.5 17.7 25.2 22.4 21.7 17.6Total Investment/GDP 29.3 27.4 21.9 17.4 23.1 18.7 20.4 20.7 22.4Gross Domestic Savings/SDP 61 27.2 37.3 20.8 21.1 15.7 23.2 30.0 30.7 31.9

1. External Factors

Current Petroleum Price Growth 11 25.9 24.7 -4.6 -2.9 -38.0 -4.6 7.5 6.4 7.7Real Pntroleum Prices Growth 14.5 14.2 -3.5 -4.0 -40.6 -7.2 5.2 1.8 3.2Net Capital Inflow tUSS million) 108.2 225.4 127.5 -146.5 -50.7 44.0 182.0 206.6 9.8OECD Growth Rate 4.4 1.1 3.4 3.3 2.8 3.8 3.6 2.9 3.0

llI.Dosestic Policy

Real Exchange Rate Growth (1976 100) 7/ -0.7 1.1 11.6 4.6 -24.2 -10.1 9/ 9/ 9/oney base growth 18.9 24.9 5.1 2.4 -2.7 -3.3 5.0 6.2 9.4

Total Central Govt Expenditure Growth 15.3 37.0 -7.7 -8.4 -12.6 -5.1 1.1 6.3 8.0Central Government *

Overall deficit/SDP -4.1 4.2 -8.0 -4.7 -7.2 -6.2 -3.0 -1.5 -0.3Current Account deficit/GOP 1.3 18.0 2.9 3.4 -1.0 -2.8 0.6 3.0 5.2

Overall Public Sect Deficit/GDP -3.4 4.6 -9.0 -5.3 -11.5 -7.5 -3.2 -2.2 2.3Total Imports/GOP 36.3 30.6 25.7 29.6 41.8 32.5 32.7 32.6 33.4Petrolues Sector/GDP 6/ 22.0 38.1 25.9 26.6 22.0 23.7 25.3 24.8 25.0Manufacturing Sector/6DP 61 8.7 6.5 6.3 6.7 8.8 8.5 8.7 9.7 11.2Agriculture Sector/GDP 6/ 5.9 5.9 3.5 3.9 4.0 4.7 5.2 5.2 5.0Services Sector/GDP 6/ 56.1 49.0 64.3 62.8 65.2 63.1 60.8 60.3 59.8

I/ Growth rates calculated using least-square sethodology.2/ Includes ammonia, urea, and methanol.3/ Includes paper products, textiles, metal mfg. furniture, clothing, footware, eachinery, miscellaneous chemicals

and other minor manufacturing.41 1971-735/ Gross foreign exchange reserves peaked at USS 3.1 Billion in 1982. In 1988 they dropped to 119 54 Million, reaching their

lovest level since 1974.6/ 1997-93 at constant price.7/ 1968-98 end of period.8/ Negative implies depreciation of echange rate; positive implies appreciation of exchange rate9/ Assumes maintenance of the prevailing real exchange rate following the 15.3% 1998 devaluation.10/ For projected years, overall deficit is equivalent to the total net external financing to the public sector.11/ Average prices for quality Trinidad oil are projected at *16.1, $17.1, $18.2, and *19.3 for 1990-93 respectively.

: comodity price projections thereafter.12/ 1989-97: IURD MaNfacturing Unit Value.

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9. The Government initially failed to respond adequately to themounting pressures for adjustment. Instead of improving the economy'scompetitiveness and promoting the production of non-oil tradeables, itbecame increasingly protectionist. Its first line of attack was tointroduce restrictive import licensing and exchange controls in 1983.These sharply curtailed imports, but with the drop in export earnings, thebalance of payments current account went into deficit. The controls alsolimited the availability of imported inputs and raw materials and closedoff the country's market from its regional partners, further shieldingdomestic activity from foreign competition.

10. Fiscal expansion continued in the first years of the economicsetback as the Government attempted to maintain living standards bystimulating aggregate demand. The public sector registered overalldeficits averaging 9? of GDP in 1983-85 compared with surpluses of about 52during 1974-82. The deficits were increasingly financed by recourse to theCentral Bank. By 1986, following the collapse of oil prices, all othermacroeconomic variables reflected the deterioration. Unemployment whichhad been 10? of the labor force in 1982 reached 182. Government savingsturned from a surplus equivalent to 20? of GDP in 1981 to a deficitequivalent to 12, severely curtailing capital expenditures, which droppedfrom 182 of GDP in 1981 to 6Z. The external current account positionchanged from a surplus equivalent to 6Z of GDP in 1981 to a deficitequivalent to 162, despite a severe compression of imports. The country'sonce comfortable cushion of gross foreign exchange reserves was alsorapidly depleted. The prolonged and deep recession severely weakened thefinancial sector. Loan activity of the commercial banks as well as depositgrowth stagnated; and as the banks' loan recovery problems mounted, theirafter-tax profits dropped sharply. Large spreads developed between depositand lending rates as banks attempted to maintain profits, and stock marketactivity dropped.

Government Response to the Crisis

11. In response to the steady drain on the foreign exchange reserves,the authorities devalued the TT dollar by 33-1132 in December 1985.However, this action was not accompanied by complementary monetary andfiscal policies, and the predevaluation exchange rate was retained foressential goods. The rate was only unified at the beginning of 1987 when anew Government took office.

12. The new Government also began to address the severe fiscalimbalances. On the revenue side, taxes were increased, and on theexpenditure side, Government suspended cost of living allowances and annualmerit increases for public servants, and reduced production and consumptionsubsidies as well as transfer payments to the state enterprises. By 1988,government subsidies and current transfers had been reduced to 122 of GDP.The Government also launched in 1987 a number of thorough-going reviews ofthe operations of the state enterprises aimed at raising their efficiencyand reducing their dependence on the budget. The work of the Commissionfor the Restructuring of the Public Enterprises (Rampersad Committee)resulted in proposals for wide-ranging reforms. In light of the continueddeterioration of the foreign reserves position, in August 1988, the T&Tdollar was devalued by 15.32 which, together with the depreciation of theUS dollar, contributed to a 6? improvement in the real exchange ratecompared to its 1976 level. The Government also secured financialarrangements with the IMF (see Part III) under which it adopted astabilization program and which enabled it to enter into negotiations on

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debt rescheduling witui the London and Paris Clubs. The reschedulingarrangements are nearly complete, and substantial trade Pnd exchangeliberalization has occurred under the IMF arrangements (para 30).

13. In an attempt to improve the incentive environment, the Governmentreduced the marginal tax rates for individuals, bringing the top rate from70Z to 502, and reduced the corporation tax on companies as well as the taxon interest income with a view to stimulating private savings and'nvestment. Changes were also introduced in 1988 to the petroleum taxregime, aimed at increasing the incentives for production. Finally theGovernment introduced medium-term planning within the context of its SevenYear Plan, with the stated objectives of resuming economic growth,restoring fiscal and balance of payments viability, laying the foundationsfor diversifying the economy, and ensuring that the burden of adjustment isshared equitably.

Key Adjustment Issues

14. The major adjustment issues confronting the country stem from thedominance and decline of its oil sector and from the distortions induced bythe 1974-82 policies. The evolution of the real exchange rate associatedwith the high oil export earnings rendered agriculture and manufacturinguncompetitive, and the policies adopted to support these sectors fosteredan inefficient agriculture and manufacturing. The current real exchangerate offers an opportunity for these sectors to improve their performanceand become more export oriented. Given their small size within theeconomy, however, it will take some time for them to make a major impact ongrowth.

15. The 1974-82 policies created distortions more pervasive thanindicated by their impact on agriculture and manufacturing. A large andinefficient public sector was created to redistribute the oil gains. Theaccompanying strategy of large subsidies to consumers and state enterprisesfostered a pattern of high consumption; the private sector was notencouraged to save and invest; and the public investments resulted, in someinstances, in wasted resources. Equally important, uneconomic pricing ofpublic services and private goods resulted in misallocation of economicresources.

16. The Government needs to reLsify these distortions by measuresaimed at shrinking the public sector, cutting subsidies and transfers andintroducing efficiency criteria into the selection of public sectorprojects. Such meas..res, focussed on switching expenditure fromconsumption to investment and introducing economic pricing, would stimulategrowth through a more efficient allocation of resources. Simultaneously,the country's development strategy must become explicitly export-orientedand conducive to foreign investment to bypess the narrow limits to growthimposed by the foreign exchange constraint and the limited domestic market.Establishing appropriate incentives for exports and for investment istherefore a priority to stimulate a resumption of grnwth. At the sametime, the Government needs to ensure that the petroleum resources, whichwill remain the principal export earner over the medium-term, areeffectively exploited.

PART II - TUE GOVERNENT'S MEDIUM-TERM PROGRAM

17. The Government has formulated a medium-term program which is partof a longer term planning framework for restructuring the economy. Arealistic exchange rate policy for maintaining export competitiveness andimproved fiscal management represent the heart of the Government's strategyto correct external and internal imbalances and set the stage for renewedgrowth. Ongoing policies in these areas are to be complemented withimproved incentives for private sector investment. Trade policy is to playa key role in changing the direction of industrial development from inward-looking to export oriented. The Government believes that the socialdimensions of the adjustment would have to be addressed in parallel inorder to alleviate the short-term impact of the program on the poor andvulnerable groups and to maintain social cohesion if adjustment is to besustained. The background and focus of the program's macroeconomic andsectoral policies are presented in greater detail in Annex IV.

18. Measures already taken in the last two years evidence theGovernment's resolve to establish a viable macroeconomic framework andcarry out an adjustment program. To ensure attainment of the stabilizationobjectives, the fiscal and exchange rate measures described in paras 12 and13 above were followed in 1989 by a 10 cut in public service salaries andadoption of an employment reduction program, the Voluntary Termination ofEmployment Plan (VTEP), through which the Government expects to shed about15S of its staff over three years. The authorities have relaxed furtherthe foreign exchange allocation system with a view to eliminating it in1990, and have indicated their intention to pursue a flexible exchange ratepolicy in order to maintain export competitiveness (see Annex VII, paras 2and 3). A critical element of the adjustment strategy is reducing thepublic sector's command of the economy's zesources. In addition to theexpenditure reduction measures described, the Government has begun thisprocess by rationalizing the state enterprise sector, closing down someenterprises, divesting others and subjecting those that remain to strictfinancial discipline and acc=untability thus reorienting them towards amore commercial outlook. W.,.hin the Central Administration also, steps arebeing taken to streamline and strengthen the administrative processes,including adopting a more rigorous approach to formulating and implemetitingthe public sector investment program (PSIP).

19. The weakening of the petroleum sector has placed a premium endiversifying the export base. The Government recognizes that the inward-looking trade policies that served in the 1970s when the country did notface an effective external constraint to its development have proveninappropriate in the economic environment of the 1980s. If it is to growfaster, the economy must achieve a closer integration into the worldeconomy on a more diversified basis. The program includes a phaseddismantling of import restrictions and a medium-term tariff reform to raisethe efficiency of domestic production and eliminate the anti-export bias inthe trade regime. The authorities will also strengthen export incentives,with emphasis on enabling exporters to obtain their imported inputs and rawmaterials at world prices. The Government is taking further steps toattract private investment generally, and into the non-oil sectors inparticular.

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20. While the Government will be reducing its role in the provision ofgoods and services, it is taking steps to enhance the business andinvestment environment for the private sector. A comprehensive tax reformis being introduced in two phases during 1989 and 1990. It will simplifythe tax system for both direct and indirect taxes, reduce marginal taxrates and provide more favorable treatment for dividends, broaden the taxbase by eliminating certain allowances, address equity concerns byreplacing some deductions with tax credits and introduce value addedtaxation. Most price controls have been dismantled, the financial marketsare being liberalized (see Annex IV, para 8), and the regulatory frameworkfor investment attraction is under review. The Government has created aone-stop shop for prospective investors and will revise the restrictivelicensing requirements that currently apply to foreigners wishing to investin T&T. The restrictive Aliens' (Landholding) Act is to be revised withrespect to investment in companies with a view to facilitating foreigninvestment.

21. The Government has also launched a major program of offering newland and marine blocks for oil exploration by private investors! and itintends to rationalize the institutional structure of the petroleum sectorby consolidating and reorganizing the eight state-owned enterprises andseveral government ministries and other agencies involved. Together withthe incentives mentioned above, these measures are expected to raise outputand exports and increase the efficiency of the industry. The strategy forthe heavy industry sector, which includes petrochemicals and steel, is toenhance efficiency through programs for financial restructuring andmanagement strengthening, consistent with the overall state enterprisereform program, and to reduce Government's involvement.

22. In the manufacturing and agriculture sectors, the medium-termstrategy depends largely on fostering an appropriate incentive framework.The devaluations and generally declining activity levels over recent yearshave sharply reduced real and nominal wages, increasing the flow of laborto agriculture as well as the competitiveness and viability of formerlyunattractive activities. In addressing the ills of the uneconomic sugarindustry, the Government has designed a plan for phasing down over fiveyears the production of sugar by the grossly inefficient sugar company,CARONI. Highlights of the plan include withdrawing all sugar caneproduction from CARONI (leaving it to small farmers) and allocatingportions of CARONI lands to farmers. This program, however, is fraughtwith delicate socio-ethnic issues which permeate the very fabric of thispoly-ethnic society, and the Government is proceeding with great caution.

23. In the search for alternative sources of foreign exchange earningsand employment, the tourism sector is now attracting greater officialattention than previously. The Government has invested in high returninfrastructure projects for runway extension and a deepwater harbor inTobago, the tourist island, and has begun to liberalize airline access toTobago. Aruba Airlines is now permitted to make scheduled flights directlyinto Tobago.

24. The prolonged economic decline and the adjustment impact haveintensified focus on raising the efficiency of delivery of social servicesand on providing adequately for the needs of the underprivileged and othervulnerable groups. In some subsectors this would imply a shift away fromexpansion of physical facilities in favor of expenditures for maintenance,better targeting and carefully structured and effective programs of costrecovery. Accordingly, the Government is considering converting some of

the facilities and resources at the large Mount Hope Medical Complex forthe provision of primary health care. In education, the Government isinterested in extending the vocational training opportunities for schoolleavers, as the existing levels of such training are insufficient to equipthe majority of school leavers for the workplace. In the area of housing,the shortage of dwellings and the growing problem of squatting are majorconcerns.

25. The social sectors exhibit a number of problems that are yet to beaddressed, including the large scale emigration of medical personnel,especially nurses; the direction and options for the education system; andconcerning housing, policy issues on rent collection and land use. Majorinstitutional issues relating to the social sectors as a whole also need tobe addressed. The social programs of past years have resulted in a socialpolicy framework characterized by lack of internal consistency, inadequatedesign and inefficient monitoring systems, and by questionable financialviability.

26. The issue of the environmen;t receives critical consideration inthe Government's macroeconomic planning framework (e.g. in energy,agriculture and tourism). A draft report of the United Nations EnvironmentProgram recommends the enactment of environmental legislation supported byadequate enforcement procedures, institutional strengthening, and publicinformation and constituency building. The Government announced inFebruary 1989 the creation of a Ministry for the Environment, and isdeveloping an approach with the Inter-American Development Bank (IDB) onthe legislative, institutional and training aspects. Solid waste disposaland reforestation are among the Ministry's first concerns.

27. T&T's return to sustained growth, however, is likely to begradual, and will have to be mostly generated by external demand andpropelled by foreign investment. Without a sharp increase in oil prices,which current Bank projections do not anticipate, growth will initiallyhave to depend mostly on the ability to raise production of petroleum andits derivatives. There is also scope for expanding the petrochemical base,but both oil and petrochemical expansion require long gestation periods.The prospects for improved performance of nontraditional exports are good.The importance of a competitive environment for these is demonstrated bythe strong growth in exports of nontraditional manufacturing andagriculture following the December 1985 devaluation. In sum, even with animproved policy and incentive environment, lead time is required forrestoring adequate and sustained growth.

PART III - THE STABILIZATION PROGRAM WITH THE IMF

The Stabilization Program

28. T&T sought IMF assistance for the first time in 1988. TheGovernment requested both an arrangement under the Compensatory FinancingFacility (CFF) and a Standby arrangement. The IMF Board approved the CFFin November, 1988 in an amount of SDR 85 million, one half of quota; andapproved a 14-month Standby in January 1989 in an amount of SDR 99 million,another 50? of quota on an annual basis. The IMF also approved in January1989 access to contingency financing under its Compensatory and ContingencyFinancing Facility (CCFF) up to maximum of SDR 42.5 million (252 of quota)should adverse external contingencies occur during the period of theStandby arrangement.

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29. The economic program for 1989 addresses the fiscal and balance ofpayments framework for adjustment and establishes the parameters to beassociated with a strengthened macroeconomic performance. Following a mid-term review in May 1989, the program was revised in line with recent(mostly favorable) fiscal and balance of payments developments. Theessential policy components of the revised Standby are:

(a) in the area of the public finances, the overall publicsector deficit is to decline to 5.5? of GDP (from 6.6? in1988), and the central government deficit to 3.5Z of GDP(from 6.7? in 1988). Introduction in 1989 of the firstphase of the tax reform (covering the income tax regime)and the VTEP are also part of the program;

(b) in the area of monetary policy - to improve the efficiencyof commercial banking and the structure of interest rates,the secondary reserve requirement (usually satisfied byTreasury bill holdings) is to be phased out and the currentrelative cost of commercial bank borrowing from the CentralBank, as a minimum, is to be maintained. Further, thecommercial banks are required to reduce their outstandingadvances from the Central Bank; financial system credit tothe private sector is to increase by 1.52 (compared to-2.9? in 1988), and the state enterprises whose debt isbeing rescheduled are required to deposit the localcurrency equivalent of the scheduled amounts into a blockedaccount at the Central Bank;

(c) in the area of incomes and prices policies, public sectorwages are to continue to be frozen, and in some casesreduced; the Central Government wage bill in 1989 is todecline as a result of the suspension of acting allowancesand of employment reduction accompanying the VTEP; and thescope of price controls was reduced as of the end of 1988;and

(d) in the area of external sector policies, the negative listof imports (i.e., subject to specific licenses) is to bereduced in three stages of US$50 million each: before theend of 1988, before mid-1989, and before the end of 1989.This corresponds to about 402 of negative-listed items interms of 1986 import value. Exchange restrictions onimport payments are to be substantially liberalized by theend of the third quarter of 1989 with a view to theirelimination in 1990; and the exchange rate is to be managedflexibly in order to attain the program objectives and thetarget for net official international reserves.

30. In addition, the program is to be monitored by quarterly ceilingsand targets set for: (i) the overall government deficit; (ii) netfinancial system cred-t to the nonfinancial public sector; (iii) the netdomestic assets of the Central Bank; (iv) net international reserves of theCentral Bank; and (v) disbursements of medium-term external credits; and(vi) stock of short-term external debt. At the IMF mid-term review, theStandby program was on track. The performance targets for the firstquarter of 1989 had been met, with the exception of the ceiling ondisbursements of external borrowings with maturity of one to twelve years,

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which was exceeded because of accelerated implementation of a large gasproject. A waiver was granted. Since then, the Government has completedthe program for trade and exchange liberalization referred to in para 29'd)above (see para 56 and Annex IV, para 3). A table summarizing therespective areas of coverage of the IHF stabilization program and theproposed SAL is provided at Annex V. The Government has indicated itsintention to enter into another standby with the IMF when the currentarrangement expires in February 1990.

Collaboration with the IDF

31. The proposed SAL has been developed in close coordination with theIHF. The Fund's mid-term review mission overlapped with the Bank'sappraisal mission; and through discussions and the exchange of information,Bank and Fund staff have collaborated in the formulation of theirrespective programs to ensure that the two are fully consistent andcomplementary. The liberalization of the country's exchange and importrestrictions is critical for both programs. The two programs have beendesigned so as to address consecutive phases of the import liberalizationprogram.

PART IV - THE REFORM PROGM UNDER THE PROPOSED SAL

32. The proposed SAL would address selected areas of policy that arekey to growth. They fall into three broad categories, (a) public sectorresource mobilization and allocation: state enterprise restructuring anddivestiture, efficiency improvements for public utilities, public sectorprogramming; (b) the incentive framework: the trade regime and investmentincentives; and (c) the social impact of the adjustment. Prior to secondtranche release, the Bank would make an assessment of the implementation ofthe medium-term economic program.

33. The program for public sector reform envisaged under (a) is aimedat raising the efficiency of public sector management, and carriesconsiderable weight in the adjustment process. The present expanse of thepublic sector offers plenty of scope for reform, even after the fiscalimprovements registered since 1984. The program of trade liberalizationproposed in (b) is aimed at removing the allocative inefficienciesengendered under the prevailing restrictive trade regime, and permittinggains in living standards. Consistent with this strategy, a complementarypolicy of exchange rate flexibility has already been agreed under the IMFStandby arrangement. Consideration of the social dimensions of theadjustment in (c) will aim to provide the social underpinnings for thesustainability of the adjustment process. A related issue is the extent ofpoverty in T&T. In the absence of recent data, the perception exists thatpoverty is 'acreasing, though it may not have reached crisis proportions.It could, undoubtedly, be exacerbated by the adjustment process. Theprogram will make provision to assess the dimensions of poverty and toincorporate measures to alleviate the impact on the poor and vulnerablegroups.

A. PUBLIC SECTOR RESOURCE MOBILIZATION AND ALLOCATION

Background to the Public Sector

34. The public sector includes, in addition to the CentralAdministration, 62 commercial state enterprises (SOEs) with full, majorityor minority government participation; 62 statutory boards and similar

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bodies, covering a wide range of organizations including local governmentauthorities, marketing boards, social, educational and developmentauthorities; and five major public utilities. The sector is characterizedby substantial overemployment (it accounted for about one-third of theemployed labor force in 1987), operating inefficiencies (losses by SOEsamounted to US$236 million in 1987, after taxes). and overall limitedinstitutional capabilities. The latter is reflected most notably in theabsence of effective coordination among agencies with relatedresponsibilities and in the weaknesses in PSIP formulation and management.Reflecting the radically changed economic and financial circumstances,total transfers and net lending to all public bodies from the CentralGovernment have fallen sharply, from nearly 142 of GDP in 1982 to about 52in 1988. Current transfers are now largely concentrated in the water andtransportation utilities, and in CARONI.

35. The Government has taken significant steps in restructuring thestate enterprises and the public sector generally. In particular, itappointed a number of committees to examine the operations of a wide rangeof enterprises with a view to recommending restructuring measures and otherefficiency improvements. As a result, SOEs have faced a hard budgetconstraint, managerial improvements have taken place, competition has beenemphasized, cost reduction measures have been implemented, some firms havebeen closed, and others have been or are about to be privatized.

36. Within the Central Administration, the reform program includesboth expenditure control, including reduction in civil service employment,and administrative reform. The program aims, among other things, to tailorthe overall staffing structures to institutional objectives, and introducea program budgeting type framework to create a more responsive, accountableand financially transparent public administration. The restructuringmeasures in the public sector are expected to produce three kinds ofeffects: (a) the operating efficiency of individual SOEs and the CentralAdministration will have been strengthened; (b) budgetary support to theSOEs will have declined further, by about 12 of GDP in each of the years1989 and 1990; and (c) Goverment involvement in the management and controlof the state enterprise sector will have decreased.

37. The efforts underway --implementation of restructuring anddivestment plans-- constitute a first phase of public enterprise reform,while a second phase would encompass areas requiring further preparation,including sector-wide issues (the legal and institutional framework;pricing, wage and employment policies; the oversight structure) as well asenterprise-specific reforms such as those for Caroni and the utilities,particularly public transportation. The proposed SAL aims to support thefirst phase. It will also sunport the initiation of reforms in the publicutilities, starting with water and power, and strengthening of the PSIPprocess. The proposed TAL will, among other things, provide assistancerelated to a social expenditure review and adjustment to staff reduction.The next phase of public enterprise reform (including public utilities)would be supported through a possible follow-on Bank loan for PublicEnterprise Adjustment and Private Sector Development (see Part VII). TheTAL will provide assistance for preparation of such further reformprograms.

State Enterprises

38. The SOEs have been classified into three groups: those to remainin the public sector because of their strategic national importance(petroleum, petrochemicals); those to be partially or fully divested,

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either immediately or over a period of time because of their financialburden, need for fresh capital, or potential private sector capacity andinterest; and those to be disbanded because they were a financial drain andhad no prospect of viability.

39. Of the 45 wholly or majority owned SOEs, 21 are to remain in thepublic sector. For most of these, restructuring plans have been formulatedand significant actions taken to strengthen management and increaseoperating efficiency. Of six companies slated for disbandment, four havealready been closed and 1800 employees laid off--National HospitalManagement Company (NHMC); School Nutrition Company (SNC), NationalSecondary Roads (NSR), and the Meat Processors Company. They have not yetbeen legally liquidated, and their assets are yet to be fully disposed of.Twelve companies have been recommended for divestment, either wholly or inpart; and most of the 16 minority-owned enterprises and the one equalpartnership are also to be divested. No decision has yet been taken on thedisposition of another six companies, one of which is currently underreview. They involve relatively small amounts of Government equity.Completion of the entire divestment process will extend beyond the timeframe of this operation.

40. Significant divestment actions have already taken place in fiveSOEs. The Government has completed the divestment of 252 of its 512shareholding in the National Commercial Bank (NCB) through twoshareofferings. It has also reduced its shareholding in the wholly ownedTrinidad Cement Limited (TCL) by 152 and intends to reduce it further; andwith the assistance of the IFC it is in the process of reducing its sharein an expanded equity base in the Development Finance Company (DFC) from952 to 43Z. Negotiations for a joint venture arrangement for the whollyowned Trinidad and Tobago Telephone Company (TELCO), which would reducegovernment shareholding to 512, are well advanced; and a possible merger ofTELCO with the majority owned (512) external communications company,TEXTEL, is under consideration. The iron and steel company (ISCOTT) hasbeen leased. Preparations for divestment of the Crown Reef Hotel and theTrinidad and Tobago Printing and Packaging Limited (TTPP) are at an earlystage. The general strategy has been to restructure the SOEs prior todivestment so as to increase their attractiveness to potential investors.Management has been, or is being, strengthened and employment reductionsare taking place. The financial restructuring of five SOEs prior todivestment resulted in the conversion of a total of TT$928 million of debtto equity.

41. Effective implementation of the restructuring/divestment plansrequires that some central mechanism capable of providing adv-ice, supportand momentum be established. Legal issues have to be clarified, necessaryaccounting and financial expertise must be mobilized, coordination withministries and other involved agencies must be maintained, and theimplementation status of action plans must be closely monitored. To datethese functions have been carried out by a very small, but high calibreunit associated with the Rampersad Committee. The Committee's mandate,however, will expire in the next few months. The gap should be filled by anew unit with similar functions (the SOE Unit) to be located within theMinistry of Finance, the shareholder of the SOEs. The SOE Unit would bedesigned to facilitate the implementation of the restructuring anddivestment actions supported by the proposed SAL.

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42. Action Program. The Government has prepared time-phased actionplans to divest partially or fully TCL, TELCO, the Crown Reef Hotel, andTTPP, and to restructure the Solid Waste Management Company. TheGovernment has also established a small, high calibre SOE unit in theMinistry of Finance to facilitate implementation of the SOE action plans.Prior to the second tranche release, the Government would complete theliquidation of NHMC, SNC and NSR. In addition, the Government wouldprepare for divestment and bring to the market at least three enterprises.

Public Utilities

43. Though the utilities' share of total transfers and net lending hasdeclined from US$448 million in 1982 (5.6Z of GDP) to US$66 million in 1988(1.6Z of GDP), none of them is characterized by strong management andfinancial discipline. The Trinidad and Tobago Electricity Commission(T&TEC) and the Water and Sewerage Authority (WASA) exhibit majorshortcomings. Each has incurred a net loss each year since 1975, requiringsubstantial government financing to remain solvent. T&TEC's losses havereached a peak in 1989, and as Government contributions have dried up since1988, the company has resorted to short-term borrowings to finance adecreasing investment program. Without increased tariffs, this situationwould continue. Major operating problems exhibited include: the ratestructure is distorted in favor of heavy users; staff salaries are highrelative to the rest of the public sector and, to a lesser extent, theprivate sector; the customer/employee ratio needs to be improved; thecompany's investment planning needs to be strengthened--T&TEC carriesconsiderable excess generating capacity; and maintenance has beenincreasingly deferred because of lack of resources.

44. WASA is in critical financial straits. Its losses over the lastthree years averaged TT$150 million (US$50 million). Operated in the pastas a subsidized social service, the utility has major operatingdeficiencies. Its large and highly paid work force accounts for about 702of operating expenses; tariff increases have been rare and the tariff baseis inadequate (based on property value, instead of being related toconsumption); and the billing and collection system is highly inefficient.Recent cuts in government transfers (from US$140 million, 1.82 of GDP in1983 to US$19.5 million, 0.5Z of GDP in 1988) have forced WASA to adoptcost reduction measures including staff reductions and improvedcollections. A complete overhaul of WASA's operations is indicated,including introduction of metering to rationalize water consumption anddiscourage waste.

45. Action Program. Agreement has been reached with the Governmentand the two utilities on the objectives of action plans to be prepared.These include: (i) financial self sufficiency, including a phasedreduction of transfers from the Central Government to WASA. and overallsound financial management as measured by targets including rate of return,net internal cash generation, debt-equity ratio, debt service coverage,receivables; (ii) administrative efficiency including appropriateaccounting, billing and collection systems; (iii) operational efficiency,as measured by targets for number of customers per employee; share ofsalaries in operating expenditures; technical losses, maintenance levels;and (iv) in the case of T&TEC, sound investment programming, based on theprinciples of least-cost expansion and financial feasibility, and soundbalance between generation/transmission and distribution. Agreement hasalso been reached that consultants to assist in formulating the actionplans would be in place by February 1990; that the Government would keep

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its account balances current and make arrangements to liquidate itsarrears; and that Government would convert its outstanding loans andadvances to T&TEC into equity. Prior to second tranche release, aconsultant report for WASA would be prepared, financed by an IDBloan/grant, with time-phased plans and proposals reflecting the agreedobjectives, including a plan for metering large consumers (including heavyindustrial users); proposals for redesigned tariff levels and structures;and a plan for achieving the following targets: working ratio less than1.05 by the end of 1991 and 0.95 by the end of 1993; receivables 6 monthsor less by the end of 1991, and 4 months or less by the end of 1993, andreduction of the number of employees per 1000 water connections from 31 toless than 21 by the end of 1991. The action plan would be adopted andmeasures implemented in accordance with the plan. Government arrears wouldhave been liquidated and its account balances made current. In the case ofT&TEC, a management and operational audit would have been carried out andan action plan reflecting the objectives mutually agreed. Measures wouldalso have been adopted, including best efforts to obtain from theautonomous Public Utilities Commission a tariff increasel in 1990, toenable T&TEC to achieve a break-even position in 1990; and T&TEC would haveadopted an investment plan in line with the action plan and achieved acustomerlemployee ratio not less than 99 (from the current 97); governmentaccount balances would have been made current, and non-government accountbalances reduced to 60 days; and Government would have converted itsoutstanding loans and advances to T&TEC into equity.

Public Sector Investment Program

46. The process for formulation, implementation and monitoring of thePSIP needs to be strengthened. The composition of the PSIP largelyreflects a stocktake of ongoing projects, some of which would probably notbe initiated if proposed now. It also includes expenditure items whichshould be classified as recurrent costs. The absence of a well-developedpipeline of technically sound and economically viable projects means thereis a tendency for the PSIP to include projects which are at the mostadvanced stage of preparation rather than necessarily those of the highestpriority. Finally, the PSIP fails to include all of the investments of thestate enterprises, although the amounts omitted are unlikely to be verysubstantial.

47. The PSIP is not supported by an integrated domestic and foreignexchange financing plan which has implications not only for financing butalso for priorities. Its foreign exchange requirements are not factoredinto the foreign exchange management system of the Central Bank. Under theexisting arrangements, therefore, only those investments with securedproject specific sources of foreign financing can be assured of adequatefunds. As to priority setting, there is no mechanism for ensuring that theinvestments of the SOEs financed by public sector borrowing actuallyreflect government priorities; nor is there any mechanism that enableschoices to be made between the investments of this kind and alternativeinvestments by the Central Government or the public utilities.

48. Institutional arrangements need to be clarified further and inter-agency coordination improved, especially among the Ministry of Planning andMobilization, the Ministry of Finance and the Central Bank. Procedures

1/ T&TEC has filed an application with the Public Utilities Commission fora rate increase of 292 over 3 years, of which 172 would apply in thefirst year.

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need to be developed to institute a pre-investment review system to ensurethat individual project proposals are linked with agreed sector strategies;and that stringent tests of economic viability and technical, financial andenvironmental feasibility are applied. A 3-year rolling core PSIP and areserve list of projects needs to be identified, and a monitoring systemintroduced.

49. Action Proaram. The Government has prepared a core PSIP for 1989,satisfactory in size, composition, sectoral balance and financing plan. Ithas also agreed: (i) that coverage of the PSIP would include theinvestments of Central Government, public utilities and all SOEs where theGovernment is the majority shareholder or is funding specific investmentprojects; (ii) to exclude recurrent expenditures (e.g. repairs andmaintenance) from the PSIP; (iii) to develop project preparation guidelines(including environmental impact assessments), project selection criteriaand project approval procedures (including the decision-making powers ofMinistries of Finance and Planning and Mobilization) so that allinvestments above an agreed financial threshold of US$1 million are subjectto full analysis and economic assessment before they are included in thePSIP; and (iv) to strengthen the system for monitoring the PSIP (bothphysical and financial progress) in order to facilitate the review ofimplementation performance on a quarterly basis. Prior to second trancherelease, agreement would be reached on: (i) the size, composition, sectoralbalance and financing plan of a rolled-over PSIP covering 1990-92, with thecore program for 1990 clearly identified; and (ii) project preparationguidelines, selection criteria and approval procedures and theinstitutional responsibilities and roles of the various agencies involvedin the PSIP process; and progress satisfactory to the Bank would beachieved in strengthening the PSIP monitoring system. Technical assistancein this respect will be financed by IDB and the proposed TAL.

B. INCBNTIV FRAMEWORK

Trade Regime

Background to the Trade Regime

50. The framework for the trade regime is the Trade Act of 1941 which,sanctioned at a time when the major concern was to avoid goods falling intoenemy hands, provides for a heavily interventionist regime. Trade policiesalso reflect the accumulation through time of policy decisions adopted toconform to the requirements of the regional integration mechanisms of theCaribbean Community (CARICOM), the regional customs union of which T&T is amember--i.e., generally inward-looking on a regional basis. Import taxes,duty exemptions, as well as administrative barriers (licensing andquantitative restriction) characterize the import regime. Exportlicensing, and a general absence of effective export incentivescharacterize the export regime. Both import and export regimes are furtherhampered by cumbersome and lengthy bureaucratic procedures.

51. The scope for introducing trade policy reforms in T&T is limitedby the country's membership in CARICOM. Trade among the 12 membercountries is, in principle, unrestricted by any import taxes, and themembers have adopted a common external tariff (CET) vis-a-vis the rest ofthe world. In practice, neither of these conditions is strictly met.Stamp duties and other taxes on imports have been permitted among themembers, and the external tariff is not common for all members, but variesamong groups of member countries according to the stage of development and

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other considerations in effect when the common market was established.Nonetheless, the existing trade arrangements are negotiated arrangements,commonly agreed. This situation formally implies that a CARICOM membercountry has surrendered the right to use tariff policy as a tool ofeconomic policy, unless it does so in unison with its regional tradingpartners. Where structural adjustment calls for tariff reform, the usualapproach is to adopt a medium term timetable to reduce average protectionlevels as well as the dispersion in tariff rates. T&T's membership inCARICOM creates a legal/institutional constraint upon the adoption of thisapproach, since tariff protection rates are jointly established in the CET.Changes in the CET can only be made in agreement with other CARICOMmembers. The most that any single member country can do in this respect,is to propose changes.

52. A practical constraint also exists in respect of import dutyexemptions, which have been used discretionally as a tool of industrialdevelopment promotion. Most industries benefit from the exemption ofimport duties on parts and raw materials. These exemptions are authorizedin the CARICOM agreement, and are embedded in the pattern of intra-re4ionalcompetition, both regarding the markets for regionally produced goods andthe destination of investments. Duty exemptions are not mandatory; rather,the Government of each CARICOM member country may or may not award them, ona case by case basis. Nevertheless, elimination of exemptions could weakenthe competitive position of T&T-based firms relative to firms producing thesame goods in other CARICOM countries, as well as T&T's attractiveness as alocation for new investments.

53. Discussions are underway among CARICOM members to restructure theCET. The aim is to rationalize it in relation to the region's currentindustrial structure and its industrialization objectives. Raw materialsand final goods are to be classified as competing and non-competing forpurposes of the tariff; and final goods are to be further grouped as towhether they are basic or non-basic. The number of tariff bands are to bereduced to 5 or 6, as against the current 17, and a range of 5 to 45% isbeing considered for most goods, compared to the present 0 to 45% for overfour fifths of all tariff positions. Duty exemptions will also come underreview. The likely impact of the proposed CET cannot be judged until theitem details of the tariff and the definition of basic and non-basic goodsare known. However, the proposed minimum of 5Z and reduction in the numberof bands, if introduced, would constitute an appropriate first step intariff reform for T&T.

54. The central objective of the proposed trade reform under theproposed SAL is to modify the structure of incentives in favor ofproduction for export. It implies moving towards the provision of neutralstatus for exporters, that is, creating an incentive environment thatgradually approaches free trade. The relevant policy areas include a two-stage rationalization of import protection, including the elimination ofimport duty exemptions; providing exporters unrestricted access toimported inputs at international prices; abandoning export licensing,except where warranted by considerations of national security and publichealth, the Government's subsidy program, and protection of the nationalheritage and international agreements; and simplifying export and importprocedures.

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Restricted Imports

55. Imports are restricted by the need to obtain a license prior tothe importation of certain goods, and by impor'. and other taxes. Importlicensing constitutes the most important source of protection. Thenegative list of imports identifies those products which can only beimported through a specific import license. Since the collapse in theinternational price of oil, the list was expanded, with a number ofproducts included for balance of payments reasons. Thus, the negative listwhich contained approximately 320 products in 1985, grew to about 430 itemsin 1988. The negative list and import licensing system amounts to a systemof informal import quotas. Formal import quotas are applied only to ahandful of products (also on the negative list), such as tires, beef andveal, pre-cure tread rubber, men's shoes, boys shoes and sports shoes.Preliminary estimates placed the import value of the negative listed itemsat US$ 400 million (in terms of 1986 import value). In terms of productionprotected by the negative list, it is estimated that products representedon the negative list accounted for 312 of total production, 402 ofagricultural production and 51X of non-oil manufacturing production (interms of 1987 output). The subsectors given the greatest protectionthrough the negative list correspond respectively to confectionaries andother food processing; footwear and leather, canvas and plastic goods;paper goods; car tires; hose; light fittings; electrical appliances; andbatteries.

56. Action Program. The first stage of the trade reform will addressthe rationalization of the system of import protection, replacingadministrative barriers by tariffs. It would include the elimination ofthe negative list based on an agreed time-phased plan. Allowance would bemade for items that need to be controlled because of internationalagreements, national security and public health reasons. An initial phaseis being implemented under the IMF Standby [para. 29(d)]. The Governmenthas eliminated under the Standby, US$150 million of items on the list (interms of 1986 import value). In terms of 1987 production, this correspondsto about 7Z of manufacturing (32 of non-oil manufacturing) productioncoverage. The Bank's conditionality applies to the remainingUS$250 million which covers about 292 of total output, 402 of agriculturaloutput and 492 of non-oil manufacturing output. The CARICOM CET rateswould be applicable to goods taken off the negative list. However, inorder to allow time for adjustment, the Government may wish to providetemporary additional protection through additional import charges. TheGovernment has agreed to phase out the negative list affecting the non-oilmanufacturing sector by the end of 1991 and shift to tariff-basedprotection. An exception to this schedule is allowed for the products ofthe state trading company (specifically, flour and animal feeds) becausethe Government uses the surplus from these activities to cross-subsidizesmall farmers. The timeframe for the state trading company would bedetermined by the results of a study which the Government has agreed tocarry out, under terms of reference agreed with the Bank, of the protectiveregime affecting the agricultural sector and the state trading company.The study would take into account the Government's objective of maximizingthe efficient use of local resources. The Government has also initiated astudy of the impact on domestic industries of removing items from thenegative list to determine which cases may warrant additional protection.It was agreed at negotiations that any temporary additional tariffprotection applied would be such that total import charges (i.e., includingstamp duties and other taxes) would not exceed 1002 of the c.i.f. price,and be reduced in successive steps to the corresponding CET by the end of

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1994. An exception would be made for (i) textiles and garments, to permita maximum of 1202 of the c.i.f. price, and (ii) for dairy products, wherethe equivalent tariff, which is to be estimated prior to second trancherelease, would apply.

57. Prior to second tranche release, the Government will reduce theremaining negative list affecting manufacture by items representing 402 ofthe production coverage involved, and agreement will be reached on a time-phased program to eliminate the rest, with the exceptions noted, by the endof 1991. In order to allow time for the Government to strengthen itscustoms procedures and introduce anti-dumping arrangements, selected items(i.e., textiles and garments, leather, shoes made of leather, and otherleather goods) which are especially susceptible to smuggling and dumpingmay be reserved for removal in this final phase. The Bank would provideassistance through the proposed TAL for improving the tariff administrationsystem, including the establishment of appropriate anti-dumpingarrangements. The study of the protective regime affecting agriculture andthe state trading company would also be completed, and the findingsdiscussed with the Bank.

Tariffs and Other Import Taxes

58. T&T's tariff schedule is the common tariff employed by the groupof four larger CARICOM countries. It contains both ad valorem and specificduty rates. Ad valorem tariff rates are generally moderate, with mostrates falling between 0-452; the maximum rate is set at 702 for fire arms,ammunition, etc. Actual duty rates over 40? apply to only 62 of importsand 18X of tariff positions. Based on 1987 imports, the intermediatetariff range (152 to 40t) applies to 39Z of the value of 1987 imports and432 of tariff positions. However, a large share of imports enter thecountry duty-free; and, of the 282 of total imports which is considereddutiable, the overall ex-post rate of duty paid amounted to 182. Localmanufacturers are granted protection via the negative list, and are alsogranted duty exemptions for their imports of parts and raw materials.

59. Other taxes are collected on imports as they go through Customs.They are: (a) the purchase tax, a tax levied mostly at ad valorem ratesranging from 202 to 852 (on selected consumption goods, plastics,construction materials, wood products, precious stones, steel products,electrical equipment, etc.); (b) a stamp duty rated at 10? for capitalgoods and 202 for other goods; and (c) the alcoholic beverage tax, leviedat specific rates. A consolidated levy of 12.5? was also introduced in 1988on all imported raw materials not otherwise subject to tax. The alcoholicbeverage tax is not a source of trade distortions since it does notdiscriminate between imported and locally produced goods. This is not thecase, however, with the purchase tax. For a group of approximately sixtyproducts (or groups of products) the purchase tax is levied at higher rateswhen goods are imported than when produced domestically. These includesome fruits and beverages, photographic and cinematographic film andequipment, garments, household goods, appliances, firearms and ammunition,and a few others. The purchase tax adds an extra 282 on average,effectively doubling the protection to these products. In the case of someindividual products, protection rates are increased by a factor of four orfive. Thus, even though the element of protection concealed in thepurchase tax may not add much to the average level of protection, itincreases the dispersion of nominal protection rates. The consolidatedlevy, if it were effective, would moderate the dispersion of the protectionrates. Numerous exemptions from the levy, however, only serve to increasedistortions.

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60. Action Program. The second stage of the trade reform will addresstariff reform over the medium term. The Government has agreed on thefollowing principles regarding the medium term tariff reforms (i) theobjective is to achieve a maximum rate of import charges (defined toinclude tariffs, stamp duties and other taxes and charges that discriminateagainst imports) equivalent to the CARICOM CET, currently 452 for mostitems (or other lower rate that may be agreed within CARICOM), and aminimum rate of import charges on parts and raw materials of the CET rate(or other higher rate that may be agreed within CARICOM); (ii) the tariffreform to be accomplished through annual adjustments in protection ratesover three to five years, ending in 1994; (iii) reduction in dispersion ofeffective protection rates; (iv) reduction of the number of tariff bands;and (v) exemptions from import duties to be kept to a minimum. Prior tosecond tranche release, the Government would conduct a study of trade andassociated policies. On the basis of the study, the Government would reachagreement with the Bank on the medium-term tariff reform program for thenon-oil manufacturing sector. (Implementation of the program would besupported through a possible follow-on Bank loan for Trade and FinancialSector Adjustment--see Part VII.)

Duty Exemptions

61. A large number of duty exemptions are granted for various reasons.For any particular import transaction, this may be because: (a) the CETsets a zero duty; (b) the goods originate in other CARICOM countries;(c) the importer benefits from discretionary incentives either under theCARICOM scheme for the Harmonization of Fiscal Incentives or as provided bythe CET to promote industries oriented to the regional market--mostindustries approved by the Industrial Development Corporation (IDC) havebeen granted duty free access to their raw materials on the latter count;or (d) the importer was the object of some other discretional award. Dutyexemptions are granted on a discretionary basis, with the result that aparticular good may be imported under several different regimes, atdifferent prices. For a large number of tariff positions, accounting for asignificant proportion of imports, the same goods enter the country underdifferent duty regimes, in some instances duty free, in other instancesdutiable. And in administering a complex system of duty exemptions, theGovernment has become the administrator of thousands of transactionsgenerating economic rents for enterprises and individuals. In 1987 thegroup of products that could be imported both duty-free and dutiableamounted to TT$3 billion, about 68S of total imports. Within this dualimports aggregate, imports which entered duty free represented 612, whileimports on which duties were paid accounted for the remaining 39%. Anindicator of the relative size of the economic rents generated by thesystem of duty exemptions is that 402 of dual-category tariff positionsreflected duty differences in excess of twenty percentage points.

62. Actiot Program. The Government has decided to refrain fromgranting duty exemptions for parts and raw materials for new industries,and has initiated a comprehensive review of duty exemptions, with a view toassessing their practical significance for TMT's competitiveness in CARICOHmarkets, and formulating an action plan for their phased removal oser threeto five years. Prior to second tranche release, a time-phased action planwould be formulated and agreed with the Bank, and measures would beimplemented in accordance with the plan.

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Restricted Exports

63, A negative list is maintained also for exports. The list containsapproximately 70 items or groups of items which may not be exported exceptunder specific license. The items include major traditional agriculturalexports suls as sugar, cocoa and coffee, other agricultural productsincluding a variety of vegetables; cereal and cereal products includingrice and wheat flour; petroleum and petroleum products; and manufacturessuch as cement and steel products, as well as items not produced in T&T,mostly manufactures. These restrictions are the result of piecemealdecision making over several decades at.d, with limited exceptions, are notconsistent with an export oriented development strategy.

64. Action Program. This action program has been implemented. TheGovernment has eliminated export licensing requirements, with limitedexceptions such as may be needed because of international agreements,protection of the national heritage, and security, the Government's subsidyprogram and public health considerations.

Import and Export Procedures

65. The complexity of export and import procedures has been singledout as a significant obstacle to an export oriented development strategy inTrinidad and Tobago. Bureaucratic and cumbersome procedures result inunpredictable delays and increase costs for importers and exporters. Astudy financed by UNCTAD identified the number of documents andbureaucratic procedures needed in connection with several operationsessential to the conduct of international trade. The study also assessedthe extent to which these procedures were unnecessary and could be reduced.It found that the total number of processing steps required for arrival anddeparture of ships, imports and exports of goods could be reduced by 44?from 81 to 45 steps. A detailed proposal for the simplification of exportand import procedures has been prepared, including draft versions of thenew forms that would be required to satisfy all parties involved andgenerate the information needed by various Government agencies.

66. Action Program. The Government has agreed to accelerate theimplementation of UNCTAD's recommendations on trade facilitation reforms,including introduction of the ASYCUDA system (Automated System for CustomsData). The Bank will provide assistance under the proposed TAL forimplementation of ASYCUDA. Prior to second tranche release, the Governmentwill have made progress, satisfactory to the Bank in implementing thereforms.

Other Export Incentives

Access to Imported Inputs at International Prices

67. No temporary admission regime for imported inputs for exportindustries exists in T&T. The Customs Act, however, establishes an in-bondmanufacturing regime in which producers of manufactures for export to thirdcountries have access to imported raw materials free of any import taxes.In principle, the system calls for the deposit of imported raw materials ina designated warehouse under the direct control of Customs. Although thewarehouse is usually located in the plant of the in-bond manufacturingfirm, it is formally and effectively under the custody of Customs officialsand is considered extra-territorial for Customs' purposes. It must remainlocked at all times, and it only can be opened by Customs officials. These

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specifications, if strictly applied, could be found to be cumbersome, slowand costly. In practice, the Customs Department exercises a good deal ofjudgment to make the system more flexible, and waives some of therequirements to businesses in good standing. Provided Customs continuesallowing flexibility of interpretation to firms that are users of the in-bond system, this system could accomplish the same objectives as atemporary admission regime. However, only a few businesses are currentlyoperating under this scheme. The Government is also in the process ofestablishing an export processing zone; the site has been identified andlegislation is in place. However, infrastructure for the site is yet to bedeveloped Past attempts at implementing rebate schemes have met withlittle success. The Government is considering which type of scheme frrproviding exporters with simulated free trade status would be mosteffective in Trinidad and Tobago.

68. Action Program. The Government has agreed to examine, incollaboration with the private sector, alternative systems in place inother countries for providing free trade status to exporters (e.g.,temporary admission regime, in-bond manufacturing, rebate system forindirect taxes) with a view to identifying a scheme suitable for adoptionin Trinidad and Tobago. In this connection, agreement has also beenreached on the scope of a study to estimate the quantitative significanceof indirect taxes incorporated directly or indirectly, in the value ofgoods exported. Prior to second tranche release, the selected scheme wouldbe established and functioning in respect of manufacturers who areprimarily engaged in exporting; and a timetable would be developed forproviding a similar facility for other exporters.

Investment Incentives

69. The existing framework for investment promotion is weak. It hasbeen based on an obscure investment code and a highly restrictive AliensLandholding Act, and a reactive, not proactive, approach to investmentattraction. Two areas of reform would be addressed under the proposed SAL.One concerns streamlining the administration of incentives, particularly asit relates to investment application procedures. While the IndustrialDevelopment Corporation (IDC) had reduced the number of separate agencies aprospective investor must deal with directly, the number could be reducedfurther. There was need to convert the IDC or other agency into a true'one-stop-shop' with clear, broad guidelines and invested with theauthority to approve projects within those guidelines. The documentationcurrently in use is too long and detailed, requiring information of nodirect relevance to assessing the soundness of the proposed investment.The second concerns the need to attract further foreign investment. Tocreate an environment more conducive to foreign investment, high prioritymust be accorded to the revision of legislation affecting foreigninvestment to ensure that its provisions, subordinate legislation andoperating guidelines are made attractive to foreign investors.

70. Action Program. The Government has created a "one-stop-shop' inthe IDC for prospective investors, eliminating the need to negotiate withother agencies during the investment application process; and has shortenedthe investment application documentation. Prior to second tranche release,the Government will ensure the satisfactory operation of the new system anddocumentation, and will adopt satisfactory legislation or equivalentregulations for facilitating foreign investment.

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Petroleum Sector Incentives

71. In 1988, the oil tax regime was revised to provide tax incentivesfor increasing petroleum exploration and production. At the same time, aprogram of leases for onshore operations has been put in place, and theGovernment has targeted as well certain rlrine offshore areas for stepped-up investment activity. However, a further review of the existingincentive systems is needed. The present legislation for contractualarrangements is complex and somewhat outmoded, dating from 1969, and hasbeen revised, modified, and amended many times, but always in a piece-mealfashion. The taxation system is also complex, dating from 1981. and hasalso suffered many revisions and amendments, again in a fragmented manner.Both contracting and the taxation system need to be modernized andsimplified, to avoid duality of systems for contractual arrangements, andto make taxation less complicated by avoiding the coexistence of severalcomponent taxes, which involve lengthy and complex calculations, and toreduce the impact of the progressive production tax on new fields or onmarginal fields. The structure of the tax incentives introduced in 1988 isnot appropriate for promoting new exploration and production activities,since the incentives can only be applied to existing production operations.

72. Action Program. The Government has agreed to review the petroleumtaxation regime and the general regulatory framework in order to assessTMT's competitiveness for stimulating increased investments by local andforeign investors in the petroleum and related sectors. Prior to secondtranche release, consultants would be engaged and progress satisfactory tothe Bank would be achieved in carrying out the review.

Tourism Incentives

73. Tourism offers the potential for substantial job opportunitiesboth directly, and indirectly, while increasing the country's capacity toearn foreign exchange. In the short-term, measures to promote tourismdevelopment will concentrate on intensifying marketing efforts andexpanding hotel capacity. At the same time, steps are being taken toaddress the deficiencies in infrastructure that have constrained tourismdevelopment over the years, particularly, the improvement of airportfacilities in Tobago. Increasing tourist arrivals to Tobago dependscrucially on bringing visitors to the island expeditiously. Currently, nopolicy-related restrictions are in force to limit entry of domesticairlines other than the national airline, BWIA, from providing scheduledservice to Tobago.

74. Action Program. The Government has initiated bilateralnegotiations for direct scheduled flights into Tobago by internationalairlines, and has entered into a bilateral agreement with Aruba to permitscheduled flights by Aruba Airlines into Tobago. Once the extended runwayat Crown Point is designated an international airport, it is Government'sintention to initiate further bilateral negotiations, within the usualframework of reciprocal landing rights, for direct scheduled flights intoTobago by international airlines.

C. SOCIAL DIMENSIONS AND ADJUSTMENT IMPLEMENTAION

75. The structural adjustment program would impose additional strainson the country's population in the snort run. It will, therefore, need tobe managed carefully to protect the poor and most vulnerable, and beacceptable to the society at large. Unemployment is the most critical

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social issue. While the labor force has grown by almost 43,000 in 1989from 445.000 in 1982, the economy has lost 23,000 jobs over the sameperiod. Average unemployment, which stood at around 152 of the labor forcein the mid-1970s, had fallen by 1982, the end of the boom, to about 102.By the first quarter of 1988 it had increased to almost 232 (or 111,000)and was concentrated in the young with more than 402 of the unemployed inthe 15-24 age category.

76. Income has been affected significantly by the deterioratingeconomic performance of the past six years. In the private sector, wherethe bulk of job losses has occurred, real wages and salaries have declined;and in some cases (e.g. in the banking industry) nominal wages have beenreduced. In the public sector, the wages and salaries bill shrank byalmost 602 in real terms over the period 1982 to 1988 although the numberof civil servants remained relatively stable. The wages, salaries and costof living allowances of civil servants have also been frozen since 1987;and, in 1989, the Government cut wages and salaries by 102 across-the-board.

77. Standards of living have been affected by the sharp decline in thelevel of Government investment and services. Since 1982, annual investmenthas been cut by more than 902 in real terms; and recurrent expenditure bymore than 502. In real terms, the overall spending on health and educationhas been cut by about two-thirds. The welfare programs, predominantly oldage pensions, social assistance and food subsidies, and the school feedingprogram, have remained at about 52 of total recurrent expenditure,representing a halving in real terms. The same broad sectoral pattern ofexpenditures has been maintained over the period, implying mostly astrategy of cuts across-the-board rather than rigorous priority setting.The necessity to sharply reduce transfers to public utilities and toincrease tariffs exacerbates the potential for declines in livingstandards.

78, In the short term the country will face a further erosion ofincomes and increases in unemployment. The Government does not yet have inplace a clear strategy to deal with the social costs of adjustment, eventhough it has developed some programs to deal with the impact of therecession. Its past strategy for protecting the poor has been: (i) toretain about the same broad share (albeit of a declining level) ofexpenditure on social safety net type programs; and (ii) to control theprices of essential foodstuffs, school books, pharmaceuticals and someother basic items.

79. Action Program. The Government has established a Social SectorsUnit (SSU) and a Restructuring Support Unit (RSU) in the Ministry ofPlanning and Mobilization. The SSU would undertake as priority activities:(a) a review of public sector expenditures on the social sectors to improvethe targeting and effectiveness of existing social programs and theprovision of a desirable minimum level of services, especially to the poorand vulnerable groups; (b) further development of the social securitysystem; (c) formulation of a system to monitor changes in living standardson an ongoing basis to strengthen the design of programs and the targetingof subventions; and (d) the preparation of an operation for possible Bankfinancing to strengthen, inter alia, employment prospects of unemployedyouths, particularly in the context of small business development. The RSUwould assist the implementation of the adjustment measures and would carryout a number of studies necessary to support the program. Both the SSU andthe RSU are to be supported by technical assistance under the proposed TAL.

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Agreement has been reached on terms of reference for the Units and fcr themajor studies. Prior to second tranche release, the Units would be staffedand functioning, and satisfactory progress made in the studies and in thepreparation/adoption of action programs or proposals in accordance withterms of reference. Annex X outlines the program of technical assistance,and lists the studies to be carried out.

PART V - MEDIUM-TERN PROSPECTS AND FINANCING REQUIREMENTS

Growth and Balance of Payments Prospects

80. The country's road to recovery will be long, requiring difficultadjustments along the way. The growth strategy aims first at exploitingthe oil sector's potential to the fullest extent possible. However,current Bank forecasts for oil price developments strongly suggest that thesector's capacity to earn foreign exchange will not soon revert to that ofthe 1970s. A significant diversification of the country's economicstructure to reduce its dependence on petroleum will require maintenance ofthe economy's competitiveness and will take time, perhaps a minimum ofthree to five years. Nevertheless, an appropriate exchange rate policy andgreater availability of foreign exchange to finance imports of inputs, rawmaterials and capital goods, together with the launching of new public andprivate sector projects as envisaged, will stimulate the expansion ofnontraditional activities and construction,underpinning the recoveryprocess.81. Petroleum exploration and enhanced recovery projects beinginitiated currently are intended to yield higher oil output. The gestationperiod for many of these projects is, however, between two to six years.The impact on domestic output and growth would be minimal during the firstyears of the adjustment period. The proposed restructuring and upgradingof the refining sector also has a gestation period of close to three years.Until the refinery losses are eliminated by these improvements, thissubsector will not be contributing to growth.

82. Growth prospects for the gas based petrochemical industry aremoderately good over the medium term, provided that the currently highmethanol prices hold up as presently projected, and that the enterprisescarry out their internal restructuring plans approved by Cabinet.Successful implementation of a second methanol plant under constructionwould enhance these growth prospects. The projections assume that a newmethanol plant will come into operation by 1992. The latter would raisegrowth in the petrochemical subsector by 1O%-12t per year during 1992-94following a period of almost no growth in output. Taking the petroleum,refining and petrochemical subsectors together, value added is projected toincrease slowly during 1989 to 1993. Thereafter, the sectors' value addedis projected at about 4.42 a year through 1997 on the bisis of the impactof new projects currently in the pipeline.

83. Agriculture and light manufacturing have benefitted from improvedcompetitiveness as a result of the exchange rate adjustments. Agricultureis also benefitting from an increased supply of labor at reduced wagerates. Light manufacturing is projected to make further inroads intoexport markets, both regional and extra-regional and, with improvedcost/price structures facing agriculture, prospects exist for thedevelopment of more efficient and profitable activity. Exports, however,still contribute one-third of agricultural value added, mostly from sugar,and are all subject to the volatility of international commodity prices.

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Availability of sugar quotas is ar:other uncertain factor. Governmentpolicy calls for a phase-down of the sugar industry, initially to satisfyonly domestic demand, eliminating all exports. The projections assume thatsugar exports would be phased out gradually by 1994. Based on theseassumptions, the agriculture sector is projected to grow very slowly(average 1.62 during 1990-94) before averaging 32 during 1995-97. Non-petroleum manufacturing is projected to average 52 per annum through 1993and then grow at about 82 per year on average during 1994-97 in response tothe improved incentive framework.

84. On the basis of a planned expansion of hotel capacity and touristfacilities during 1989-93, tourism has the potential to more than doublethe number of hotel tourist arrivals over the next five years. Theadditional contribution to foreign exchange earnings from this group alonewould exceed US$40 million, or twice as much as the sector's earnings in1987. Its current market share and long term potential is significantlygreater than these figures indicate. Full development of a carefullyplanned tourism industry would occur over an extended time frame, given theneed to improve the tourism product.

85. On these assumptions, the decline in real GDP is projected tobottom out in 1990. An essential factor favoring this outcome is theincreased flow of foreign exchange in 1989 and 1990 from balance ofpayments support by multilateral and a very few bilateral donors whichwould ease the import constraint so critical in 1988. Thereafter, GDP isprojected to rise gradually from 1.52 in 1991 to 2.5Z in 1992 and to 32 in1993. Growth is projected to reach 42 per annum during 1995-97.

86. The composition of domestic expenditure, which fell steadily overrecent years, would have to shift strongly in favor of investment tosupport the projected economic recovery. The expected investments in theenergy sector, chiefly exploration and refining, largely private sector,but channelled through the state enterprises, would be the principalvehicle of growth in private investment, which is projected to rise to 182of GDP during the projection period, from 152 in 1988. The programmedstrengthening of public sector operating performance is projected toimprove domestic savings. The improvement would result primarily from lossreductions in the state enterprises, but also from expenditure restraint inthe Central Government. Central government savings are projected to risesteadily, reaching 3.52 of GDP by 1993 compared to -22 of GDP in 1987.With the projected strengthening of the economy in the outer years,government savings are projected to reach 6.52 of GDP by 1997. Under thisscenario, which emphasizes gains in savings and investment under theadjustment program, the recent slide in per capita consumption could behalted only by 1991. During 1991-97, average growth of about 22 per annumcould be attained.

87. The balance of payments current account would have to narrowfurther in view of the prospects of limited net foreign capital inflows,particularly on the public account. This implies that the resource balancemust improve, as the sizeable factor service deficit reflects largelyobligations to remit the returns from past investments, i.e. dividends andinterest. Export growth is projected to be moderate during 1989-93. Sincethe biggest export earner is the petroleum sector, export performance willinevitably hinge on the output and price prospects for crude oil, petroleumproducts and petrochemicals. The medium-term outlook for oil prices ismoderate with prices expected to rise gradually from recent levels ofUS$16-US$17 per barrel, reaching about US$20 on a sustained basis only by

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1993194, consistent with Bank projections. And little increase inTrinidad's oil production can be expected in the next three years.Increased oil production from new petroleum sector projects is expected toboost exports, however, to about 42 real annual growth during 1994-97.Nontraditional exports can be expected to increase strongly in the next fewyears, provided their competitiveness is supported by an appropriateexchange rate management policy. Import growth would increase only slowlyat first, while trade liberalization proceeds gradually. Later, to supportoutput growth, import growth is projected to average 52 per year in realterms in 1994-97. The current account deficit is projected to narrowgradually from 4.32 of GDP in 1988 to about 1.2Z of GDP in 1993, and togenerate small surpluses in 1994-97.

88. Restoring the economy's growth generating capacity will only bepossible if the deep structural constraints on the supply side of theeconomy are substantially reduced. The adjustment measures being put inplace are expected to re-establish a basis for diversification andresumption of growth. Positive results could be expected to occur with atime lag. Indeed, much stronger export performance could be expected fromthe mid-1990s. Only sharply rising oil prices could result in asignificantly more favorable balance of payments outlook over the nearterm.

External Capital Requirements

89. Substantially increased inflows of official capital are requiredin the critical years of the program. This arises primarily from theweight of scheduled debt repayments over the next four years. Taking intoaccount the need to build a cushion of external reserves, total grossfinancing requirements are estimated at US$4,380 million during 1989-97,approximately US$487 million a year on average. The expected reschedulingwould provide debt relief totalling US$776 million. The financing gap,after taking into account this debt relief and the projected capitalinflows from medium and long term disbursements, DMP financing and directinvestment, would amount to US$403 million (see Table 2 below). Theidentified financing sources include first tranche disbursements from theproposed loan and cofinancing from the Export/Import Bank of Japan. Theyalso assume that successive Bank operations, as proposed in Part VII, alongwith cofinancing would provide about US$81 million in each of the years1990 and 1991, and US$58 million in 1992. On the present projections,unidentified financing gaps remain in 1990 (US$70 million), 1992 (US$112million), 1993 (US$67 million) and 1994 (US$110 million). Donor supportwould be sought for these amounts under the aegis of the Caribbean Group.Conmercial sources would also have to be tapped for a portion of the neededfunds. Commercial bank financing could take place in the form of new loansor as partial rescheduling of obligations falling due.

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Table 2s IRDUDAD AND TOBAGO - FUIANCINS PftA, 1909-97(US$ I Illow.)

1989 1990 1991 1992 1993 1994 1995 1908 1997 TOTAL

A. Financing Requirements 716 692 510 571 497 465 816 818 810 4880

Current Account Deficit 148 174 172 120 62 -11 -29 -76 -187 428Total Amortization */ 448 468 820 486 417 888 809 848 383 3465Ro srve Change (non-IMF) 119 62 18 15 18 129 86 41 64 492

8. Financing Sourcee 716 622 490 459 480 846 801 804 810 8977Long-term Sources

IBRO 20 43 46 41 82 27 14 0 0 228Other Multilateral 79 126 116 168 187 121 6o 120 181 1111Bilateral 48 66 42 24 8 s 4 0 0 176Private Creditora 105 so 21 67 79 48 07 29 19 491- Total MLT Disbursements 247 279 226 299 800 201 151 149 150 2001

-Debt Rlitf 281 266 180 60 0 0 0 0 0 776- 0ther Long Term 41 0 0 0 0 0 0 0 0 41- Direct Investment 86 70 85 100 180 145 1SO 1SS 160 1031

IMF Purchass 110 18 0 0 0 0 0 0 0 128

C. Financing Gap 0 70 20 112 67 110 15 9 0 403

_/ Scheduled.

90. Total external debt outstanding and disbursed is projected toincrease from US$2.3 billion in 1988 to US$2.8 billion in 1993, and thengradually decline to US$2.3 billion in 1997. The external debt to GDPratio is projected to peak at 62? in 1989, up from 552 in 1988; it is thenprojected to decrease steadily to 33? in 1997. In relation to exports, theexternal debt would decline steadily from 1442 of exports of goods andservices in 1988 to about 64? in 1997. After an initial decline as aresult of rescheduling, the debt service ratio would rise again to 24? ofexports of goods and services in 1992 because of the expiration of theperiod of grace afforded by the rescheduling. It would later decline toabout 16? by 1997. Total interest to GDP would initially rise from 4.32 in1988 to 6? of GDP in 1989. It would then decline gradually to about 3? ofGDP by 1997.

Creditworthiness and Risk

91. T&T's current payment problems stem from a bunching of scheduledamortization in the years 1989-92, coupled with the decline in exportearnings since 1985. The debt rescheduling and a projected strengtheningof exports would alleviate those difficulties by the mid-1990's whenrepayments of the Bank's proposed loans would begin. The economy'sopenness, of course, renders it highly vulnerable to external shocks.Further oil price declines and interest rate increases could raise thefinancing requirements by amounts up to US$170 million a year during 1990to 1994 (ref. Annex VI). Current Bank projections do not anticipate suchdevelopments. Were they to occur, however, they would imply heavierdependence on external assistance in the form of further rescheduling ofthe commercial bank debt andlor new loans from commercial sources, as wellas intensification of the adjustment process.

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92. The policy risks lie on the sociolpolitical fronts. Following anextended period of economic decline and a series of tough economicmeasures, the social costs may become too burdensome and cause the programto be derailed. Adequate consideration of the appropriate pace ofadjustment and the necessary complement of social programs as proposed inthis operation, could guard against these risks.

PART VI - THE PROPOSED LOAN

Loan Amount and Cofimnancin

93. The proposed loan to support structural adjustment would beUS$40 million to be disbursed in two tranches of US$20 million each, basedon compliance with agreed policy conditionality. The first tranche wouldbe available for disbursement following loan effectiveness. Retroactivefinancing will be permitted for eligible imports made before the date ofthe agreement but not before August 1, 1989 up to an amount of US$8 millionequivalent. The second tranche would be disbursed following a satisfactoryreview of program implementation and compliance with specified conditionsstated in Part IV and summarized in the attached Policy Matrix (AnnexVIII). The Export-Import Bank of Japan is considering cofinancing theoperation. It is expected to participate on a one-to-one basis with theBank, i.e. providing US$40 million in two equal tranches subject to thesame conditionality as the Bank's tranche releases.

Procurement, Disbursement and Audit

94. The loan would reimburse 100X of the foreign exchange cost ofgeneral imports, excluding alcoholic beverages, tobacco, luxury and tobaccoproducts, military and hazardous and other goods that are specificallyprohibited in a negative list. A recent Batik review of public sectorprocurement procedures in Trinidad and Tobago revealed that they areregulated by law and are generally consistent with Bank policy. Importsunder existing contracts for the supply of certain goods such asfertilizers and commodities would be eligible for Bank financing providedthat they were not procured from a single source or under bilateral tradeagreements. A survey of private sector procurement practices determinedthat limited bidding among suppliers on approved lists is the normalprocedure. However, in some instances private companies place purchaseorders on the basis of direct negotiations. For the proposed loan,contracts for general imports to cost the equivalent of US$3 million ormore shall be awarded following simplified ICB procedures. For all importsunder US$3 million equivalent: (i) public sector agencies and rompanies

will follow the Government's procurement lrocedures which n(rmally requirelimited competitive bidding, and which have been found to be satisfactotyto the Bank; and (ii) ptivate sector firms tcould follow their owlestablished eommercial practices, provided that price quotations fromeligible suppliers from at least two countries would be sought, exceptwhere direct contracting is permitted by the Bank guidelines.

95. The Central Bank would administer the loan and would beresponsible for the coordination and collection of relevant documentationunder the loan. To assist with this work, a qualified ProcurementSpecialist would be appointed by Central Bank for the duration of the loan.Disbursements would be made against statements of expenditures, except forcontracts valued at US$l million equivalent or more, for whichdisbursements would be made against full documentation. The minimum value

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for each statement of expenditure submitted would be US$250,000 equivalent,for which detailed documentation evidencing expenditures would be retainedby the Central Bank and made available for the required audit and also forreview by the Bank. Expenditures for goods procured under individualcontracts with a value less than US$5,000 equivalent would not be financedunder the loan.

96. The Central Bank would keep separate accounts for all expendituresunder the loan. These accounts would be audited each year by auditorsacceptable to the Bank, in accordance with the Bank's auditing guidelines,and the audit reports would be submitted to the Bank within six months ofthe close of the financial year.

Benefits and Risks

97. Benefits. The most immediate benefits of the program will be areduction in the role of the public sector in economic activity, and theadoption of an outward-looking development strategy. In the medium term,the balance of payments would be strengthened through increased exports andsustained economic growth. Restructuring and institutional rationalizationof the petroleumlpetrochemical sector, the largest single productivesector, and furthering the divestment efforts would strengthen theproductive base; and a successful export diversification could reduce thevulnerability to external fluctuations. The proposed technical assistanceoperation would provide the necessary studies and training of officials tosupport the implementation of the structural adjustment program. Theprogram's success should build the confidence of external donors andinvestors in the viability of the economy--its growth, balance of paymentsand employment prospects. The loan itself will provide quick-disbursingforeign exchange that will alleviate the current shortage of importedinputs, intermediate and capital goods which has constrained capacityutilization and export performance. The financing program would permitreasonable progress toward meeting the Government's longer termmacroeconomic objectives. Essential import levels would be maintained anddebt service obligations would be fulfilled.

98. Risks. The major risks to the policy reform program stem from thedeep social impact of the negative adjustment to date--i.e., prolonged fallin incomes, employment, imports, investment and services, and shortage offoreign exchange-- and the consequent political pressure. Anintensification of these pressures could derail the program. A splinteringin the ruling political party led to the formation of another oppositionparty; and the 102 cut in public service wages in 1989 significantly raisedthe level of disaffection in the society, most vocally from the laborunions. Further needed adjustments, particularly in the sugar-basedsector, could trigger ethnic disputes. The next election is due in twoyears' time, which allows barely enough time for the adjustment pr(ogram tobegin to take hold and produce discernible positive results. TheGovernment is committed to pursuing vigorously the full adjustment agenda.However, it is sensitive to the likely adverse social impact in the shortterm, and does not have in place a clear strategy to address the problems.It is looking to the Bank for guidance on the pace of adjustment and thenecessary complement of social programs, both of which are critical to themaintenance of the adjustment effort.

99. In terms of the effectiveness of the adjustment program itself, alack of implementation capacity, and failure of domestic or externalinvestment to respond to the improved incentive environment could weaken or

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delay the projected supply response. A drop in oil prices by 102 or anincrease in interest rates by two percentage points would increase thefinancing gap in each year during 1990-94 by amounts ranging from US$90million to US$170 million, implying heavier dependence on externalassistance in the form of debt relief and other assistance from commercialsources, in addition to intensifying the need for adjustment. Unexpectedadverse developments of this type in the world economic environment--and inthe demand for TMT's exports--and output shortfalls arising from a toorapid pace of stabilization and import liberalization, with consequentfurther rises in unemployment and decreases in real incomes, could createpressures on the Government to abandon its adjustment program.

100. There are, however, a number of factors that reduce the aboverisks. First, and most importantly, is the strong Government commitmentwhich it indicated by initiating and intensifying its economic reformprogram before seeking multilateral support. Second, support through acomprehensive TAL should strengthen from the outset implementation capacityand also technical work required where there is a dearth of localexpertise. Third, the Bank is providing technical assistance through theTAL for strengthening the Government's social policies and programs foralleviating the social impact on the poor and vulnerable groups. Fourth,the Government is committed to maintaining export competitiveness. Theimplementation of this policy includes the regular review of the evolutionof the real exchange rate and the follow-up actions to ensure its adequacy.Finally, the most recent Bank projections on medium-term OECD countries'growth and international prices for Trinidad and Tobago's exports do notenvisage abrupt adverse changes. Nevertheless, a significant effort todiversify exports should reduce, over the medium to longer term, theeffects on export performance of changes in the international economicenvironment and in the prices of such commodities as petroleum.

I VII. COUNTRY ASSISTANCE STRATEGY AND BANK OPERATIONS

A. BANK GROUP ASSISTANCE STRATEGY AND OPERATIONS

Past Assistance

101. The first Bank loan to T&T was made in 1961. Since then, 13 loanstotalling US$93.0 million were provided in agriculture, finance, power andtransportation, education and population. The last Bank loan, for ahighway project, was made in 1979. In 1984, the Bank graduated T&T fromIBRD lending because of its high GNP per capita of US$6,450 compared withthe Bank's graduation level of US$2,910, and because of its then favorableaccess to capital markets. Bank assistance was then provided within theframework of 52 staffweeks per annum on a nonreimbursable basis. The IFChas continued to make investments in the country. The most recent, inFY89. assisted the capital restructuring of the Trinidad and TobagoDevelopment Finance Company.

Proposed Bank Strategy

102. The Bank is renewing its involvement in Trinidad and Tobago at acritical point in the country's economic development. The country'sweakened external position has resulted in a severe shortage of foreignexchange, a constraint currently affecting every aspect of life. Negativeeconomic adjustment has already taken place. The challenge faced is totransform negative adjustment--characterized by declining imports,

- 31 -

production and employment--into positive adjustment--reflected inincreasing exports, imports, production and employment. This implies thatother sectors (i.e., manufacturing, agriculture, tourism) that until nowonly made modest contributions to foreign exchange earnings, must fill inthe gap left by the petroleum sector and provide a rapidly increasingsource of growth in foreign exchange earnings and employment. Only in thisfashion would the country generate economic opportunities beyond the limitsimposed by the narrow size of the domestic and regional markets. In themeantime, the country should maximize the opportunities of improving outputand product mix of the petroleum sector and rapidly expand petrochemical'exports. The Bank's efforts should, therefore, be directed towardsassisting the Government to structure a more efficient and competitiveeconomy, reducing the size of the public sector in economic activity.making those activities that remain in the public sector more efficient,and restructuring and diversifying the sources of medium and longer termgrowth. Significant effort should be focussed on increasing foreign anddomestic investment. This, together with rationalizing the petroleum andoil refining sectors and improving the incentives for investment inpetroleum will be essential for achieving sustained growth. The longrecession has exacted a high social price in terms of employment, incomeand standards of living; and further adjustment must occur before there canbe much of an increase in consumption. The pace of implementation of theadjustment program will need to be geared to the maintenance of socialcohesion and to sustaining domestic support for the adjustment. Socialprograms to protect the poor and vulnerable groups should therefore proceedin parallel.

103. The Bank's country assistance program will focus on the measuresneeded to achieve the objectives outlined above. Accordingly, its mainelements should be to: (a) complement the proposed SAL with a parallelTechnical Assistance Loan (TAL) in order to help the Government:(i) implement its medium-term adjustment program, (ii) strengthen socialsector policies and programs, including the design and preparation ofprograms to alleviate the social costs of adjustment, and (iii) preparepossible future Bank operations. For this purpose, the TAL would supportthe establishment of a Restructuring Support Unit and a Social SectorsUnit, within the Ministry of Planning and Mobilization, to coordinate thepreparation and implementation of the Government's overall adjustmentprogram over the next three to five years, and the formulation ofsupporting social policies and strategies; and (b) support and further thereform efforts initiated under the proposed SAL with assistance torestructure the supply side aspects of the economy. Thus, building on theadvances to be made under the SAL, a proposed Trade and Finance Loan woulddeepen the SAL-supported trade reforms with support for a tariff reformprogram to reduce the level and dispersion of effective protection; itwould also help to revitalize a financial sector under severe stress byformulating policies, and legal and institutional reforms to reverse thepresent deterioration. In tandem with this operation would be a proposedSocial Sector project. The focus of the project would be youth trainingfor productive employment. It would aim inter alia at strengthening theemployment prospects for unemployed youth, the group most at risk, in thecontext of small business development and youth employment insertionschemes. Cofinancing would be sought from other multilateral and bilateraldonors.

104. A proposed Public Enterprise Adjustment/Private Sector DevelopmentLoan would target simultaneously the twin issues of public sectorefficiency and private sector development in terms of the complementary

- 32 -

roles of the sectors and specific issues related to divestment andderegulation. In addition, a proposed Industry Restructuring andDevelopment Project would address the needs for financial, management andoperations restructuring of industrial enterprises adjusting to the newpattern of incentives. Thereafter, focus would shift to more traditionalinvestment lending, including possibly cofinancing with the IDB a projectin the petrochemicals sector and an operation to support rehabilitation ofthe Water and Sewerage Authority.

105. The Ban.k's assistance program would take into account the ongoingand proposed assi3tance programs of other multilateral donors. The IMPwill focus on stabilization and key macroeconomic parameters. The IDB isdesigning a comprehensive strategy to address issues and investmentrequirements in the petroleum and agriculture sectors. The CaribbeanDevelopment Bank (CDB) is considering providing financing for forestrydevelopment and industrial credit. The European Community is expected toprovide this year a line of credit to finance imported inputs for exportingmanufacturers.

106. T&T returned to the Caribbean Group for Cooperation in EconomicDevelopment (CGCED) as a recipient in June of 1988 but received littlespecific financial support from bilateral donors. The bilaterals stronglysupported the Government's reform efforts, but felt that Trinidad andTobago should first engage the support of the multilateral donor community.Bilateral donors would subsequently review the scope for assisting Trinidadand Tobago, although the still relatively high GNP per capita mightcontinue to be a hindrance. The EXIM Bank of Japan is consideringcofinancing for the SAL, and possibly the Trade and Finance and PublicEnterprise/Private Sector adjustment loans.

B. BURDEN SHARING

107. The Bank's exposure in the country is insignificant at this time--only 1.52 of T&T's total external debt in 1988. Debt service to the Bankwas about 2.5X of the country's total debt service obligations. Theproposed lending program is projected to change these ratios to about 6.52and 3.12 by 1993, and to 8.12 and 5.42 respectively by 1997. The financingplan envisages that Bank lending would provide 5.72 of the gross financingrequirements during 1989 to 1991, and 6.52 during the following threeyears. The remainder of the financing is expected from multilateralagencies, including the IMF, the IDB, the CDB and the European InvestmentBank along with official export credits, commercial financing and somerecourse to bilateral sources. Bilateral sources will thus finance about72 of the requirements during 1989-91. Bilaterals are however not expectedto be a permanent major source of funding, chiefly because of Trinidad andTobago's relatively high per capita income. Multilateral donors willtherefore be major sources over the next three to f-ive years. Includingthe Bank, they are expected to provide about 302 of the financingrequirements during 1989-94.

- 33 -

m0os EML FDUNCDA RE_nWI , oMSOV

(US$ ml lI on)

199-9 1992-94 1998-97 1989-97

Multi leterl 480 614 ga1 1U36*/w: 18IR 110 99 14 223

Other 320 416 817 1112Bi latera 140 82 4 170Privet* Creditors 270 480 186 8S8IMF 129 0 0 129Direct Invetment 191 876 486 1031Debt Reli- 716 60 0 776Other Long-term 41 0 0 41

Total 19P7 182i 981 4837

(in percent of total)

1999-S1 1M-94 1996-97 1989-97

Multilateral 22.4 87.7 85.8 80.6s/w: I88R 5.7 6.s 1.5 5.1

Other 16.7 81.2 88.8 25.4Bilateral 7.8 2.1 0.4 4.0Private Creditors 14.1 81.6 14.7 20.8IMF 6.7 0.0 0.0 2.9Direct Investment :0.0 24.7 49.5 23.6Debt Relief 87.4 8.9 0.0 17.7Other Long-term 2.1 0.0 0.0 0.9

Total 10t. 10Fb to"7t 1o"

108. While private sector flows financed the bulk of T&T's capitalrequirements up to five years ago, these virtually dried up as a result ofthe severe decline in the country's economic situation. However, in 1989private capital inflow is expected to cover about 152 of the financing(aside from debt relief), largely in respect of financing for a major gasproject, and to average 222 during 1989-94. An objective of the adjustmentprogram is to restore T&T's access to the private capital markets. In viewof T&T's current debt service burden, however, renewed borrowing oncommercial terms needs to be carefully managed in the concext of a prudentmanagement of the external debt over the medium-term.

PART VIII - RECOHHZNDATION

109. I am satisfied t the proposed loan would comply with theArticles of Agreement of e Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber B. ConablePresident

Attachments

Washington, D.C.November 21, 1989

-34- ANNEX IPage 1 of 9

TRINIDAD AND T0BA60 - iEV INDICATORS

Prel is. Projections

key indicators 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

6DP Growth Rate -7.4 -4.6 -2.0 0.0 1.5 2.5 3.0 3.5 4.0 4.0 4.06DP/Capita Growth Rate -6.2 -5.7 -3.0 -1.0 0.5 1.5 2.0 2.3 2.8 2.7 2.7Consueption!Capita Growth -iS.4 -13.3 -7.5 -1.7 0.2 1.2 1.2 1.6 2.7 2.8 2.9

Total DOD 11 in US$1 2238 2325 2405 2543 2661 2792 2847 2841 2697 2507 2277DOD!XGS 2T 136.8 144.4 134.2 133.1 129.6 125.6 117.5 106.8 93.0 78.4 64.4DOD/GDP- 48.6 54.9 62.3 61.7 60.9 59.7 56.6 52.3 45.7 39.2 32.8Debt Service fin USS1 418 398 399 432 357 522 547 529 518 543 557Debt Serviceil6S 2/ 25.6 24.7 22.2 22.6 17.4 23.5 22.6 19.9 17.9 17.0 15.8Debt Service/6GP 9.1 9.4 10.3 10.5 8.2 11.2 10.9 9.7 9.8 8.5 8.0InterestlX6S 2/ 9.9 11.2 12.9 11.5 11.3 10.9 9.7 8.0 7.2 6.1 5.0Interest/6DP 3.5 4.3 6.0 5.3 5.3 5.2 4.7 3.9 3.5 3.0 2.5

Gross InvestmentiGDP 18.9 18.4 20.3 20.4 20.5 20.6 21.0 21.5 21.8 22.3 22.7Do3estic SavinqsiGoP 20.0 26.3 29.7 30.2 30.4 30.6 31.1 31.6 31.6 31.5 31.4National Savings/GDP 12.6 14.1 16.5 16.2 16.6 18.0 19.8 21.7 22.3 23.5 24.7Governsent Investment/GDP 4.6 3.7 3.5 3.5 4.0 4.5 5.0 5.5 5.5 5.5 5.5Governeent Savings/GDP -2.1 -3.5 0.1 1.0 2.5 3.0 3.5 4.2 4.5 5.7 6.5Private InvestaentiGDP 14.3 14.7 16.8 16.9 16.5 16.1 16.0 16.0 16.3 16.8 17.2Private Savin s/GDP 14.7 17.6 16.4 15.2 14.1 15.0 16.3 17.5 17.8 17.8 18.2Ratio of Pub/Priv Investnent 32.2 25.2 20.8 20.7 24.2 28.0 31.3 34.4 33.7 32.7 32.0ICOR 3' 0.0 -4.1 -9.2 0.0 13.6 8.2 6.9 6.0 5.4 5.5 5.6

Gov't Revenues/GDP 4* 31.4 2m.4 30.3 31.6 31.6 31.8 32.0 32.0 33.0 34.0 34.0Gov t Expenditures/l6P 4/ 37.1 36.1 33.7 34.1 33.1 33.3 33.5 33.3 34.0 33.8 33.0DeficitH-) or Surplus(+T/GDP -5.7 -6.7 -3.4 -2.5 -1.5 -1.5 -1.5 -1.3 -1.0 0.2 1.0

Export Growth Rate 5'' -2.8 4.9 a.3 1.7 1.1 2.7 3.3 3.9 3.9 3.9 4.0Exportsi6DP - 35.2 38.7 41.9 42.7 42.5 42.6 42.7 42.9 42.9 42.8 42.8ieport Growth Rate 5i -27.2 -14.0 3.5 1.0 0.7 2.5 3.0 4.2 4.8 5.6 5.6Imports/GDP - 34.1 30.8 32.5 32.8 32.6 32.6 32.6 32.8 33.1 33.6 34.1Current Account (in USt1 -291 -184 -148 -174 -172 -120 -62 11 29 76 137Current Account/GDP -6.3 -4.3 -3.8 -4.2 -3.9 -2.6 -1.2 0.2 0.5 1.2 2.0Terms of Trade Index 100.0 83.5 87.0 84.4 85.3 87.1 88.5 89.4 89.6 91.5 93.6

1/ Debt outstanding and disbursed.2/ Exports of goods and services.3/ One year lag.'41 Central Governeent_5/ Goods and Non-factor Services.

- 35 -

ANNEM IPage 2 of 9

TRINIDAD AND TOBA6 - BALANCE OF PAYNENTS

(US$ millions at current prices)

Prelim. Projections

1987 1988 1989 1990 1991 1992 1993 1994 1995 199w 1997

A. Exports of 6oods & NFS 1622 1571 1785 1886 2020 2194 2399 2637 2866 3161 34941. Merchandise (FOB) 1400 1370 1534 1611 1707 1862 2034 2222 2406 2652 29292. Non-Factor Services 222 201 250 275 313 332 365 415 460 510 565

8. Imports of 600ds & NFS 1572 1465 1560 1684 1771 1895 2038 2217 2426 2672 29421. Merchandise [FOB) 1161 1096 1175 1269 1334 1428 1535 1670 1828 2013 22172. Non-Factor Services 411 369 385 415 437 467 502 547 598 659 725

C. Resource Balance 50 106 225 202 249 299 361 420 440 490 551

D. Net Factor Income -301 -253 -344 -344 -386 -383 -383 -363 -359 -355 -3481. Factor Receipts 14 39 7 25 33 29 23 25 34 36 352. Factor Payments 316 292 351 369 420 412 406 388 392 391 388

(interest payuents) lel 181 232 220 231 243 235 214 209 194 177

E. Net Current Transfers -39 -37 -29 -32 -34 -36 -40 -46 -52 -59 -o61. Current Receipts 0 0 0 0 0 0 0 0 0 0 0

a. workers' resittances 0 0 0 0 0 0 0 0 0 0 0b. other current trans. 0 0 0 0 0 0 0 0 0 0 0

2. Current Payments 0 0 0 0 0 0 0 0 0 0 0

F. Current Account Balance -291 -184 -148 -174 -172 -120 -62 11 29 76 137

S. Long-Term Capital Inflow 66 69 156 208 203 232 185 139 5 -35 -701. Direct Investsent 55 26 36 70 65 100 130 145 150 155 1602. Official Capital 8rants 0 0 0 0 0 0 0 0 0 0 03. Net LT Loans 8 87 80 138 118 132 55 -6 -145 -190 -230

a. Disbursements 265 304 247 349 244 411 366 310 165 159 150b. Repayments 257 217 167 211 126 280 311 315 309 348 380

4. Other LT Inflows (net) 4 -43 41 0 0 0 0 0 0 0 0

H. Total Other Items (net) -4 -43 .. .. .. .. .. ..1. Net Short Term Capital -26 -20 .. .. .. .. .. ..2. Capital Flows N.E.I. 22 30 .. .. .. .. .. ..3. Errors and bOissions 0 -53 .. .. .. .. .. .

1. Changes in Net Reserves 229 157 -9 -33 -32 -112 -124 -151 -36 -41 -641. Net Credit fron the IHF 0 114 110 18 -14 -97 -106 -22 0 0 02. Other Reserve Changes 229 43 -119 -52 -18 -15 -1& -129 -36 -41 -64(- indicates increase)

- 36 -

AMI= IPage 3 of 9

TRINIDAD AND TOBAS - BALANCE OF PAYNENTS

(US$ millions at current prices)

Prelis. Projections

1987 1988 1969 1990 1991 1992 1993 1994 1995 1996 1997

Shares of GOP (Current US$:

1. Resource Balance 1.1 2.5 5.8 4.9 5.7 6.4 7.2 1.7 7.5 7.7 7.9; Total Interest Payments :.5 4.3 6.0 5 3 5.3 5.2 4.7 3.9 3.5 3.0 2.53. Current Account Balance -6.3 -4.3 -3.8 -4.2 -3.9 -2.6 -1.2 0.2 0.5 1.2 2.0

4. LT Capital Inflou (line 6) 1.4 1.6 4.1 5.0 4.6 5.0 3.7 2.6 0.1 -0.5 -1.05. Net Credit from the IMF 0.0 2.7 2.9 0.4 -0.3 -2.1 -2.1 -0.4 0.0 0.0 0.0

Foreign Exchange Reserves:

1. Int'l. Reserves 145 109.6 205.7 257.4 275.6 290.4 308.2 437.4 473.0 513.7 578.22. Gross Res. in Ionths Inpor z; 0.7 1.3 1.5 1.5 1.5 1.5 2.0 2.0 2.0 2.1

Menorandun Items:

GDP (ilns. of Current US$1 4603 4234 3858 4123 4369 4675 5027 5432 5898 6398 6940Debt Relief ... 87 281 255 190 60 ... ... ...

- 37 -

ANIEX IPage 4 of 9

TRINIDAD - EXTERNAL CAPITAL AND DEBT

(US$ millions at Current Prices)

Prelim. Projections

A. Disbursements 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

1. Public & Publicly Gdar. LT 265 304 247 349 244 411 366 310 165 159 150

Cfficial Creditors 171 161 141 224 204 232 221 153 84 120 131multilateral 139 141 99 169 162 208 218 148 80 120 131oft hich IBRD 0 0 21 43 46 41 32 27 14 0 0oft hich IDA 0 0 0 0 0 0 0 0 0 0 0

Bilateral 32 20 43 55 42 24 3 5 4 0 0

Private Creditors 94 143 105 125 40 179 145 156 80 39 19Supoliers 1 3 2 0 0 0 0 0 0 0 0

Financial harkets 92 140 103 55 20 59 53 30 24 0 0

2. Private Non-6uar. LT 0 0 0 0 0 0 0 0 0 0 0

3. Total LT Disbursements 265 304 247 349 244 411 366 310 165 159 150

4. IMF Purchases 0 114 11C 18 0 0 0 0 0 0 0

5. Net Short-Term Capital -26 -20 0 0 0 0 0 0 0 0 0

6. Total incl. IMF & Net ST 239 398 357 367 244 411 366 310 165 159 150

D. Repayments

1. Public & Publicly 6uar. LT 257 217 167 211 126 280 311 315 309 348 390

Official Creditors 62 71 190 102 98 54 107 73 75 92 109Multilateral 11 20 57 27 29 31 35 44 55 71 88

of hich IBRD 8 7 7 7 7 6 5 6 a 12 15of which IDA 0 0 0 0 0 0 0 0 0 0 0

Bilateral 52 51 132 75 68 23 72 29 20 20 21

Private Creditors 195 146 -23 109 28 226 204 242 234 257 272Suppliers 23 27 27 27 17 17 5 0 0 0 0Financial Narkets 172 119 -50 82 11 209 199 228 216 215 211

- 38 -ANNEX I

Page 5 of 9

TRINIDAD - EXTERNAL CAPITAL AND DEBT (continuedl

Prelis. Projections

1997 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

2.Private Non-Suar. LT 00 0 0 0 0 0 0 0 0 03. Total LT Repaysents 257 217 167 211 126 280 311 315 309 348 380

4. IOF Repurchases 0 0 0 0 14 97 106 22 0 0 05. Total LT Repay.+INF Repur. 257 217 167 211 140 377 417 337 309 348 380

C. Interest

1. Public & Publicly Guar. LT 161 181 232 220 231 243 235 214 209 166 148

Official Creditors 72 69 110 88 99 112 109 96 100 105 107Multilateral 15 19 45 39 52 66 82 86 90 9o 100of which IBRD 3 3 2 3 6 9 12 14 16 16 15of which IDA 0 0 0 0 0 0 0 0 0 0 0

Bilateral 57 50 65 50 47 45 27 10 10 9 8

Private Creditors 89 112 122 132 132 131 126 118 109 69 70Suppliers 12 9 7 5 3 2 0 0 0 0 0Financial Markets 77 103 115 127 123 123 110 96 78 83 62

2. Private Non-Suar. LT 0 0 0 0 0 0 0 0 0 0 03. Total LT Interest 161 181 232 220 231 243 235 214 209 194 177

4. IOF Service Charges 0 0 9 18 20 19 11 2 0 0 05. Interest on ST Debt 0 0 -2 -2 -2 -2 -2 -2 -2 -2 -26. Total incl. IHF & Net ST 161 181 .40 237 250 260 244 214 207 193 175

D. External Debt (DOD)

1. Public & Publicly Guar. LT 2238 2325 2405 2543 2661 2792 2847 2841 2697 2507 2277

Official Creditors 822 912 863 985 1091 1269 1383 1463 1473 1501 1523Multilateral 207 327 368 510 643 620 1003 1107 1132 1160 1223of which IBRD 41 34 48 85 124 159 186 207 212 200 185of hich IDA 0 0 0 0 0 0 0 0 0 0 0

Bilateral 616 585 495 475 448 449 380 356 340 320 299

- 39 -

AIQU IPage 6 of 9

TRINIDAD - EXTERNAL CAPITAL AND DEBT (continued)

Prelis. Projettions

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Private Creditors 1415 1413 1541 1558 1570 1523 1464 1378 1224 1006 754Suppliers 116 92 67 41 24 7 1 1 1 1 1Financial Narkets 1299 1320 1474 1447 1456 1306 1160 961 768 554 342

2. Private Non-Suar. LT 0 0 0 0 0 0 0 0 0 0 03. Total Long-Term DOD 2238 2325 2405 2543 2661 2792 2847 2841 2697 2507 2277

4. IMF Credit 0 111 221 239 225 128 22 0 0 0 05. Short-Term Debt 0 -20 -20 -20 -20 -20 -20 -20 -20 -20 -206. Total incl. IMF & Net ST 2238 2415 2666 2762 2866 2900 2149 2821 2677 2487 2257

Percent of Total LT DOD:1. On Concessional Teros 4.0 3.5 3.0 2.6 2.1 1.0 1.5 1.3 1.2 1.0 0.92. With Variable Int. Rates 58.1 56.8 61.3 59.7 58.1 54.3 51.4 48.4 45.3 40.1 33.0

E. Bank and IDA Ratios

-hare of Total LT DOD (D.3)1. I1RD as I of Total 1.9 1.5 2.0 3.3 4.7 5.7 6.5 7.3 7.9 8.0 8.12. IDA as X of Total 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.03. IBRD+IDA as I of Total 1.9 1.5 2.0 3.3 4.7 5.7 6.5 7.3 7.9 8.0 6.1

Share of LT Debt Serv (B.3+C.3)1. IBRD as Z of Total 2.5 2.5 2.3 2.3 3.6 2.9 3.1 3.8 4.6 5.2 5.42. IDA as X of Total 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.03. I1RD+IDA as % of Total 2.5 2.5 2.3 2.3 3.6 2.9 3.1 3.8 4.6 5.2 5.4

F. DOD-to-Exports Ratios (a]

1. Long-Tern Debt/Exports 136.8 144.4 134.2 133.1 129.6 125.6 117.5 106.8 93.0 78.4 64.42. IhF Credit/Exports 0.0 6.9 12.3 12.5 11.0 5.8 0.9 0.0 0.0 0.0 0.03. Short-Term Debt/Exports 0.0 -1.2 -1.1 -1.0 -1.0 -0.9 -0.8 -0.6 -0.7 -0.6 -0.64. LT+IKF+ST DOD/Exports 136.8 150.0 145.4 144.5 139.6 130.5 117.6 106.0 92.3 77.8 63.9

- 40 -ANINE I

Page 7 of 9TRINIDAD - EXTERNAL CAPITAL AND DEST (continued)

Prelim. Projections

1987 1968 1989 1990 1991 1992 1993 1994 1995 199k 1997

6. DOD-to-6DP Ratios

1. Long-Tero DebtJ8DP 48.6 54.9 62.3 61.7 60.9 59.7 5e.6 52.3 45.7 39.2 32.92. IMF CreditJ6DP 0.0 2.6 5.7 5.8 5.2 2.7 0.4 0.0 0.0 0.0 0.03. Short-Tern Oebtl60P 0.0 -0.5 -0.5 -0.5 -0.5 -0.4 -0.4 -0.4 -0.3 -0.3 -0.34. LT.IMF+ST DODI6DP 48.6 57.0 67.5 67.0 65.6 62.0 56.7 51.9 45.4 38.9 32.5

H. Debt ServiceiExports (a)

1. Public & Publicly 6uar. Lt 25.6 24.7 22.2 22.6 17.4 23.5 22.6 19.9 17.9 16.1 15.02. Private Non-Suar. LT 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.03. Total LT Debt Service 25.6 24.7 22.2 22.6 17.4 23.5 22.6 19.9 17.9 17.0 15.84. IMF Repurchases+Serv.Chgs. 0.0 0.0 0.5 1.0 1.7 5.2 4.8 0.9 0.0 0.0 0.05. Interest only on St Debt 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.06. Total (LT+INF+ST Int.) 25.6 24.7 22.7 23.5 19.0 28.6 27.3 20.7 17.8 16.9 15.7

1. Interest Burden Ratios

1. Total Interestl60P 3.5 4.3 6.2 5.8 5.7 5.6 4.9 3.9 3.5 3.0 2.52. Total Interest/Exports (a) 9.8 11.2 13.4 12.4 12.2 11.7 10.1 8.1 7.1 6.0 5.0

(al Ratio to 'Exports' with latter receipts from non-factor services, factor services, and workers resittances.

- 41 - ~~~~ANNEX I- ~~~~~~Page 8 of 9

Socia Indicators of Dovelpmnt, 1"99

Trinidad and Tobago

moos Neut25JOV 15.20 Maio 8 Latia 1gher

Usite ofYdAn yun ntbwate Amria.icomefleit 29 ago go (awe) Caibea icome growp

INCOME AND POVERTYincomeGNP per capia (mfe = 1988) us$ 770 2.000 3.350 1.940 2.940 17.080Toalhouseod miaowe

Sha t tp 0%of households % Ofincome .. 32 Shar to2O fhushls4o.SharetO b4dtra40%owfhue"hol ds .. 13 Shareto b4tm2%ofhueod

PovertyAbsolute povaty income: urban US$ per pero . ..

ruralPop in absolute poverty urba % ofjpp......

mudPrevalence of malnuritimn (uider 5) % of age group... 86

EXPENDfrUREFood %ofGDP . ..

ea, fish. milk, cheese eggs &u erctrns 11 28 22 1.4 556 7.6

Food aid mcereals 0Food productio praia197941=100 139.9 139.5 71.6 100.1 104. 102S

Shareofagriculturein GD? ~% of GDP 8.2 3.3 4.2 11.7 12.3 2.6Dail aorisp calones per persn 2.4697 2,6618 3.0812 2.7,04 2-9810 3.376Dadyprotein upply gramaper peras 46 8 98 0Housin %ofGDP . ..

A"eag household size person per. household .. S.Urban

fixedinvestmenuthousing % of GDP .. 8. 10.5Fadland power % ofGDP . ..

En cnzpontppt kg of oil equivalen 4,492.2 3,524.8 5,173.5 974.1 1,427.7 4,885.1

Urban % of households .. 91.6Rural

Transport dandmrmtnlatiou %s of GDP ....

Pp lroprasengercar eros16 10 5 16 14 F=KediWUnvesimou'=tsportequipmentt %poefGP .. 1.1 0.8 Total road length km . i

opultonmper telephone persons .. 15 10119

INVESTUME IN HUMAN CAPITALMedical cam %.of GDP ...

Population pec physician P"19Son 3.813i 2.20 962 933 1.21 53,0nurse 50 20 258 875 0 6hospital bed .. 200 201

Access to health care V of pop.Immunized (under 12 months) meses of a&e group 60.0 52.7

DT 7. 624 .. 82.4Oral Rehydratio Therap use (under 5) V. of caseso. 60.0 33.6Educain V. Of GDP . ..

Gross enrollment ratiosPrimary. total %of school*age growp 93.0 99.0 95.0 108.1 103.5 101.9

female * 90.0 100.0 96.0 105.2 99.4 101.8Secondary: total 36.0 48.0 76.0 48.8 57.8 94.3

female 34.0 51.0 79.0 52. 56.7 93.7Testiary scaclnineV Of teuiai students 21.9 28.1 45.3Pupil-teacherratio: pimr pupils per teacher 34 3 1 24 26 2 20

seonay 27 39 20Pupils echinkg grade 4 V. Of cohort .. 73.9 88.7 66. 768 97.7Repeaterrte: prmryV of tota enrollment . .3.5 17.9 18.1flteaciyrwtoveui %pp(a e5. . .3.9 16.7 21.8

female % of femiale ragel15+) ... 5.2 19.0 25.6Newspaperclraaladsm ~~~~per hou pop. 108.3 99.1i 144.5 81.2 86. 315.6

- 42 - ANNEX IPage 9 of 9

Socal Indats of Devdepment, 1969

Trinidad and Tobago

m Same region I i4Cat gromp NexMossN

25-30 15-20 recent Laiti higherye= Ye= eab Amria, ncnz

mzeaswe 490 9a a (Me) incom groupHUMAN"RESOURCESSlr, grot, sucre of populatnTo'a1unotu( lre .1968) dwusands 896 1009 141 416398 424?O6 7828

14 aunderak (V.=lgsof.pop. 424 74 69 015-64 53.9 5&5 62.2 58.6 60.2 666Age dnncyaio uni 0.86 0.71 0.61 0.71 0.65 0.49Perc r uban ara of p. 30.0 48.4 66S 72.6 68.8 78.3

Fa_duPr 100 dUdm nanber .e .... 104 .Ruud

gn whratea 13 13 1.6 2.0 1.8 0.5IJ;bdgb "6.5 53 3.5 3.2 3.1 0.8

Urban/rulgncwrhdifferntial difference 72 7.7 5.8 3.7 3.8 03Pjecd population: 2000 dtusands .. .. 1,429 516.308 521,035 829,402Stao pun . .. 2.012Deterulmant otpopulail growthF-

tbihph ra m thou. pOp. 33.4 26.4 25.9 287 26.4 13.7Totalfetily rae thsperwoman 4.33 3.37 2.80 3.59 3.39 1.78C Rpveprvalene fwome 1549 .. .. 54.0U, (0-4) lwan (1549) atiosUrban~p 10wmn .. .. .. . ..

bR per. 100 women..

rudeath raw. per hu pap. 7.6 6.9 6.7 7.5 8.3 93per tho ive irths 42.2 27.6 20.0 S4.2 46.9 9.6

Undera5mo e ' .. .. 23.0 65.0 58.4 19.7life expectan at birbi overall yeas 653 67.1 69.8 66.4 67.2 76.0

fema 67.4 69.5 72.6 69.2 69.8 79.3Labwr frce(15.64Totallaborfare thousands 301 364 481 146,446 156,018 365,613

A * ellfogce ~~~~~20.1 14.4 ...Aricdwm S~~~~~V of labor force 34.8 37.2Femae 284.8 27,8 29.9 266 29.5 37.8

Feles per 100malesUrban number .. .. .. 106

rau:rverllV.88Pacpanon :ovofelabor force 33.6 361 38.6 35.0 38.2 47.S

female a 18.8 20.5 23.1 18S 22.1 35.0FAucalio.a atlalamoa of lsabr forcSdcool yam completed:e yean .. .. .. . ..

male n .. ..

NATURAL RESOURCESArea thou. sq.km 5.13 5.13 5.13 20.396 20.337 33,827Density pQp.peraq.km 175 197 238 20 20 23Agriltualland oflanda 20.5 24.6 25.5 363 31.6 37.0Aiuuraldensity pppesqkm 853 801 933 55 65 62Foessandwoodlind ho 'am 2.45 2.3 225 9,776 7587 8,S48Defoaionn rte (nu) -04045 404A 0.0Ac,emtosaewat of.po .. 93.0 98.0 73.2 79.4

Urban * 3.79 ° 's:8 IN 6290.Rwd 1~~~~~~~~~~~~100.06.

Poputon growth Infant mort Primary school enrollment6 wMO ta0

ma 10

4 5~~~~~~~~~~~~~~~~~~~~~~~~~~0

2 4~~~~~~~~~~~~~~~~~~~~~~~~~~0

0 ol~~~~~~~~~~~autyEb e*70; mn eatymb eadyft e ary ta ely7ta we

.TWai. hZTobw - UidM%Lnea.m

- 43 -

Annex 11

STATUs OF BANK GROUP OPERATIONS IN TRINIDAD AND TOBAGO

A. Statement of Bank Loans as of September 89, 1989

-- _-U^SS Nillon…---Amount

Loan Fiscal (Lose Cancel lotlon)No. Year Borrower Purpose Bank Undisbursed

18 loans fully disbursed 93.4 -

Of which hbo been repald 76.0

Total Now Outstanding 17.4 a/

Amount Sold 22.9Of which has been reopld 21.6 1.8

Total now held by Bank 16S1 a/

Total Undisbursed

B. Statement of XFC InvestAents as of September 80, 1989

Fiscal - ---- SS Million------…Year Borrower Type of BusTnes Loan Equity Total

1978 Canning A Co. Ltd. Poultry 1.2 - 1.2

1979 Caribbean Clsea Works, Ltd. Class ContTiners 1.2 - 1.2

1987 Trinidad Nitrogen Co. Ltd. Chemical A Petrochemicl 190.0 - 190.0

1987 Home Mortgage Bank Money and Capital Markete 6.4 0.4

1989 Trinidad and TobagoDevelopment Finance Co. Ltd. Capital Market. 6.5 065

Total Grors Coamitment 192.4 0.9 193.3

Lese Cancellotions, Terminations, Sales and Repaymnt. 1C09 - 160.9

Total Commitments now hold by XFC 81.5 0.9 82.4

Total Undisbursed 0.0 O6 6.5

B/ Book value.

- 44 -

ANNEX IIIPage 1 of 2

TRINIDAD AND TOBAGO

STRUCTURAL ADJUSThENT LOAN

SUPPLEMENTARY LOAN DATA SHUT

Section I - Timetable of Key Events

(a) Initiation of structural adjustment operation: in March 1988. theGoverntment requested the Bank to review Trinidad and Tobago'seligibility for Bank borrowing in light of the deterioration ofeconomic performance. Following the review, the Bank decided toresume lending in FY90, within the context of a viablemacroeconomic framework. The Government later entered intoarrangements with the IMF for a CFF, a Standby and a CCFF; andrequested Bank support through a series of adjustment operations,the first of which was to be a SAL.

(b) Preappraisal mission November 1988

(c) Appraisal mission April/May 1989

(d) Completion of negotiations November 1989

(e) Planned date of effectiveness December 1989

Section II - Special Bank Implementation Actions

The Government's wide-ranging efforts at structural adjustmenthave stretched the implementation capacity of an already weak institutionalstructure. To ensure timely implementation of the loan conditions, theBank will provide technical support under a parallel Technical AssistanceLoan.

Section III - Special Conditions

Effectiveness of the loan, which will permit use of the firsttranche of US$20 million equivalent, is subject to no special conditionsover and above the several policy measures that were adopted prior to Boardpresentation. Release of the second tranche of US$20 million equivalentwould be contingent upon significant and satisfactory progress made by theGovernment in implementing the structural adjustment program, notably incomplying with the following specific conditions:

Conditions of Release of Second Tranche

(a) Satisfactory implementation of the medium-term economic programand review of the performance of non-petroleum exports and of theevolution of the real exchange rate.

(b) Measures to reform the state enterprise and public utilitiessector as follows: (i) complete liquidation of NHMC, SNC and NSR;(ii) prepare for divestment and bring to the market at least threewholly or majority owned state enterprises; (iii) in respect ofT&TEC, complete management and operational audit and prepare and

- 45 -ANNEX IIIPage 2 of 2

agree on action plan reflecting agreed objectives; achievespecified targets for operating balance including a possibletariff increase of 172, customer/employee ratio, and arrears inreceivables, and convert Government loans and advances to equity;(iv) in respect of WASA, prepare consultant report containingproposals and plan for rehabilitation of the commercial system,including plan for an initial metering program; for achievingspecified targets for customer/employee ratio, working ratio andarrears in receivables; and for achieving tariff levels andstructure consistent with agreed objectives; adopt action plan andimplement measures in accordance with plan (paras. 42 and 45).

(c) Agreement with the Bank on a rolled-over, 3-year PSIP for 1990-92,and a core program for 1990; guidelines for project preparation,criteria for project selection, and approval procedures; andsignificant steps in strengthening the institutional process forPSIP formulation and monitoring, (para. 49).

(d) The following trade reforms: (i) reduction by 402 (in terms ofproduction coverage) of the remaining negative list of imports andquantitative restrictions affecting the manufacturing sector, andagreement on time-phased program to eliminate the remainder by end1991, except for a limited set of items agreed with the Bank(total import charges on items removed from the negative list notto exceed 1002 of the c.i.f. price, with exceptions for textilesand garments and possibly dairy products, and be phased out overthree to five years); (ii) study of protective regime foragriculture and state trading company and discussion of findingswith the Bank; (iii) formulation of and agreement on a time-phasedaction plan for removal of duty exemptions over three to fiveyears; implementation initiated according to plan; (iv)introduction of reforms to simplify import and export procedures;and (v) study of trade and associated policies and agreement withthe Bank on a medium-term program of tariff reform incorporatingagreed principles (paras. 57, 60, 62, and 66).

(e) The following export incentive measuress examination ofalternative systems for providing free trade status to exporters,including estimation of the significance of indirect taxesincorporated in exports, and establishment of a selected schemefor major exporters; timetable for establishing a scheme for otherexporters (para. 68).

(f) Satisfactory functioning of the one-stop-shop and the simplifieddocumentation for prospective investors; and satisfactorylegislation or equivalent regulations adopted for facilitatingforeign investment (para. 70).

(g) Satisfactory progress in reviewing the regulatory and incentiveframework applicable to the petroleum sector (para. 72).

(h) Satisfactory functioning of the Restruct ring Support Unit and theSocial Sectors Unit, and satisfactory progress in studies and inpreparation of action plans or proposals in accordance with agreedterms of reference (para. 79).

- 46 -

ANNEX IVPage 1 of 11

TRNIDAD AND TOBAGO

STRUCTURAL ADJUSTMENT LOAN

BACKGROUND AND FOCUS OF THE M¢DIUM-TERM ADJUSTMENT PROGRAM

A. MACROECONOMIC POLICIES

1. An appropriate exchange rate policy and improved fiLcalmanagement, including increased efficiency in the public sector, are theheart of the Government strategy to correct external and internalimbalances and set the stage fer renewed growth. Measures in these areasare to be complemented with reforms to improve the incentive environmentfor private sector investment. Trade policy is to play a key role inchanging the direction of industrial development from inward-looking toexport-oriented.

The Foreign Exchange Regime

2. It is evident from recent export developments that the realexchange rate is significantly more favorable for non-oil exportables thanover the last 15 years. (Following the 1988 devaluation, the index of realeffective exchange rate showed an improvement relative to the 1976 base ofabout 6 percentage points.) The real growth of nontraditional exportsexceeded 201 per annum during 1985-88. The more competitive environmenthas been created by the two devaluations coupled with the fall in nominalwages resulting from the protracted economic decline -- unskilled laborcurrently earns TT$ 35-50/day (US$8-12 at the current exchange rate)compared with TT$ 90-lOOIday (US$38-42) a few years ago. The country hasnot yet experienced the full supply response to the exchange rateadjustments, and the Government intends to adopt additional exportincentive measures along the lines discussed below. In thesecircumstances, close monitoring of the evolution of the real exchange ratewould be required. This implies following developments in the foreignexchange market and in the performance of both exports and imports and,regarding the latter, progress in the proposed import liberalizationprogram which will put pressure on the exchange rate in the absence ofadequate financing flows.

3. The authorities have indicated their intention to pursue aflexible exchange rate policy in order to maintain export competitiveness.With this in view, they have considerably eased the foreign exchangeallocation mechanism during 1989, with a view to eliminating it by 1990.The basis is increased availability of foreign exchange resulting from theIMF program and other external financing expected. The first step was toexempt from the allocation process early in 1989 manufacturers who are netearners of foreigr. exchange, selected tourism activities and oil sectorservice industries. These are now allowed to maintain foreign currencyaccounts in the local commercial banks. In September 1989, mostagricultural inputs, some raw materials for manufacturing, and capitalgoods and spares were made exempt from the ex ante allocation process.

- 47 -ANNEX IVPage 2 of 11

Fiscal Policy

4. Fiscal policy will focus on bringing expenditures in line withrevenues, thus reducing the public sector's recourse to the banking .ystemto minimize the Central Bank's reserve losses in the short term and releasefinancial resources to the private sector. This objective calls forprograms to reduce the dependence of state enterprises and the publicutilities on the budget, and for a more structured approach to budgetreductions than in the recent past when capital expenditure bore the bruntof budget cutbacks. Current transfers to the rest of the public sector,which peaked at close to 8S of GDP in 1983 before declining to 31 of GDP in1988, are to be further reduced by the equivalent of 12 of GDP in 1989.Towards the objective of progressively increasing their financialindependence, most enterprises are being required to introduce wide-rangingreforms, including financial restructuring, divestiture and in some casesclosure. Their recourse to the banking system and to foreign borrowing hasbeen curtailed; and oversight arrangements are to be introduced to ensurethat ongoinF financial improvements are sustained.

5. The Government wage bill is to be reduced through both wage andemployment cuts. Although an Industrial Court ruled in August 1988 thatthe cost of living allowances suspended in 1987 (after 4 years of stagnantnominal wages) should be reinstated and that a salary increase for 1987 of21 be awarded, and the Government accepted the decision, Parliamentauthorized a postponement of the award. Further the Government announcedin the 1989 budget a 1O0 across the board reduction in public service wagesand salaries. Legislation giving effect to this decision was passed ir. theParliament in February 1989. The Government also introduced in 1989 aVoluntary Termination of Employment Plan (VTEP) through which it expects toshed close to 9,600 workers over three years, 152 of its permanent civilservants.

6. The system for public sector investment programming is to beupgraded to improve the efficiency of use of investment funds. To thisend, emphasis is being placed on building a capability in projectpreparation, analysis, implementation and monitoring.

7. The Government has embarked on a comprehensive tax reform to beintroduced in two phases. The objective is to broaden the tax base,redress disparities In equity and enhance the incentive effects of the taxsystem, while simplifying its application. The first phase, introduced in1989, deals with direct taxes. It reduces the number of bands in theindividual income tax from 11 to 4; lowers the top rate (reduced from 70%to 502 in 1988) to 45Z; eliminates most allowances, providing tax creditsinstead; and'reduces the corporation income tax from 49.52 to 45%. Theadjustments involve a correspondingly more favorable tax treatment fordividend income aimed at stimulating investment in compan'.s. In thesecond phase of the tax reform, to be adopted in 1990, a value added taxwill be introduced, and lirect taxes reduced further, to a top rate of 35z.

Monetary and Credit Policy

8. The fiscal measures for containing the Government deficit and thefinancing plan for 1989 are directed at limiting inflationary creditexpansion and enhancing the scope for mobilizing financial resources

- 48 -

ANNEX IVPage 3 of 11

through the banking system. Thus the domestic financing requirement forthe year will be diverted to the local bond market. Measures were alsotaken, late in 1988, to raise deposit rates and mobilize more financialresources from the private sector. Since interest rates are marketdetermined, the Central Bank raised its rediscount rate by 2 percentagepoints to 9.5Z, and intends to keep, as a minimum, the present spread ofabout 2 percentage points between the Central Bank rediscount rate and theweighted average interest rate on time deposits in the financial system.It also established a schedule under which commercial banks are required'toreduce their outstanding advances from the Central Bank. With a view tobroadening its money markets and raising average yields, the authoritiesbegan to phase out the secondary reserve requirement (treasury billholding) applicable to commercial banks. The requirement was reduced from112 to 92 in January 1989 and further to 72 in May 1989. This measurewould help improve banks' earnings, and facilitate a reduction of thespreads between their average deposit and lending rates (around 6percentage points in the last quarter of 1988).

Wage and Price Policies

9. The authorities have adopted a stringent policy of wage restraintfor the public sector. Recent wage reductions were described in para. 5above. The persistent declines in economic activity have also affectedreal wages in the private sector. Real weekly earnings in manufacturingdeclined by about 4.42 per year on average during 1985 to 1988 and dailypaid unskilled wage rates have fallen by 50-602 in TT$ terms (para 2.above).

10. In keeping with the aim to introduce greater efficiency in thefunctioning of the economy, the Government has dismantled most pricecontrols. By the end of 1988, only essential food items, and items where asubstantial amount of monopoly price fixing existed -- school books,pharmaceuticals and auto tires -- were still controlled. For theseremaining items, 13 in all, the authorities plan to introduce greaterautomaticity into the price adjustment process, i.e. the Secretariat of thePrices Commission is to be given the authority to approve increases withinguidelines established by the Commission, and enterprises in some caseswould be able to adjust prices subject only to ex-post notification to theSecretariat.

11. Domestic prices of petroleum products are adjusted to reflectinternational opportunity costs. Prices of public utilities, however, areadjusted only periodically, and require the approval of the PublicUtilities Commission. They have been raised more frequently since 1983when the Government began to curtail subsidies for public services.Nonetheless, tariffs of many of the utilities are currently out of linewith the economic cost of their operations. The objective under theadjustment program is to introduce corrective pricing policies for theutilities.

External Debt and Debt Management

12. Trinidad and Tobago experienced debt servicing problems in 1988.The public and publicly-guaranteed external debt rose rapidly between 1982and 1987, doubling to over US$2 billion, equivalent to 1372 exports of

- 49 -

ANNEX IVPage 4 of 11

goods and serv'-es. A rising share of the debt was denominated in Japaneseyen and European currencies (602 in 1986). This pattern significantlyincreased the debt service burden in terms of US dollars in which the bulkof exports ore priced. The debt service rose from 7Z to 262 of exports ofgoods and services during 1982-87; this ratio reflects also the muchreduced level of export earnings. In the absence of debt rescheduling,Trinidad and Tobago faced a bunching of debt repayments to commercialcreditors in the next few years.

13. In the context of its adjustment program, the Government hasnearly completed rescheduling arrangements with its commercial bankcreditors and with its official creditors under the aegis of the London andParis Club, respectively. The arrangements would reschedule allemortization payments falling due from September 1, 1988 throughAugust 31, 1992. The terms are ten years' maturity and four and a halfyears' grace period. This would provide debt relief totalling US$863million (of which US$281 million would apply to 1989). The effect is toreduce the debt service ratio in 1989 from 382 of exports of goods andservices to 222. For the medium term, the authorities are adopting aprudent debt management strategy having the following elements: a morecareful selection of investment projects; an increased reliance onmultilateral or bilateral sources for external finance; and closermonitoring of the external borrowing of state enterprises, whose externalobligations account for about 402 of the debt expected to be rescheduled.

3. SECTORAL POLICIES

The Hydrocarbon Sector

14. The discovery of oil in Trinidad and Tobago in 1890 set the stagefor the country's future prosperity and consequent problems. When thisland find was followed in 1908 by marine discoveries and somewhatthereafter by the construction of an oil refinery, Trinidad was establishedearly as the leading income earner in the English speaking Caribbean. Thepetroleum sector has, however, suffered periodic production declines as oldwells were depleted, leading as recently as 1968-70 to a domestic recessionand high unemployment. The sector is currently in such a production slump.Existing wells are becoming depleted and drilling them is more costly.Crude oil production, which peaked at 83.8 million barrels in 1978,declined to 58.3 million barrels by 1983, a fall of 302 in five years. Theoil price collapse in 1986 stifled a recovery that began in 1984, and in1988 production reached a 15 year low of 50.8 million barrels. TheGovernment's strategy is to stimulate higher oil production through morefavorable tax incentives, introduced in 1988. The Government is targetingfurther exploration and secondary oil rectvery to increase productiton.During 1988, it introduced the lease operatorship program for secondaryrecovery aimed at reactivating wells currently at low production and notbeing drilled by current owners. These latter would lease to privateoperators who would qualify for additional tax incentives under the revisedSupplemental Petroleum Tax. Government invited bids for the leaseoperatorships and for new exploration acreages. The response to bothprograms was good and the authorities are optimistic that over the medium-term, these and prime new areas to be offered for competitive bidding wouldbe explored. Further improvements to the incentive and regulatory regimeare, however, needed. The tax revisions of 1988 are applicable strictly to

- 50 -

ANNEX IVPage 5 of 11

existing production operations, not to new ones, and are not geared tostimulating their production much above 1987 levels. The taxation systemis complicated and the contracting arrangements are outmoded. These issuesare to be addressed under the adjustment program.

15. While refining has been central to the sector's operations formany years, accounting for 40-50Z of the sector's export earnings, therefining industry has not kept up with world-wide sector developments. Itfailed to adjust its product lines away from fuel oil for which demand wksfalling to the lighter products, such as gasoline and diesel, in greaterdemand. This factor, coupled with the lower crude oil production and thecancellation in 1982 of a long-term processing arrangement led to a drasticfall in capacity utilization. With industry throughput averaging only 251of refining capacity, refinery losses have averaged TT$100 million peryear. For some time the Government has recognized the need to rationalizeand upgrade the subsector. Although the two refineries, at Point Fortinand at Pointe-a-Pierre, are run by the state-owned Trinidad and Tobago OilCompany (Trintoc), their refining processes are not integrated, withrespect to the supply and use of feedstock, for example. Overstaffingafflicts both plants; and because many of the facilities are old, and theprocessing configuration is very simple, extensive refinery conversions andnew plant are necessary to change the yield pattern in order to be able toexport more profitable distillates. These problems afflict the PointFortin plant, the older and smaller of the two plants, more so than theother, and the option of closing down operations at Point Fortin altogetherhas been proposed. The Government is approaching such a proposalcautiously because of the considerable social implications -- about 1,000workers would be added to the already large and rapidly growing numbers ofunemployed, in a company town with no major alternative source of income.However, it is embarking on an industry rationalization and refineryupgrading program with IDB support.

Heavy Industry

16. Trinidad and Tobago had, in the past, embarked on a strategy ofdeveloping energy-based heavy industry as a mechanism to harness itsabundant gas resources and diversify the economy. The petrochemical (urea,ammonia, methanol) and steel industries launched under this programbeginning in the 1970's offered promise of diversifying export earnings.Various reasons, including start-up and management problems, as well asweak marketing capabilities and low international prices, have preventedthem from realizing their potential. The Government, which has full ormajority ownership in most of the enterprises, has covered their lossesover the years.

17. The Iron and Steel Company of Trinidad and Tobago (ISCOTT)suffered from market related problems, low capacity utilization, highcosts, and weaknesses in management and technical skills. It requiredannual capital transfers of some US$60 million in 1986 and 1987. Afteroperating under a management contract for about a year, the company wasleased to an experienced international steel producer in 1989. Withrequired investments and improved management, ISCOTT would be able tocompete effectively in higher-value products and achieve its rated capacityof 600,000 tons per annum.

- 51 -

ANNEX IVPage 6 of 11

18. In the petrochemical sector, experience has been mixed, primarilybecause of the significant influence of international prices on financialperformance. There are four companies in this sector. The Trinidad andTobago Methanol Company (TTMC) is wholly owned by the Government. FederalChemicals (Fedchem) is an ammonia plant owned by W.R. Grace & Company.Trinidad Nitrogen Company (Tringen) is an ammonia producer owned 512 by theGovernment and 492 by W.R. Grace & Company and managed by Fedchem.Fertilizer Company of Trinidad (Fertrin) is owned 512 by the Government and492 by AMOCO. It is managed by AMOCO, and produces ammonia. A urea line,wholly owned and operated by the Government is located in the Fertrincomplex. TTMC has been well managed, and with the recent sharp increase inmethanol prices is generating sizable surpluses as against its earlierdeficits. The ammonia companies in which the Government has an interesthave been affected by low ammonia prices, while the 1002 Government-ownedurea plant has been losing money.

19. Given the abundance of Trinidad and Tobago's natural gas reserves,expansion in gas-processing industries is a logical step. A number ofmethanol proposals have been discussed over the years, and, with thecurrent prognosis for methanol prices, additional methanol capacity couldbe an interesting option, and is under consideration both by the Governmentand by private concerns. Downstream conversion of methanol into methyltertiary butyl ether (MTBE, an octane enhancer) -- a protect that has beenproposed -- would have to be looked at carefully in light of both MTBEcapacity in the region and the lack of local butylene needed to make MTBE.Similarly, Government's proposals to build a new ammonia plant to integratewith the existing urea plant should be examined in the framework of otheroptions for the urea plant (e.g., sale to Fertrin, where the urea plant islocated). One project under serious consideration by the Government andwhich would be carried out with foreign partners is a Natural Gas Liquids'project (for the separation of liquids from natural gas). The projectwould strip the gas of condensables which could be fractionated to producepropane, butane and gasoline. As the process would not affect thesuitability of the gas for ammonia or methanol production, the projectwould effectively enhance the value of currently produced natural gas. TheIFC has been approached about this and other projects in the petrochemicalsector, and would be prepared to consider feasible investments.

Other Manufacturing

20. The light manufacturing sector consists of food processing, otherresource-based industries such as wood processing, assembly and associatedcomponent industries and apparel. The sector has the typicalcharacteristics of an industry shielded from import competition over a longperiod of time. Assembly of imported parts, frequently in completelyknocked-down form, and mixing and bottling operations of the foodprocessing industry dominate light manufacturing with about two-thirds oftotal value added. These activities have small shares of value added insales, operate with weak linkages to the domestic economy and offer littleopportunity for learning by doing. Product quality of the industry hasgenerally been well below comparable imports; and prices of mostdomestically manufactured goods have been substantially above world marketlevels.

- 52 -

ANNEX IVPage 7 of 11

21. In line with the overall performance of the economy, the sectorgrew rapidly during the boom years. Behind a tight system of non-tariffprotection, annual real growth of manufacturing output (excluding petroleumrefining and petrochemicals) ranged between 72 and 142. However, as growthof other economic sectors was also high, the share in GDP averaged only6.5Z during 1974-82, lower than in the early 1970s. With the sharp drop inthe petroleum sector, the share increased to about 92 by 1986. Geared tothe domestic market and boosted by the captive demand in the rapidlygrowing economy, the sector had little incentive to export and has been blarge net user of foreign exchange. Exports grew 2.5Z during 1974-82, anddeclined in the next three years as import and foreign exchange controlstightened. The sector's potential, however, is demonstrated by its exportperformance in the last three years. Depressed domestic demand and a morecompetitive exchange rate stimulated real export growth in this sector inexcess of 202 per annum, albeit from a low base.

22. The issues and potential in the sector point to the need to revampthe incentive environment facing manufacturers. Current industrial policyrelies heavily on non-tariff import protection administered through a'negative list' of imports, import duty exemptions on imported inputs forapproved industries and an export incentive regime rendered ineffective bythe underfunding of export support institutions and by the dearth ofmarketing expertise. The Government recognizes the need to shift emphasisaway from import substitution toward export manufacture, and the medium-term adjustment program includes proposals to reduce the anti-export biasin the trade regime and to provide exporters with access to imported inputson a simulated free trade basis.

Agriculture

23. While the development of a strong petroleum export sector renderedthe real exchange rate uncompetitive for agriculture in the past,Government policy continued to accord that sector a major role in theeconomy. It was expected to achieve food security, maintain farm incomesand be the employer of last resort. The Government put in place a complexand costly system of protection -- controls and subsidies, sometimesconflicting -- that did not produce the expected results. Agriculturaloutput fell some 222 between 1976 and 1981, and over the decade of the1970's the number of agricultural workers almost halved.

24. Sugar, the main export crop, contributing 95Z of agriculturalexports, is kept afloat only by massive domestic and foreign subsidies.Production costs in 1987 were five times the world price and 3-1/2 timesthe preferential price obtained from sales in the guaranteed UK and USmarkets. The state-owned sugar corporation, CARONI (1975) Limited,required annual budgetary transfers averaging US$65 million during 1984-87to cover its operating losses. The Government is now considering phasingout the production of sugar for export. The minor export crops of cocoaand coffee suffered from an exodus of labor and severe neglect of theestates. In sum, the total subsidy to agriculture, large as it was,attracted only limited resources to a sector that, basically, wasuncompetitive at the prevailing exchange rate.

25. Increased unemployment, together with the recent devaluations ofthe TT dollar, have created more favorable conditions for agriculture.They have brought an influx of workers into the sector at greatly reduced

- 53 -

ANNEX IVPage 8 of 11

wages; prompted a reduction of Government subsidies; and generallyincreased the competitiveness of agriculture. Employment in agriculturerose by 28Z between 1982 and 1986 from 34,600 to 44,200. All subsidiesexcept for milk have been scaled back significantly since 1983, from TT$62million to TTS22 million in 1987. Under those conditions, greaterharvesting and some modest rehabilitation of existing cocoa, coffee andcitrus orchards are occurring. The Government recognizes the need todismantle the protective system, and has dismantled most price controls;and import restrictions are slated for relaxation under the medium-termadjustment program. The 1988 recent elimination of restrictions againstCARICOM imports is exposing agriculture to a certain degree of externalcompetition.

26. The above actions are consistent with a thrust toward export-oriented development and efficient import substitution. Nonetheless, theGovernment has been contemplating major import substituting investments inrice and livestock production which past experience and preliminaryanalysis suggest would be economically unviable. The proposed policy,moreover, of utilizing the demonstrably inefficient sugar producer, CARONI,as the vehicle for the Government's agricultural diversification strategy,including the proposed rice and livestock projects, is inappropriate.Ensuring that major projects under consideration are subjected to fulltechnical, financial and economic analysis prior to implementation wouldmake explicit the costs of the Government's import substitution policies,and would promote a more efficient use of scarce national resources. Fulldismantling of the price control and subsidy system and shifting away fromquantitative restrictions toward tariff protection would permit thedevelopment of a more efficient and competitive agriculture. Theseimproved policies are being promoted under the medium-term adjustmentprogram.

Tourism

27. Within the twin-island state, Tobago offers the natural endowmentassociated with sand and sea type of tourism. Trinidad, nonetheless,contains nearly three-fourths of the existing hotel rooms catering, for themost part, to business visitors. Over half the visitors to the country,however, fall into neither category, but consist of Trinidadians andfriends visiting for local holidays and festivals, who stay in privatehomes. Hotel holiday visitors account for a marginal share. During theboom years government policy toward tourism was at best one of benignneglect, while societal attitudes towards service-type jobs did not favorthe industry. Trinidad and Tobago became a high price, low qualitydestination. In 1986, it ranked behind Aruba in total stayover visitorsand received only one half of the numbers that visited Barbados. In 1987,while average room occupancy rates in the Caribbean were 60Z, its roomoccupancy rates were 442. Average regional length of stay is also doubleTrinidad and Tobago's low average of three days. The same low marketpenetration exists in the cruise ship passenger market. Cruise shippassengers to Trinidad and Tobago were one-fourth of those to Aruba, farlower than any among five competing 1987 regional destinations. There istherefore considerable scope for short-term foreign exchange and employmentgains from improved promotion efforts.

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ANNEX IVPage 9 of 11

28. In the current search for alternative sources of foreign exchangeearnings and employment, the Government is targeting tourism with newemphasis. The official tourism development policies, however, areambitious in that rapid expansion is anticipated within a developmentphilosophy that places considerable emphasis on regional dispersion. socialbalance and environmental protection. Such management will not be easygiven the current limited institutional capacity. The Government alsoplaces emphasis on the high income tourist market. To attain thisobjective, Trinidad and Tobago must be perceived as a high qualitydestination, with sophisticated and diverse support services and a low riskof disappointment. There is also a need in Trinidad and, to a much lesserextent, in Tobago for a national awareness campaign to help foster a morepositive image for tourism within the community.

29. The Government is considering transforming the Tourism Board intoa commercially oriented Tourism Development Authority with primeresponsibility for promotion, development and regulation of the sector --an essential step for effective policy implementation. Budget constraintscould, however, limit its critically needed overseas marketing andpromotion activities. However, significant infrastructural development isunderway in Tobago. A new deepwater harbour tn Tobago is expected to becompleted by the end of 1989, and extension of the Crown Point runway inTobago to allow direct flights by wide-bodied jets is expected to becompleted by mid-1990. Ongoing private sector investments in hotelconstruction and expansion would increase accommodation capacity in Tobagoby an additional 500 rooms for the 1989/90 season; and other reasonablyadvanced project and financing plans indicate that these numbers could riseto about 2000 by 1994/95. It would be important for the regulatoryframework to facilitate the tourism development implied by theseactivities. In particular, a policy of liberalization of airline servicesto Tobago, permitting direct scheduled and chartered flights into CrownPoint airport in Tobago, would promote tourism growth. The Government hasinitiated bilateral negotiations for scheduled international flights. andrecently entered into an agreement with Aruba for scheduled flights byAruba Airlines into Tobago. The Government should also review its presenthotel ownership position -- full ownership of the Hilton, and the 52 roomFarrell House, 91Z ownership of the Crown Reef, 66Z of the ChacacabanaHotel and 35Z of the Holiday Inn -- with a view to eventual divestment toprivate sector interests. The funds released could then be used to helpfinance tourism-related infrastructure, promotion and training programs.(The Crown Reef hotel was closed in February, 1989 and Cabinet has approveda proposal that Government enter into a joint venture arrangement for thehotel).

Social Sectors

30. The impact of the prolonged economic decline and adjustmentmeasures has focused attention on raising the efficiency of delivery ofsocial services and ensuring that the needs of the underprivileged andother vulnerable groups are adequately met. In some subsectors this wouldimply a shift away from expansion of physical facilities and in favor ofexpenditures for maintenance, better targeting and carefully structured andeffective programs of cost recovery.

31. Public policy on health in the past has emphasized curative morethan preventive medicine, with hospitals accounting for almost four-fifthsof all medical services provided. Standards of hospital services havefallen and the conditions of some health centers have deteriorated because

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ANNEX IVPage 10 of 11

of budget cuts; and the limited public funding of the health sector as awhole has spurred a wave of emigration of medical personnel, particularlynurses. Measures are needed to reorient the focus of public healthprograms in the direction of primary health care provided at the communitylevel; to ensure that public expenditures on health are not furtherreduced; and to introduce cost recovery on a selective basis.

32. Expansion of education in the past occurred at the expense ofprimary education and the quality of output has dropped, while theexpansion of secondary education has failed to raise the examinationperformance of students. The difficulty experienced by school leavers infinding work has highlighted the lack of opportunities for vocationaltraining. In this respect, development of training schemes in conjunctionwith employers is an option to be considered in preference to increasingthe vocational content of the curriculum, because of the efficiency and therelatively lower costs per student of the former approach. Pre-schooleducation also deserves more weight in the education system. At present itreaches only about 102 of the relevant age-group. Its expansion wouldproduce the added benefit of reaching some of the most vulnerable socialgroups. The Government recognizes the need for a general improvement andrestructuring of the education and training services. An in-depth reviewof the sector is necessary to provide sound prescriptions for policyaction.

33. The present and projected supply of dwellings falls short of thecorresponding demand, and squatter regularization with concurrent provisionof community infrastructure is a major concern. The Government hasinstituted a new housing strategy that aims at the development ofsettlements that satisfy the need for shelter, education, recreation andsmall scale farming. The State is the largest land owner and these issuesare linked with the need for a land reform. Policies affecting state-rented accommodation also need to be reviewed in light of the ineffectivecollection of arrears and unadjusted rents.

34. The Government wants to accompany the adjustment program withmeasures to attenuate the negative social impact of the reforms,particularly on the poor and most vulnerable groups. Existing socialsafety net programs, such as school feeding programs and old age pensions,are to be protected; an innovative job oriented training program, firsttested in 1987, is to be introduced; and various employment-generationschemes are in place, or proposed. The Government's proposal to promotethe development of small business by facilitating the delivery of creditand technical services for such businesses is also an element in the effortto provide new income earning opportunities. The Government intends tostrengthen its social policies and programs including addressing the socialdimension of adjustment.

Environment

35. The United Nations Environment Program has recently prepared areport on an assessment of options for environmental management in Trinidadand Tobago. The document is still in draft. Focussing on resourceallocation, resource management and pollution abatement as the main problemareas, it recommends the enactment of environmental legislation supportedby adequate enforcement procedures, institutional strengthening and public

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ANNEX IVPage 11 of 11

information and constituency building. Serious pollution problems exist,such as disposal of industrial effluents, soil erosion and urbanization offlood plains without the presence of basic infrastructure. The Governmentannounced in February 1989 the creation of a Ministry for the Environment,and is developing an approach with the IDB on the legislative,institutional and training aspects, as well as on solid waste disposal andreforestation. The Government is aware of the policy dimension of theenvironment, and this subject is treated as a critical consideration in theGovernment's macroeconomic planning framework, e.g. in energy, agricultureand tourism.

- 57 -ANNEX VPage 1 of 1

TRINIDD AND TOBAGO

STRUCTURAL ADJUSTM LOAN

COVERAGE OF IHF AND BANK PROGRAMS

Macroeconomic - IMF: flexible management of exchange rate andrelaxation of exchange allocation system;fiscal policy including public sector deficit,government wages and employment; monetarypolicy including reserve requirements, interestrates and financial system credit to the publicsector; debt management; relaxation of pricecontrols.Bank: competitiveness of real exchange rate,taking into account IMF reviews; andsatisfactory implementation of the medium-termeconomic program.

Trade Regime - IMFt partial elimination of importrestrictions.Bank: elimination of remaining importrestrictions and duty exemptions; initiation ofmedium term tariff reform; elimination ofexport restrictions; introduction of free tradestatus for export industries; simplification ofimport and export procedures.

Investment Incentives - Bank: improvement of legislation affectingand Sources of Growth foreign investment, simplification of

procedures facing prospective investors;airline liberalization to promote tourism;review of regulatory and incentive frameworkfor petroleum sector.

Public Sector - IMF: public sector deficit, government wagesand employment (as mentioned above).Bank: restructuring and divestment of selectedpublic enterprises to raise efficiency inpublic sector and increase resourcemobilization; improvement of financialperformance of selected public utilities.These improvements would address problems ofoveremployment in the public sector and ofcentral government transfers to the rest of thepublic sector.

Public Sector Investment - Bank: development and application of projectanalysis and project selection criteria;institutional strengthening for PSIPformulation and monitoring; formulation of coreinvestment program and three-year rolling PSIP.

Social Dimensions and - Bank: technical assistance for strengtheningAdjustment development of social sector policies throughImplementation safety net and information programs; and for

preparation of a proposed social sectorproject; technical assistance for implementingthe adjustment program.

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ANNEX VIPage 1 of 3

TRINIDAD AND TOBAGO

STRUCTURAL ADJUSTM LOAN

CRBDITVORTHINESS ANALYSIS

Overall Assessment

1. T&T's current payment problems stem from two sources: (i) abunching of scheduled amortization during the years 1989-92; and (ii)falling export earnings since 1985. With the debt rescheduling andprojected pickup in exports, these problems are projected to be alleviatedby the mid-1990s when repayments on the Bank's proposed lending programwould begin. This outcome would, of course, depend on the continuedimplementation of improved policies, to which the Government appears to becommitted, and to adequate external financing to support the adjustment.The latter could include follow-up financial arrangements with the IMF andnew commercial money. The principal risks lie on the socio/politicalfront. The social costs of the adjustment may be too burdensome and causethe program to be derailed and/or generate political instability. Adequateconsideration of the appropriate pace of adjustment and the necessarycomplement of social programs could guard against these risks.

Downside Risks

2. Policy Slippage. The present Government received a strong mandatefrom the electorate in the December 1986 elections. The tough measuresadopted and proposed by the Government since then have taken a politicaltoll. They created disaffection within the population and caused a rift inthe ruling party when in September 1988 three Cabinet members, including aDeputy Leader, were expelled from the party over disagreement about thedirection of economic policy. This faction has since formed anotheropposition political party. A 102 cut in public service wages announced inthe 1989 budget and recently enacted into law has fueled generaldisaffection into the makings of dissension, most vocally from the laborunions. Real weekly earnings in manufacturing declined by 4.42 per year onaverage during 1985-88. A general strike was called on March 6, 1989 andfurther demonstrations have taken place. Further needed adjustments,particularly in the sugar-based sector which has an ethnic concentration,could trigger ethnic disputes. The Government is committed to a strongadjustment program, but is sensitive to the likely adverse social impact inthe short term. The next election is due in two years' time, which isbarely enough time for the adjustment program to begin to take hold andproduce discernible positive results.

3. External Environment. The economy is highly open. Though exportsplus imports were some 202 less than GDP in the boom years, the rest of theeconomic activity was fueled by the oil revenues. The trade figurestherefore underestimate the external dependence. Since the petroleumsector will continue for some time to be the leading foreign ex.changeearner, international reserves will continue to be highly vulnerable toexternal shocks. A drop in oil prices by 102 would increase the financing

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ANNEX VIPage 2 of 3

gap by amounts ranging from US$90-170 million a year during 1990-94,implying heavier dependence on external assistance in the form of debtrelief and/or new loans from commercial sources, in addition tointensifying the need for adjustment. Proposals under the medium-termadjustment program will expand the tourism sector and improve theperformance of the heavy industries as well as of manufacturing andagriculture as a means of diversifying the sources of growth and foreignexchange earnings. On this score too, the balance of payments would bevulnerable to a US recession.

4. Concerning sensitivity to interest charges, the reported floatingrate debt was about 64? of total external debt in 1987. It is estimatedthat the share of floating rate debt would be 72? by 1993 and 78? by 1997.Assuming interest rates exceed current projections by 2 percentage points,the financing requirements would rise by the following amounts (calculatedon new and rescheduled debt):

1990 1991 1992 1998 1994 1995 1996 1997

USS M. 19 28 88 41 82 87 49 6s

S. Capital Availability. There was a bunching of repaymentobligations in the years 1989-92. The rescheduling under the aegis of theLondon and Paris Clubs therefore resolves the present short-term financingproblems. For the medium term, an increasing portion of the financingrequirements are to be sought from multilateral and bilateral sources so asto improve the debt structure. Cofinancing arrangements are being soughtactively in connection with the Bank's proposed SAL and subsequent proposedpolicy-based operations in the next two fiscal years. The Export-ImportBank of Japan is the most likely source for such cofinancing. Otherbilateral sources in the form of official export credits would have to bepursued. Cofinancing with the IDB may also become a possibility. However,new commercial borrowing would be required.

6. Debt reduction might also become a financing option over themedium term. The market value of TMT's debt has fluctuated between 55? and702 recently in a thin and irregular market.

Relations with Creditors

7. In 1988 T&T entered, for the first time, into an arrangement withthe IMP. It has successfully concluded rescheduling negotiations andenjoys good relations with its creditors.

8. The Bank has not lent to the country in 10 years, and its exposureis modest in relation to other creditors and to the country's exportearnings. The Bank's DOD was US$34 million in 1988, equivalent to 1.5? ofT&T's total debt. Debt service to the Bank in 1988 was 2.5? of thecountry's total debt service obligations. The proposed lending program isprojected to change both these ratios to about 6.5? and 3.12 respectivelyby 1993, and to 8.1? and 5.4? respectively by 1997.

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ANNEX VIPage 3 of 3

lank Strategy and the Downside Risks

9. The most difficult downside risks in terms of the Bank's abilityto respond would be a shortfall in financing. The Bank, as chairman of theCaribbean Group, intends to use the vehicle of the Tighter ConsultativeGroup for soliciting and coordinating the resources needed to finance theprojected gap. That gap would be larger if commodity prices, particularlyoil prices, fell below the base case assumptions.

10. In the case of commodity price declines leading to shortfalls inexport earnings, the IMF is the lender of last resort. Following approvalby the IMF Board in January 1989, the contingency element of the CCFF isavailable to cover adverse movements in current account variables thatmight occur over the period of the current Standby arrangement, in anamount up to 25X of quota, approximately US$50 million. (To date there hasbeen a triggering of the symmetry provision of the CCFF which has resultedin a higher target for net international reserves). In principle,additional access of up to 152 of quota is available under the compensatoryelement of the CCFF.

11. In the case of a policy slippage, resulting from factors otherthan a lack of commitment, such that the Bank would have to cancel all or aportion of the SAL, the Bank would attempt, under appropriate conditions,to formulate with the Government a new structural adjustment operation, andto prepare the proposed Social Sector Project to be presented to the Boardsimultaneously with the new SAL.

- 61 - ANEX VIIPage 1 of 11

MINISTRY OF FINANCE

FRUC WIIAtSM fPNANCE BUJWD(GERIC WILLIAMS PLAZA

INDEPENDENCE SQUAIAPORT.OF-SPAIN

R1: Pl16t 12/11/6 TRDIDAD

........... ... ......... .9.0.1

Mr. Barber B. ConablePresidentThe World Bank1t19 H Street W.W.Washington, D.C. 20433United States of America.

3ear Mr. Conable,

The Government of the Republic of Trinidad and Tobago requests

the World Bank (IBRD) to provide a loan in an amount of USV40 million

equivalent in support of critieal elements of the Government'sstructural adjustment program.

x enclose herewith a statement which sets out the Government'sdevelopment policies and strategies for the medium term.

Sincerely your.,

Selby WilsonMinister of Finance.

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ANNEX VIIPage 2 of 11

TRINIDAD AND TOBAGO

STRUCTURAL ADJSTMN LOAN

STAT$MT OF DEVELOPMENT POLICIES

Dackgromd

1. Between 1982 and 1988, the Trinidad and Tobago economy experiencedsix consecutive years of negative growth. Over this period, petroleumexport earnings fell by close to one half, and Government revenues frompetroleum by 40 percent. The unemployment rate more than doubled, from 10percent to 23 percent, and real GDP at the end of 1988 was some 28 percentbelow the level of 1982. In addition, despite a significant reduction inimports, there was a lose in foreign exchange reserves of some US$2.8billion between 1982-1988. This severe economic contraction was a productof both domestic and external factors, the most important of which were:

{i) the substantial deterioration in the country's terms oftrade consequent upon the weakening and ultimate collapseof oil prices;

(ii) the decline in oil production (by a.out 40 percent since1978) as a result of an inadequate exploration effort;

(iii) insufficient adjustment in domestic demand to the declinein oil revenues; and

(iv) the sharp rise in the external debt service burden.

2. A number of measures, including a significant devaluation of theTrinidad and Tobago dollar, were introduced in the 1983-85 period to dealwith the deteriorating balance of payments situation. These measures wereinadequate both in terms of their comprehensiveness and their intensity andin addition the situation was aggravated by further declines in petroleumprices in 1986.

3. Soon after taking office in December 1986, the new Governmentbegan to implement a comprehensive approach to stabilization and medium-term structural change in the economy. In the area of external policy,steps began to be taken to improve external competitiveness. Thus, inJanuary 1987, the exchange rate was unified, completing the exchange rateadjustment begun in December 1985. Later, in mid-August 1988, in order tocorrect for the remaining over-valuation of the currency, the Trinidad andTobago dollar was devalued further, by 15.3 percent. This action lelped toreduce the real effective exchange rate index to a level about 6 percentbelow that of 1976.

4. To address fiscal imbalances, action began to be taken in 1987 toreduce the wage and salaries bill of the Central Administration through thetemporary suspension of cost-of-living allowances and merit increases.This measure resulted in fiscal savings equivalent to 3 percent of GDP.Also, in the context of both the 1987 and 1988 budgets, transfers to thestate enterprises and several of the statutory authorities (including the

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ANNEX VIIPage 3 of 11

main public utilities) were substantially reduced as a result of theclosing down of some enterprises, and the introduction of cost-cuttingmeasures, including employment reduction. Some temporary tax measures werealso introduced to strengthen the Central Government's revenue performance.At the same time, however, the Government was undertaking work on acomprehensive tax reform programme which aimed at simplifying the taxsystem, broadening its coverage and generally reducing direct taxes so asto provide greater incentives for savings and investment.

5. As a result of the measures introduced in 1987-88, the overalldeficit of the public sector was reduced from the equivalent of 11-1/2percent of GDP in 1986 to about 7 percent of GDP in 1988; over the sameperiod, the external current account deficit was reduced from approximately16 percent of GDP to roughly 4 percent of GDP. Economic activity, however,continued to decline during these two years.

The Stabilization Programme for 1989

6. In the second half of 1988, the Trinidad and Tobago Governmentunveiled a planning framework for restructuring the economy. Thisframework incorporates a comprehensive Seven-year Macro-economic Plan(1989-95), a Public Sector Investment Programme (1989-91) and a Medium-TermEconomic Programme (1989-91). The principal aim of the medium-termeconomic programme is to restore the economy to a positive growth path in acontext of reduced external and internal imbalances.

7. The stabilization programme for 1989 was set within theframework of this medium-term strategy. The specific objectives of thisprogramme were to reduce domestic and external imbalances further and tobegin to set the stage for the turnaround of the economy. Under theprogramme the Government adopted measures designed to raise public sectorsavings, improve the functioning of credit markets, relax controls on tradeand payments ard improve incentives to the private sector. The programmewas supported by a 14-month Stand-by Arrarngement with the Fund approved bythe IMP Executive Board in January 1989.

8. The 1989 budget, which forms an integral part of the economicprogramme, aimed at reducing the Government deficit from 6.7 percent of GDPin 1988 to 4.1 percent of GDP in 1989 largely through action to r.rtailgovernment expenditures. To effect this, the Government postponeaimplementation of a pay award, handed down by a Special Tribunal of theIndustrial Court, which called for the restoration of cost-of-livingallowances and a 2 percent salary increase with effect from January 1,1989. In addition Government introduced a 10 percent cut across the boardto the wages and salaries of employees in the central administration, thelocal authorities and the statutory boards (including the publicutilities). This wage cut resulted in expenditure savings (net of reducedtaxes) of the order of 1.3 percent of GDP. The budget also provided for areduction in current transfers and subsidies to be facilitated by thecontinued rationalization of employment in the public utilities and byincreases in prices charged by certain state enterprises (includingdomestic sugar prices and domestic air fares), and by restructuringmeasures in other enterprises. In 1989, Government introduced a VoluntaryTermination of Employment Plan (VTEP) which includes an early retirementscheme for employees aged 50-60 years and a voluntary severance scheme for

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ANNEX VIIPage 4 of 11

emplcyees under age 50. The savings to the budget from this scheme areexpected to accrue as from 1990.

9. The expenditure measures have been complemented by theimplementation of the first phase of a tax reform programme which tookeffect in January 1989. In this phase, the income tax system forindividuals has been simplified through a reduction in the number of taxbrackets from 11 to 4, several income tax preferences have been eliminatedand the highest marginal tax rate for both individuals and corporationshave been reduced to 45 percent from 50 percent and 49.5 percentrespectively. In the second phase of the tax reform programme, to beincorporated in the 1990 budget, a value-added tax will be introduced toreplace a whole range of existing indirect taxes. Further reforms in thesystem of direct taxation for individuals and corporations are expected in1990.

10. The fiscal adjustment described above is being supported bymonetary and credit policies geared to protecting the balance of paymentsand containing inflation while at the same time ensuring that sufficientcredit is available for productive activities in the private sector.Greater interest rate flexibility is being fostered by new operatingprocedures in the Treasury bill market which will ensure that treasury billyields are more responsive to market conditions. The Central Bankrediscount rate was increased by two percentage points in late 1988 and theBank plans to continue to adjust the rate so as to ensure that anappropriate differential is maintained between the rediscount rate andcommercial banks' deposit rates. These measures, combined with a phasedreduction in the Secondary Reserve Requirement applicable to commercialbanks, and steps to reduce commercial bank's reliance on advances from theCentral Bank, should greatly increase competition in financial markets.

11. The economic programme for 1989 also includes measures geared toimproving resource allocation in the economy. The system of price controlshas been substantially dismantled, except for a small group of basic fooditems; and Government has initiated a phased reduction in quantitativeimport restrictions. As of September 1989, items valued at close to US$150million were removed from the Negative List. The foreign exchangeallocation system was liberalized early in 1989 and again in September 1989when most agricultural inputs, some raw materials for manufacturing andcapital goods and spares were made exempt from the ex-ante allocationprocess. The foreign exchange allocation system is scheduled to be totallyliberalized in 1990.

THE MEDIUM-TERM ECONOMIC PROGRAMME

12. The Government's medium-term programme anticipates a levelling offof real GDP in 1990 and a gradual increase in growth to 4 percent by 1995.The growth projections are predicated on an increase in crude oilproduction (which has declined steadily since 1978) as a result of theimplementation of additional incentives and investment projects; theupgrading and expansion of the energy-based industries; and increasedactivity in manufacturing, agriculture and tourism. Fiscal performance isto be improved through efforts on both the revenue and expenditure sides toachieve current savings of about 1 percent of GDP in 1990, compared with-3.5Z in 1988. Government would undertake additional measures to improve

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ANNEX VIIPage 5 of 11

savings performance further, over the medium term. Aided by prudentmonetary and exchange rate management, the external current account balanceis expected to remain at about 4 percent of GDP in 1990-91, then improvesignificantly over the medium term, achieving small surpluses in 1994-97.

Public Sector Reform

13. Achievement of the growth objectives rests heavily on the abilityto improve resource allocation, including reducing the demands of thepublic sector on the economy's resources. Government participation inindustrial and commercial enterprises grew considerably up to the mid-1980's. By 1986 Government owned or had majority participation in aboutsixty companies operating in virtually every sector. In many cases,government companies operated inefficiently and suffered heavy losses.This led to heavy reliance on the Treasury by several of the largerenterprises to cover their operating deficits as well aa to financeinvestment. Over the period 1979-84, total loans, advances and subventionsto state enterprises amounted to US$2.4 billion. The larger stateenterprises also borrowed extensively on the international capital markets.The external debt outstanding of the state enterprises at end 1988 wasUS$786 million, equivalent to almost 40 percent of the country's totalexternal debt.

14. The present Government has already begun to rationalize the stateenterprise sector with a view to reducing the crippling burden on thecentral government finances. In general, Government will seek to reduceits role in directly productive activities and instead concentrate onproviding an appropriate environr3nt, conducive to the effective operationof private initiative. As much emphasis will be placed on the expansionand/or upgrading of physical infrastructure, along with the provision ofthe necessary incentives to assist the private sector in the establishmentof new industries.

15. The Government has embarked on an active policy of encouragingprivate foreign investment in order to promote national economicdev'lopment. Such investment can be valuable where it is associated withaccess to specialized skills, expertise, markets and finance. Jointventures between local and foreign investors provide the most efficientroute for mobilizing foreign investment, although in very special cases--for example where leading edge technology is being contemplated -- fullforeign ownership of local enterprises may be allowed. State investment,with or without local private investment, is often the vehicle required toattract the private foreign investor and in appropriate cases the Statewill participate in such joint ventures.

16. As mentioned earlier, the rationalization of the state enterprisesector is already being actively pursued. Committees were appointed toexamine the operations of a wide range of state enterprises and three broadapproaches were decided upon for the rationalization of the sector:

(a) the winding up of those companies which have no realprospect of becoming commercially viable and whosecontinued existence cannot be justified on the basis ofsocial considerations;

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ANNEX VIIPage 6 of 11

(b) the reduction of shareholding in those enterprises wherethere are obvious benefits from foreign or local privatesector participation; and

(c) the restructuring of the capital base and improvingmanagement systems and practices in those enterpriseswhich, because of their strategic national importance, havebeen chosen to remain under state ownership and control.

17. In accordance with these guidelines the National HospitalManagement Company, School Nutrition Company, National Secondary RoadsCompany and the Meat Processors Company have been closed. The Iron andSteel Company has been leased to a foreign concern and there has beenpartial divestment involving the Trinidad and Tobago Cement Company, theNational Commercial Bank and the Development Finance Company. Negotiationsare nearing completion for another sale of shares of the Cement Company andthe partial divestment of TELCO, the Crown Reef Hotel and the Printing andPackaging Company. Restructuring and cost-reduction measures have beentaken in a number of enterprises including the methanol, urea andfertilizer companies, the Agricultural Development Bank and the DevelopmentFinance Company. The Solid Waste Company is also to be restructured.Within the next year, Government intends to complete the liquidations ofthe entities that have been closed down.

18. Those enterprises which, by virtue of their strategic importanceor because of their overriding socio-economic benefits, are to be retainedby the State will be required to achieve and maintain a very high level ofefficiency and to operate, as far as possible, without financial supportfrom the Treasury. Accountability of Boards and Executive Management willbe stressed. The Boards will be expected to take the necessary steps toensure that the human resources available within the organization, at alllevels, are properly trained and equipped to support the required level ofefficiency. As indicated earlier, the levels of financial support to theState Enterprises, Public Utilities, Statutory Boards and Local GovernmentBodie3 were reduced in 1988-89. Further reductions are earmarked for thenext few years. Procedural guidelines have been issued to these entitiesrequiring that:

(i) the strategic plans for state enterprises and publicutilities be brought in line with the approved budgetaryallocations;

(ii) the approval of the Ministry of Finance be sought beforeapproaching the market for new credit or drawing down onexisting credit lines;

(iii) all necessary steps be taken to settle outstanding claimsamong themselves and with the Central Government;

(iv) strict financial and management principles be adhered towith a view to promoting greater self reliance; and

(v) all income tax liabilities and national insurancecontributions be remitted when they fall due.

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Page 7 of 11

19. Implementation of the rationalization measures has been greatlyfacilitated by the Co ordinating and Monitoring Unit of a Select Cabinet-Appointed Committee. With the imminent expiry of the Committee's term, theGovernment has established a unit of high calibre in the Ministry ofFinance to co-ordinate and monitor implementation activities, as well asassist in mobilizing necessary expertise to facilitate implementation ofthe restructuring and divestment programme.

20. Government is soon to initiate a review and restructuring processfor the Water and Sewerage Authority (WASA) and the Trinidad and TobagoElectricity Commission (T&TEC). Consultants will be engaged to assist inthe formulation of action plans for these enterprises that.are gearedtowards achieving financial self-sufficiency and administrative andoperational efficiency. The plans would include agreed targets forrelevant indicators such as the working ratio, the net internal cashgeneration, the customer/employee ratio, and the level of receivables. Inrespect of WASA, the action plan will be designed to achieve by end 1991 aworking ratio of less than 1.05, receivables 6 months or less, and a ratioof employees per thousand connections less than 21, from the present 31;and by end 1993, working ratio less than 0.95, and receivables 4 months orless. In respect of T&TEC, in 1990, adjustment measures, including apossible tariff increase, will be taken to achieve a break-even position inthe company's operating accounts and a customer/employee ratio not lessthan 99 (from the present 97). Government will take measures to eliminateits arrears and those owed by local authorities and Statutory Boards toWASA and T&TEC and, in addition, will convert residual loans and advancesto T&TEC into equity. Government's account balances to these entities willbe kept current, and T&TEC's non-governmental account balances, includingthose of state enterprises, will be reduced to 60 days. To facilitate thetimely preparation of the action plans, Government will ensure that theconsultants are in place by February 1990.

21. Reforms are also being adopted within the Central Administration.An administrative reform programme will address long-term efficiency of theadministration. A complementary exercise is the Government's programme tostrengthen its capability to formulate and monitor the public sectorinvestment programme. Technical assistance is being sought from the IDB toimprove project-cycle management. The exercise will assist the Governmentin establishing project selection guidelines and criteria, includingenvironmental impact assessments, and institutional procedures for projectapproval and review; will provide training in techniques of projectanalysis and project preparation; and will establish project monitoringprocedures. Government prepared a core capital programme for 1989 andintends to institute the system of a three-year rolling PSIP.

Incentives for the Private Sector

22. It is Government's objective to stimulate the economy by improvingthe conditions for growth in private investment and exports. Achievingthese goals requires reforms in the foreign trade regime as well asmeasures to enhance investment incentives including reform of the taxsystem. The issue of membership in a foreign investment guarantee schemesuch as HIGA is directly relevant for attracting foreign investment andGovernment is considering its options in this area. Government recogniizesthe importance of the maintenance of international competitiveness to

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ANNEX VIIPage 8 of 11

further its export thrust. Such competitiveness depends on exchange ratepolicy, on wage and salary developments and on other factors (such astechnology and management) which bear on productivity and costs in theexport sector. Thus, Government is committed to a flexible management ofthe exchange rate to maintain export competitiveness and will keep underconstant review the performance of non-traditional exports.

A. Trade Policy and Export Incentives

23. Government is seeking to redress the balance in the structure ofincentives so as to favour production for the export market. The ongoingprogramme of policy reforms has the objectives of moving the domestic pricestructure closer to international prices; making the protection system moretransparent; and reducing, over time, average protection levels and thevariability of protection across sectors. In pursuing this course ofaction to eliminate anti-export biases, the Government is conscious of themany non-tariff barriers to trade imposed by industrialized countries, thewidespread practice of dumping and the maintenance of protection ofselected industries in the economies of many industrialized countries. TheGovernment strongly supports the efforts of the international organizationsto convince the industrial countries to reduce trade barriers.

24. Government's policy will be directed towards reducing importprotection; the ultimate elimination of import duty exemptions except wherethey are absolutely needed to maintain competition with other CARICOMproducers benefiting from such exemptions; abandoning export licensing;assuring exporters unrestricted access to imported inputs at internationalprices; and simplifying export and import procedures.

25. Trinidad and Tobago's membership in CARICOM places certain limitson the scope for introducing trade policy reforms. One constraint islegal-institutional, and is related to the existence of a common externaltariff (CET) vis-a-vis third countries. In effect, by virtue of theexisting agreement CARICOM countries have no independent authority toadjust tariffs. Another constraint is based on the practical considerationthat import duty exemptions, authorized under the CARICOM Agreement, are anintegral part of the intra-regional competition for investment and exportmarkets. Unilateral elimination of these exemptions could place Trinidadand Tobago's industry at a competitive disadvantage with other CARICOMcountries.

Import Protection

26. The reform of the import protection regime is to be implemented intwo phases. Phase One seeks the immediate rationalization of protection ofthe manufacturing sector to make it transparent, replacing administrativebarriers to imports (largely quantitative restrictions), by tariffs. Thisinvolves the gradual elimination of the Negative List of imports affectingmanufacturing, with exceptions for some goods on the basis of internationalagreements, public health and national security. As noted earlier, therewas a significant reduction in the Negative List in 1989. During 1990, theGovernment plans to reduce the list further by excising items representing40 percent of the production coverage involved. The Negative Listaffecting the manufacturing sector will be eliminated by the end of 1991,

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ANNEX VIIPage 9 of 11

subject to the exceptions noted, and the fact that the time frame forexcising items produced by the state trading company is to be determinedafter study. In principle, the items removed from the Negative List willbe eligible to receive tariff protection not exceeding 100 percent of thec.i.f. price, except for textiles and garments where the maximum would be120 percent of the c.i.f. price, and dairy products where the equivalenttariff would apply. The applicable tariff will be reduced in successivesteps to the corresponding CET by end 1994.

27. Phase Two will focus on the Medium-Term Tariff Reform and will bebased on the following general principles:

(i) to achieve a maximum rate and a minimum rate (on parts andraw materials) of import charges no higher or lower thanthe CARICOM CET. This objective is to be accomplishedthrough annual adjustments in protection rates over fiveyears ending in 1994;

(ii) the reduction of the dispersion of effective protectionrates and of the number of tariff bands; and

(iii) exemptions from import duties are to be kept to a minimum.

28. A study of trade and associated policies, including quantitativeestimates of effective protection, will be undertaken to define the medium-term tariff reform programme more precisely. Also, the World Bank willprovide assistance, financed through the proposed Technical Assistanceloan, for improving the tariff administration system, including theestablishment of appropriate Anti-Dumping arrangements.

29. The agricultural sector will remain under import licensing duringthe period of the SAL. However, the Government will undertake a study ofthe impact of the trade regime on the development of the sector, and of thestate trading company, taking into account the Government's objective ofmaximizing the efficient use of local resources.

Duty Exemptions

30. Government will seek to eliminate over time import duty exemptionssubject to the need to maintain the competitive position of Trinidad andTobago producers vis-a-vis their CARICOM partners. As a first step,Government has decided to refrain from granting duty exemption for newtypes of industries, except for capital equipment. A review of existingduty exemptions has been initiated, with a view to assessing theirpractical significance for Trinidad and Tobago's competitive position inCARICOM markets and formulating an action plan for their phased removalover three to five years ending in 1994.

Export Restrictions

31. Government believes that exports should not be hindered by anyadministrative restrictions and has therefore eliminated all exportlicensing requirements, with limited exceptions such as for goods coveredby international agreements, and for the protection of the nationalheritage, items relating to public health and national security and forsubsidised commodities.

- 70 -ANNEX VII

Page 10 of 11

Access to Imported Inputs at International Prices

32. The international competitiveness of Trinidad and Tobago's exportswould be enhanced by guaranteeing exporters access to imported inputsunrestrictedly and at internationally competitive prices. A reformed traderegime, based on low and relatively homogeneous tariffs, should go a longway towards realizing this guarantee. Various mechanisms have beenemployed in other countries to provide exporters with unrestricted accessto imported inputs at international prices. Among the most common havebeen the Temporary Admission Regime (TAR), the In-Bond Manufacturing Systemand a system of rebates from indirect taxes. Government plans to initiateshortly, in collaboration with the private sector, an examination ofalternative systems in place in other countries for providing free tradestatus to exporters with a view to identifying a suitable scheme.Government will implement the selected scheme during 1990 for manufacturersengaged primarily in exporting activities, and will seek to establish asimilar facility for other exporters.

Simplification of Import and Export Procedures

33. Excessively cumbersome export and import procedures, increase thetransaction costs of international trade and, consequently, adverselyaffect competitiveness. A study on trade facilitation in Trinidad andTobago found considerable scope for simplifying import and exportprocedures. Government will accelerate implementation of theserecommendations regarding trade facilitation reforms, includingintroduction of the ASYCUDA System (Automated System for Customs Data) withfinancing under the proposed Technical Assistance Loan.

3. Other Incentives

34. Government intends to take steps to improve the institutionalarrangements for processing investment proposals. A one-stop-shop has beencreated, and the investment application documentation has been shortened.Government also intends to revise the legislation affecting thefacilitation of foreign investment.

35. The petroleum sector continues to be the key productive sector inthe economy, and steps are being taken to place it on a more securefooting. In the 1988 Budget, the oil tax regime was revised and atemporary scheme providing tax incentives for increases in oil productionwas introduced, with the understanding that the system will be modifiedwith effect from January 1, 1992. The oil tax regime, as well as otheraspects of the regulatory framework will be reviewed in order to assessTrinidad and Tobago's competitiveness for encouraging increased investmentby local and foreign investors in the petroleum and related sectors.Government will draw upon resources to be provided under the proposedTechnical Assistance Loan to engage expert technical assistance for thispurpose.

36. Tourism development offers the potential for substantial jobopportunities both, directly and indirectly, while increasing the country'scapacity to earn foreign exchange. In the short run, measures to promotetourism development will concentrate on strengthening institutions and

- 71 -ANNEX VII

Page 11 of 11

intensifying marketing efforts. At the same time, steps are being taken toaddress the deficiencies in infrastructure that have constrained tourismdevelopment over the years. Thus, work has begun on the improvement of thewater supply and the construction of cruise ship facilities both inTrinidad and in Tobago, and on the extension of the runway at the CrownPoint Airport in Tobago. Increasing tourist arrivals to Tobago dependscritically on being able to bring visitors to the island expeditiously.Recently, the Government entered into a bilateral agreement with Aruba topermit scheduled flights by Aruba airlines into Tobago. Once Crown Pointis designated an international airport, it is Government's intention toinitiate further bilateral negotiations, within the usual framework ofreciprocal landing rights, for direct scheduled flights into Tobago byinternational airlines. Domestic air service to Tobago, remainsunrestricted by any governmental policies towards local airlines. Underpresent arrangements, private local carriers are permitted to operatescheduled flights between Trinidad and Tobago, provided they satisfy theLicensing Authority in respect of their proposed schedule of operations,technical competence, etc., and obtain Cabinet approval.

Social Dimensions of the AdJustment

37. The measures outlined above for effecting the Government's medium-term programme for stabilization and adjustment will inevitably imply someshort-term welfare loss for the population. Government is consideringvarious approaches for ameliorating the hardships on the population.Employment generating and training schemes would assist the unemployed andthe young to acquire the skills and other requirements for self-employmentor other employment; or, in the case of youth training programmes, wouldpostpone entry into the labour force. In this regard, an area which hasbeen targeted for attention is the strengthening of the Youth TrainingEmployment Programme, while a Small Business Start-up Scheme is underconsideration. Government will also review its welfare programmes toimprove the targeting of the needy.

38. Government plans to establish a Social Sectors Unit in theMinistry of Planning and Mobilization to develop the necessary data andhelp design relevant social programmes. The Unit would review publicexpenditures on the social sectors and review the social safety netprogrammes, identifying target groups, analyzing targeting mechanisms,delivery systems, etc.; and it would introduce a Living StandardsMeasurement Survey System to monitor the effects of the adjustmentprogramme on the poor and vulnerable groups and facilitate the developmentof better targeted interventions. A Restructuring Support Unit will alsobe established, in the Ministry of Planning and Mobilization, to assist inimplementing the adjustment programme. The two units would work closelytogether. Studies to be carried out by the units are to be funded throughthe proposed Technical Assistance Loan.

TRINIDAD AND TOBAGO - STRUCTURAL ADJUSTMENT PROGRAM

POLICY MATRIX

Policy Ara Mej or Zesures TakenObl ctlyves/lissues by u id89 : Summary Further Measures Taken Second Tranche Measures

I. Macro Economic

Objectlve - viability of Government transfers Maintain appropriate Favorable Bankeconomic progrma. and subsidies reduced macroeconomic assessment of the

by 2.8% of GOP In fraework and imploemntation of theOveremployment and 1988; Gvorment impleeent medium-term medium torm economicoperating inefficiencies salaries cut by 10% In economic program. program and itsIn pubilc sector were 1989; employment sustainability.supported by government reduction programtransfers. introduced; public

sector overall deficitreduced by 1.73 of GODPIn 1988.

II. Exchange Rate

Objective - Improve TTS devalued 8a.8% In Monitor International Performance of non- Review performance ofinternational 1986, and 15.83 in competitiveness. petroleum exports and non-petroleum exportscompetitiveness. 1988. evolution of real and evolution of real

exchange rate exchange rate.Export earnings reduced reviewed.by 1/8 because of oilprice decline.

III. Public Sector

(a) State-owned Five review committees Continue Time-phasod action Complete liquidationsenterprises. established' Implementation of plans prepared to for MHC, SNC and NSR.

restructuring and cost restructuring and divest partially orObjective - improve reduction masures divestment plans. fully an agreod list Propare for divestmenttesouroe mobilization and taken for SOEs to be of enterprises (TCL, (including byefficiency of resource retained in public TELCO, Crown Reef, liquidation, mergertallocation. sector and initiated TTPP) and to joint venture or long-

for SOEs to be restructure Solid term lease) and bringWeak management, divestod; 4 SOEs Waste. to tho market at leastovoremploymant, lack of closed; 4 SOEs three enterprises. waccountability lod to partially or fully Unit established In 0poor financlal divested. Ministry of Finance,performance by many SOEs. to be supported with

technical assistance ° -under the TAL, to 1-4facilitateImplementatlon ofagreed action plans.

IRDEIDAD AND TOBAGO - STRUCTURAL AJUSTdENT PR10MM

POLICY MATRIX

Pollcy Ar. Major enasures TokenOblect slte acu by a_id-1989 Suin ry Furthr Measures Taken Second Trencho Measures

(b) Public Utilities Water Authority

Objective - Improve Reduction In transfers Eliminate government Agreement with the Consultant reportreo_roe mobillzation and from USt140 million in arrears and formulate Government and Water prepared including:efficienc of resourcn 1S86 (2.9S of GDP) to action plan to Authority on the (1) plan forellocetion. USS66 millon In 168B strengthen financial, objectivs of an rehabilitation of

(1.69 of GDP) adinistrative and action plan to be commercial system;High operating costs, operational prepared and carried (e.g., billing andparticularly labor, performance. out by the Government colltcton, census ofuneconomic pricing and and VSA. These all water and seweragepoor manogemnt of deand objectives includo: connections and planled to poor financial (1) financial self- for metering largeperformance and wasteful sufficiency (including consumers, lncludinguse of water *nd phsed reductIon of heavy Industrial

eletiity, transfers from Central users); (it) proposals*overnment) and for tariff levels andoverall sound structure in line withfinancial management agreod objectiveo;as easured by targets (l;t) plans forincludin working achieving theratio and receivables; following targets by(TT) administrative end 1991 - workingefficioncy Including ratio leso than 1.05;appropriate recelvables 6 monthsaccounting, billing or less; andand collectlon employees/1000 watersystemo; connections reduced(TTT) operational from 81 to less thanefficiency ,as 21; and by ond 1I98-measured by targets working ratio lessfor number of than 0.96, andcustomers per receivablos 4 monthsemployee; share of or les.salories in operatingexpenditures; number Action plan adoptedof metered and measuresconnections; Implemented in Inmaintenance lovels. accordance with plan.

Government agreement Hthat consultants wouldbe Tn place byFebruary 1990.

TRINIDAD AND TOBAGO - STRUCTURAL ADJUSTMENT PROGRAM

POLICY MATRIX

Policy Area Major Measures TakonOtj*ct1;i7r*/I"s4 by ild-I989 Summary Further Meosures Taken Second Tranch. Measures

Government co itment Arreors of Governmentto koep Its account and Its agenciesbalances end those of liquidated and accountIts agencies currnt, balances made current.and to makearrangements toliquidato arrars.

Power Company

Formulate and Agreement with the (i) Management andImplement action plan Government and tho operational auditto strengthen power company on the carried out, andfinancial, objectlivs of an action plan reflectingadministrative and action plan to be objectives formulatedoperational prepared and carried and mutually agreed;performncen adjust out by the Governmont (action plan totariff lovoel and and the power company Include targets,structure, and (bseod on the tming, and means ofeliminate arrears. management and achieving targets);

operational audit to (il) measures adopted,be financed under the including best effortsTAL). Theso to obtain tariffobjectives Include: adjustment, in order(t) financial self- to achievo break-evensufficioncy and position In 1990;overall *ound (iii) Investmentfinancial management progrs adopted Inas meaured by trgets line with action plan;Including rate of (IV) customr/employeereturn, net internal ratlo of not les thancash generation, debt- 99 (from current 97)equity ratio, debt achiovd.service covorag,raceivables;(ii) administrativeefficiency Includingeppropr ists accounting, billingand collection °systems;

1-.

TRINIDAD AND TOBAGO - STRUCTURAL ADJUSTMENT PROOBAM

POLICY MATRIX

Polic ay Alea Ualor Measures TakenObjectives/Issuse by mid-In9 Summary Further Measures Taken Second Tranche Measures

(i I) operationsleffIietncy, asmeasured by targetsfor number ofcustomers peremployee; share ofsalaries In operatingexpenditures;technical losses;maent0enance levels;(Iv) sound investmntprogrsaing based onthe principles ofleast-cost expensionand financialfoesibility. Soundbalance betweongeneration/trars-mission anddistribution.

Government areementthat consultants wouldbe In place byFobruary 1990.

Government coiitment Non-government accountto keep Its account balances reduced to 60balances and those of days; arrears ofIts agencles current; Government and itsand to make agencies liquIdatedarrangements to and soccunt balancesItquidate arrears. made current.

Government commitment Loans and advancesto convert its converted into equity.outstanding loans andadvances Into equity.

4

I-'

TRINIDAD AND T08AGO - STRUCTtRAtL ADJUSAMENT PROGRAM

POLICY IATRIX

Pollcy Area MJor Measures TakenObjectRdiUr5e!!ue! by aid-r - Su_mry Further Measures Taken Second Tranche Measures

(c) Public SectorInvesteuntProgrm

Objective - develop Throe-year rolling Strengthen investomnt Agrements Agreement on:capacity to formulate, PSIP prepared for programing,liplement *nd monitor 1989-91. Implementation and (1) on the size, (l) size, co2position/PSIP. monitoring. composition/sectoral sectoral balance and

balance and financing financing plan of aInstitutional *rrangement plan of a core PSIP rolled over PSIPfor project oslection and for 1909; covering tho periodPSI? formulation and 1990-92, with the coremonitoring aro eak. (Ii) that coverae of program for 1990Measures required to the PSIP would laclude clearly identifiedstrengthen capability. the investments of (project development

Central Government, will be assistedpublic utilities and throuh the TAL).all SOEs where theGovernment is the (ti) project prepara-mjorlty shareholder tion guideline", eel-or Is funding spocific ection criteria andlnvestment projects; approval procedurs

nd the linstitutional(iI) that current roles and responsibil-expenditures would be ities of the variouexcluded from the agencies Involved InPSIP, the PSW process;

approprlie(Iv) to deelop coordinationproject prparation mecheniem and aguidelines (including formal project pro-environenta itmpct selecion proces.assessments) nlcludingan lysiu of recurrentcost lpiliations ofInvestmt projects,selection criteria andpriojet approval Sprocedures (including u xdecision making powers) to ensure that ° mal1 projects above a 3-financial threshold ofUSh1 million oresubject to fulltechnical, economlcand financial analysisbefore thoy areincluded In the PSIP.

TRINDAD AD TOBAGO - STRUCTURAL ADJUSTMENT PROGRAM

POLICY MATRIX

Po ll¢ Ae Major Msures TakenO-bI S/ by mId___ _ Surmary Further Measuree Taken Second Tranch. MIasures

(v) to strengthen the (111) satisfactorysystem for monitorlng progress inthe PSW (both strongtheni ng the PSPphysical and financial monitoring system.progrss) In order tofacilitate ehe reviewof Implementatlonperformance on aquarterly asis.

IV. Incentives Frameorkq

(a) Trade Regime

Objeative - reduce anti- USING, million worth Reduce negative list Agreement to phase out hgotive listexport bia In trade of item rmoved from (i.e., Import negative list affecting the (nonregime. negative list of Itcensing and QRs). affecting the oil) manufacturing

Imports froe Dec. 1988 mnufacturing sector sector reuced byRestrictive regime to June 198. by end 1981 and shift Ite representing 40Xfeatures specific to tariff-basd of the productionproduct licnsing protection (with coverage nlvolved; andfor Imports and limited exceptions reemnt on time-export. in addition to such as may be phaed progrm toimpor duty exemptions required bcaus of eliminate the rest byand cwmbersom iort and International ond 1991 (textiles andexport procedures. agreements, national gaet te, leather,

security and public shoe. made of leather,health). Tmefram and other leatherfor Items produced by ood to be rmovedstate trading company in this final phase).subj0ect o result. ofZr1ricul study

proposed below.

Agrement that totalImport chargs !/ onitaes removed from thenegative list wouldnot exceed 100l of the 0c.I.f. priee (exceptfor textiles and Chgarments where the 0o-mximm would be 120X

TRINIDAD AND TOBAGO - STRUCTURAL ADJUSTMENT PROGRAM

POLICY MATRIX

Pollcy Area Major Measures Takonby______ aid-Insg_ Sumary Further Measures Taken Second Tranche Measures

of c.l.f., and dairyproducts where theequivalont tariff tobe estimated, wouidapply); and be redueodin succsive steps tothe corresponding CETby nd 1994.(Technical assistancewill be provided underthe TAL forstrengtheningtar ff/custosadministration andanti dumpingarrsngmnts.)

Agreement to conduct a Study of thestudy, under TOR protective re gimeagreed with the Bank, affecting agricultureof the protective and the state tradingregime effteting company completed, andagriculture end the findings discussedstate trading company, with the Bank.taking into accountthe Govornment'sobJective ofmaxioising theefficient ue of localresources.

Study Initiated of theimwet on domesticindustries of removingitems from thenegative list.

Initiate elimination Agreement to retrain CrMof import duty fro granting dutyexemptions, exemptions for new

industries. 0

'-4S

TRDNIDAD AND TOBAGO - STRtCTIMtAL ADJUSTMENT PROOUAM

POLICY MATRIX

Poe IIArea Major Measures TaxknObject]v s/I-Lues by mii-1i9w Summry Further Measures Taken Second Tranche Messures

Review Initiated of Time-phased actionexisting duty plan formulated andexemptions with a view mutually agreed;to assossing their Implementation inpractical signitfcan¢e aecordance with actionfor T & T's plan.competitiveness InCARICOM markets andformulating actionplan for their phasedremoval over threO tofive years.

Initiate modiur-term Agreement on the fol- Study conducted oftariff reform to lowing prlnciples of trade and associatedreduce level and the medium-term toriff policies, to bedispersion of reform: (1) the ob- financed under theeffective protection. j.ctive is to *chleve TAL; and agreement on

a maximum rate of the design of theImport charges, / medium-term tariffequlvalent to tha reform program for theCARICOM CEr, currently (non oil) manufactur-45X for most items (or ing ector.other lower rate thatmay be agreod withinCARICOM) and a minimmrate of Import chargson parts cad rawmterials of the CETrate (or other higherrate that may beagreed withinCARICOM); (It) thetariff reform to beaccomplished through 'uannual adjustments inprotection rates over ethree to five years Xending In 1994;(iil) reductlon In O

dispeorson of 'off ct1v protectionrates; (v reduction P

of the number oftariff bends; (v)exemptions from importduties to be kept to aminimum.

TRIN IDAD AND TOBAGO - STRUCTURAL ADJUSENLT PROGRAM

POLICY MATRIX

Polleey r MaJor Measures Taken____by _ _d-19_ _ Sum_ry Further Moasures Taken Second Trancho M.asuroe

Eliminate oxport Export licensinglicnsing. requirements

eliminated, withlimited exceptions asneeded bMeau o.fi nternati onal*gresonte, nationalsecurity andgovernment sublidies,or for protoection ofnational heritage andpublic health.

Simplify Import and Agroeent to Satisfactory progrssexport proceduree. aceelerato In lmplementing the

lmplementtion of reforms and thoUNCTAD s ASYCUDA system.recommendations 0

reaprding tradefacilitation reforms,including Introductionof the ASYCUDA systemwith fInancing underthe TAL.

(b) Export Incentives

Objectlve - Improve Export Doevlopment Provide free trado Agreement to oxamine, Selected schemeincentives for exporting Corporation statu, for exportors, In collaboration with estabitshed andby creating simulated estabilshod with the private sector, functioning forfree trade status for objectives to provide alternative systems In manufacturersexports. information and advice plaeo In other primarily engaged in

and assist exporters countries for exporting; timetableIn penetrating foreign providing freo trado for providing similarmarkets; and to status to exportors facility for othergivefinaneial (e ., temporary exporters o.assistane and provide admission regime, in- 0insurance facilities bond manufacturing,to exporters. rebate syst for any

Indirect taxes) with a °view to Identifying ascheme suitablo foradoptton In Trinidadand Tobago.

TRINIDAD AND TOBAGO - STRUtTURAL ADJUSTMENT PROGRAM

POLICY MATRIX

Policy Ara !jbr Measures TakenOblectiles/_s_ues by a_ d-______ Summary Further Measures Taken tocond Tranche Measures

Agreement on scope ofstudy, to be financedunder TAL, to estimatedirect and indiroctcontent of lndiroettaxes In domesticexports.

(c) InvestmentIncentives

Objective - increase Committee formed In Streamline procedures 'One-stop chop' for Satisfactory operationincentives for investment ZDC as initial stop for investment new investors croeted. of new system andparticularly foreign towards simplifying application review. Investment *pplication documentation.investent. inv tment application documentation

proe dures, simplified andshortened. o

Adopt _meures for 8stisfactoryfacilitating foreign legislation orinvestment, equivalent regulations

adopted forfacilitating foreignInvestment.

(d) Petroleum SectorIncentives

Objectivo - Stimulate In 198, Potroleum Improve regulatory and Agreement to review, Consultants ongagedtncreased private Taxes Act amended to Incentive framework, with assistance under agree TOR;Investment in the provide for a through the TAL, the satisfactory progresspetroloum sector. modification of the petroleum taxation In conducting reviws.

petroleuo taxation regime and the generalregim. New land and regulatory frameorkmarnon blocks opened to assess Trinidad and OF to bids for Tobago sexploration, and competitiveness foraards made. oneour0<ing lac ed°

Investment by local o 0 and forelgn Investors 0% 1-In the petroleum snd -rolated sectorsF.

TRINIDAD AND TOSADO - STRUCTURAL ADJUSTMENT PRORAM

POLICY MATRIX

Policy Amz Ibr Mbasures T kenO9woctl] r_ biy mid_19_9 S_uury Further Measures 'akon Second Tranche Measures

te) TourisIncentve

Objective - lcre ^ er Wa nd strengthened Liberalize airline Bilatoral nreotiationstouriet arrival. Tourism Authority services. Initiated for direct

estblshd and scheduled flight torelated infrastructure Toao byinvestment onoing. international

airlines.

V. Social Dimtions

i1_I iont"o

Objective - stre n Establish coordinating Social Sector Unit and Unite st ffed andte Government's units to manage the Restructuring Support functioning; c

institutlonal capacity design and Unit estabilsh d in sattstactory progressto: (1) amllorate the lplea-ntation of the ministry of In studies and insocIal costs of agreed studies aimed Planning and preparation/adoptionadjustment; and at Improving the Mobilization, of action programs *nd(i) Implement the provision of social Agreemnt on TORe for proposals par TORs.

adJ ustenmt progrm. services and studies to be carriedfactIlItatng the out by these unite andImplementation of the financed under theadjustment progra. TAL lncluding, in

adition to the SAL-related studiesstudies on publicexpenditures In thesocala sectors, livingtndrds m ret,ocal security, and

preparation of aSocial Sector pojct.

Defined teo Include tariffs, stamp duties and other taxes and charge thot discriminate against Imports.F1dC

- 83 ANNEX IX

Page 1 of 4

TRINIDAD AND TOBAGO

STRUCTURAL ADJUSTHT LOAM

PRODUCTION COVERAGE OF DMPORT NEGATIVE LIST

This Annex describes the data sources and methodology for derivingthe production coverage of items on Trinidad and Tobago's negative list ofimports (i.e. the list of imports requiring import license), and explainshow the analysis is to be used to monitor the import liberalizationprocess. The analysis has been performed using the World Bank SINTIA-Tsoftwarel and data provided by the Government.

A. Data Sources

The following data were obtained from the Governmentt

(i) value of 1987 production by 4-digit ISIC classification.the finest detail available (Central Statistical Office);

(ii) a consolidated list of items requiring import license, i.e.the negative list of imports, as at May 1988, with amapping between Ministry Code, CCCN and SITC codes. Thelist identified items that had been removed from thenegative list under the IMF program, i.e.. in the periodDecember 1989 to June 1989 (Ministry of Industry.Enterprise and Tourism).

B. Methodology

The SINTIA-T program was used to make a correspondence between thenegative list by CCCN code and production value by 4-digit ISIC (seeattached Table --detail is presented for the manufacturing sector only,which is the focus for the first stage import liberalization under theSAL). The analysis is performed using three definitions of manufacturing(see lines a, b and c of Table.)

(i) Each item on the negative list corresponds to a subset ofCCCN observations, column (2), within the 4-digit ISIC,column (1);

(ii) the relative frequency of these observations, column (3),is a measure of the extent of protection provided to thecorresponding subsector by the negative list;

(iii) to obtain the inputed production covered by the negativelist, i.e., column (5), the ratios in coluum (3) wereapplied to the corresponding 1987 production value incolumn (4) for each 4-digit ISIC;

(iv) the sum of the results (line a, b, or c of column 5) takenas a ratio of total 1987 manufacturing production (line a,b, or c, of column 4) produces the production coverage of

1/ SINTIA-Ti Software for Industrial, Trade and Incentives Analysis,Tariff and Nominal Protection Analysis, World Bank Software

- 84 - ANNEX IXPage 2 of 4

the negative list, with respect to the manufacturingsector, for either of the three definitions, i.e.,

Coverage Ratiot £ (ni * VHJVMT

where n3 is the percentage of CCCN observations representedon the negative list in subsector j (i.e. column 3); VMJ isthe value of 1987 manufacturing production in subsector j(i.e. column 4); and VMT is the total value of 1987manufacturing production. Following are the results onproduction coverage of the negative list:

Sector Coverage Ratio

(a) Total Manufacturing 30.72a/(b) Non-Oil Manufacturing *8.5Z'(c) Adjusted Non-Oil Manufacturing 48.02

(i.e., excludes items coveredby international agreementsb/)

(v) Columns (6) and (7) show, in percentage points, how eachgroup of items represented on the negative list, classifiedby 4-digit ISIC, contributes to the total productioncoverage. Column (6) deals with non-oil manufacturing;column (7) deals with non-oil manufacturing adjusted foritems covered by international agreements. Each group'scontribution is calculated as the ratio of thecorresponding value in column (5) to the total (or non-oil,or adjusted non-oil) manufacturing production, i.e.,

VMT

For example, the first number in column (7), 2.9, is to beinterpreted as follows: items on the negative list thatcorrespond to the meat preparation industry account for 2.9percentage points of the total 48? production coverage ofthe negative list affecting the adjusted non-oilmanufacturing sector.

C. MonitorinR

The derived data on contribution to coverage ratio (column 7) willbe used to monitor the removal of items from the negative list. Column (7)includes an adjustment of total non-oil manufacturing production to excludeISIC 3115, 3118 and 3710 because the items on the negative listcorresponding to these categories are covered by internationalagreements.bl

al Corresponding figures on production coverage of the negative listbefore reductions under the IMF program are 38? for total manufacturingand 51? for non-oil manufacturing.

b/ The CARICOM Oils and Fats Agreement, the Lome Agreement and theVoluntary Restraint Agreement with the United States.

-85- ANNEX IXPage 3 of 4

TRINIDAD: PRODUCTION COVERED BY QUANTITATIVE RESTRICTIONS

() (2) (8) (4 5 (6)- -- -- (7') -IMPUTED CONTRISUTION CONTRIBUTION

X ITEMS PRODUCTION TO COVERAGE TO COVERAGECOVERED 1987 COVERED BY RATIO RATIO (EXCL.

t OF WITH BY PRODUCTION QR'S (EXCL. 8512 8512, 8580SECTOR OBS LICENSES LICENSES ('000) ('000) a 8580) 8116,8118,1710)

(Adj.)

TOTAL ECONOMY 2720 796 29X 112,690,843.0 aAGRICULTURE 195 78 401 8776,540.6MINING 54 1 2X 38,925,282.0

a. MANUFACTURrNG 2471 719 29X 17,186,470.4 82,198,679.9b. MANUFACTURING (EXCL.

Petrol A Ferti.) 34,212,870.4 82,048,262.8c. MANUFACTURING (EXCL.

Petrol, Ferti, V.g.Oil,Sugar, Iron/Steel) 18,840,980.1 8l,608,765.8

8111 Meat Preparation 61 89 64% $158,146.0 397,918.0 2.83 2.9%8112 Doiry Products 19 6 82x 1206,947.8 $86,861.8 1.d6 2.0%8113 Fruit/Veg Conning 55 S1 981 896,040.0 8#i,126.0 2.1X 2.618114 Fiah Canning 28 12 62X 825,876.6 518,501.8 0.81 0.418115 Veg/Animal Oils 60 43 72X 8278,788.8 8190,215.8 4.71 n/.8116 Grain Mill Products 88 9 27X 8184,453.8 350,806.6 1.21 1.658117 Bakery Products 7 5 71X n188,869.7 *11U,885.5 8.11 3.938118 Sugar Refining 11 7 64x 8190,231.0 8121,0S6.1 2.91 n/a8119 Confectionery 18 14 781 878,884.7 857,088.1 1.43 1.7X8121 Food Products n.e.s. 71 84 49X 827,849.8 $18,U86.8 o.8x 0.4X3122 Animal Feed 7 4 57X 8217,628.6 8124,299.1 8.0% 8.718181 Distilling Spirits 15 8 58x 878,81$.6 889,867.8 0.9X 1.218182 Wine Industries 10 0 0o 817,857.1 $0.0 0.0% 0.0O8188 Malt Bev.rang 9 4 44X 8180,718.6 871,428.8 1.7X 2.118184 Soft Drink, 4 4 100% 8180,358.7 8180,858.7 4.x1 5.4X8140 Tobacco 5 0 0% 1800,880.0 80.0 0.01 0.018211 Spinning,Weaving 107 29 27X 80.0 O.OX n/a8212 Textiles 23 8 8Sx 82,565S.8 89,240.8 0.2X 0.818218 Knitting mills 88 84 95X l17,662.5 816,678.8 0.4X 0.658214 Carpet., Rugs 11 0 OX 82 060.2 80.0 O.OX 0.018216 Cord and Rope 18 6 283 #C80.4 8134.0 0.03 O.OX3219 Textiles n.e.s. 0o 0 OX 8295.2 80.0 0.01 O.OX8220 Wearing Apparel 107 78 781 872,348.6 158,100.9 1.81 1.638231 Tanneries 11 0 01 859.2 80.0 O.OX O.O08232 Fure, Dyeing 1 0 O3 80.0 0.01 n/a8288 Leather Products i8 7 543 $582.4 8286.7 O.OX O.OX8240 Footwear 10 10 100X 866,242.7 866,242.7 1.63 2.0X8811 Sawmill. 84 5 15X $18,642.1 $2,447.4 0.11X 0.1U812 Wood Container. 5 1 20X 328.1 *4.6 O.OX 0.018819 Wood, Cork n.e.s. 24 8 18X 1867.292 8170.9 .KO.0O 0.018820 Wood Furniture 10 8 801 342,406.8 88,989.4 0.8X 1.018411 Pulp, Paperboard 27 4 lX 80.0 001X n/a3412 Paper ContaInerr 6 4 80X 857,872.4 845,897.9 1.13 1.438419 Paper Prod n.-.o. 25 14 6x 888,248.2 821,419.0 0.6X 0.613420 Printing 18 C 281 8122,224.9 888,961.4 0.8X 1.013611 Industrial Chmicals 116 1 1X 825,600.2 8222.6 0.01 0.018512 Fertil/Pesticides 84 0 o0 8868,400.0 80.0 n/a n/a8S18 Synthetic Product. 84 12 8sx 80.0 o.OX n/a8521 Paints, Vernishes 19 15 79x 8107,868.9 884,764.9 2.01 2.518522 Drug.,Medicine. 29 0 ox 819,666.0 80.0 0.01 0.018528 Cosmetic* 28 1o 8e1 e84,676.6 828,170.2 o.6X 0.718629 Chemical. n.o.c. 77 7 sx 818,887.2 81,217.0 0.01 0.018580 Petrol Refineries 41 a 7X 82,055,700.0 8160,417.1 n/a n/a8540 Petrol/Coal Product. 18 0 OX 82,768.0 80.0 O.OX 0.0o8551 Tire,Tube Industries 19 11 6Sex 87,178.6 844,100.6 1.0X 1.8x8559 Rubber Productn n.e 21 2 lx 8872.4 8856.6 O.OX O.OX5680 Plstic Products n.e 16 8 50X 878,465.6 889,227.8 0.9x 1.2X

8610 Pottery, Ceramics 24 9 881 81,490.7 8659.0 0.01 0.01820 Clas. Product. 8s 0 ox 860,599.8 80.0 0.01 o.0x8691 Structural Clay 18 4 813 882,099.1 39,t87.6 0.2% o.8x8692 Cement, Lime 9 4 443 881,186.5 886,062.9 0.sx 1.1X8699 Non-motal n.e.6 19 a lx 685,504.1 85,606.9 0.13 0.218710 Iron Steel 8-Metale 60 16 8o0 8407,420.5 8122,226.2 2.91 n/a3720 Non-ferrous Metale 74 4 a9 80.0 o.0x 0.01U611 Cutlery, Tool. s8 2 ax 82,556.8 886.1 0.01 0.01U612 Metal Furn/Fixtures 1 1 1001 89,487.7 89,487.7 0.2X 0.81

-86- ANNEX IXPage 4 of 4

TRINIDAD: PRODUCTION COVERED BY QUANTITATIVE RESTRICTIONS

- ( i(1) (2) -(a) (4) (5) (0) (7)IMPUTED CONTRIBUTION CONTRIBUTION

X ITEMS PRODUCTION TO COVERACE TO COVERAGECOVERED 1887 COVERED BY RATIO RATIO (EXCL.

* OF * WITH BY PRODUCTION QR'S (EXCL. 3612 8612, 8530SECTOR OBS LIt.INSES LICENSES ('000) ('000) a 8580) 8l16,811,8;710)

3818 Structural Metls 8 2 25S $83,817.7 *8,344.2 0.21 0.218619 Fabricated Metal n.- 95 19 20X 190,007.6 818,001.6 0.4X 0.618621 Engine, Turbine* 28 0 OX 8692.9 30.0 O.OX O.OXS822 Agoric Machinery 26 8 12X 8592.9 871.1 0.0% O.OX8828 Mtal/Wood Machinery 80 0 01 80.0 O.0 0.013824 Industriol Machinery 62 a 61 a0.0 0.0% 0.018825 Office Machineny 17 0 OX 80.0 O.OX 0.018829 Machinery n.e.s. 90 6 61 a74,788.8 34,162.1 0.11 0.1%8681 Elec Indus Machinery 81 1 8X 10.0 O.OX 0.01882 Radio, Telecoumun 46 19 40X 321,986.2 86,683.1 0.2% 0.818688 Electrical Appliance 17 2 12X 30.0 0.0 0.018689 Elec Machinery n.e. 16 4 265 885,572.8 86,W89.1 0.21 0.818641 Ship Building 15 6 401 32,728.1 81,089.2 0.01 0.0%8842 Railway Equipment 10 0 OX 80.0 0.01 0.OX8a48 Motor Vehicle. 38 19 50% 8165,778.2 $82,866.6 2.01 2.51a844 Motorcycle. 2 0 OX 3488.7 30.0 0.01 0.018846 Aircroft Manufacture 12 0 OX 80.0 0.01 O.OX8849 Transport Equip n.o 12 5 42X 80.0 O.O1 0.01O8861 ScientIfic Equip a8 0 OX 8784.1 80.0 0.0% 0.018852 Photo/Optical Equip 22 0 O #1,442.2 $0.0 0.01 0.01P853 wtch"., Clocks 14 0 01 39,176.4 20.0 0.0X 0.018901 Jewelry 22 0 01 S36,808.1 80.0 0.01 0.0%8902 Musical Instruments 12 0 01 80.0 0.01 0.018908 Sporting Goods 6 0 01 $12,646.9 80.0 0.01 0.013909 Other Manufucturing 100 12 121 38,776.8 31,053.1 O.OX 0.01

Total Manufacturing Production Coverod by g os: 80.7%

Manufacturing (Excl. Petrol .Related Activities) Covered by QR's: 48.61(Excludes Soctors 858O and 8512)

Manufcturing (Excl. Petrol.Rolated Activities A Intn'l Agreements) 48.01(Excludes sector. 8650, 8512, 8115, 8118,8710)

Note: *Total Production also Includes sectors 5000 (8819,900.0), 6100 (S247,800.0), 6200 (U6,100.0),and 7715 (8289,800.0).

Source: Ministry of Industry (License); Centrol Statistical Office (Production).

- 87 -ANNEX XPage 1 of 2

TRINIDAD AND TOBAGO

STRUCTURAL ADJUSTMENT LOAN

SUMMARY OF TECHNICAL ASSISTANCE

1. This Annex summarizes the technical assistance to be providedunder the companion Technical Assistance Loan to help the Government:

(i) carry out the structural adjustment measures under theproposed SAL, as well as other aspects of theGovernment's adjustment program;

(ii) strengthen social policies and programs including thedesign and preparation of programs to cushion theimpact of adjustment; and

(iii) prepare future projects for Bank support.

Restructuring Support Unit (RSU)

2. The TAL would finance about 55 man-months of short and long-term consultants, equipment and training to assist the RSU in itsfunctions of facilitating and coordinating the implementation of themedium term adjustment program, as well as in contracting theconsultants who will assist in the areas described below.

Social Sectors Unit (SSU)

3. The TAL would finance about 80 man-months of consultantsservices, equipment and training to assist the SSU in strengtheningsocial sector policies and programs, including the design andpreparation of programs to alleviate the social impact of theadjustment.

Public Enterprises

4. A State Owned Enterprise Unit (the SOE Unit) established inthe Ministry of Finance will provide critical support for coordinatingand monitoring the Government's program for restructuring, liquidatingand divesting inefficient and loss-making state enterprises. About20 man-months of consultant services would be provided under the TAL.

Public Utilities

5. The TAL would finance a management and operational audit ofT&TEC, the power company, which would fuc.s on achieving financialself-sufficiency, improving administrative and operational efficiency,improving investment programming and rate setting capacity. About 40man-months would be provided.

-88- ANNEX xPage 2 of 2

Public Sector Investmest Program (PSIP)

6. The IDB is providing assistance to help the Government in thedevelopment of project preparation guidelines, and to improve theproject selection process. However, at present the PSIP pipeline isthin, and the TAL would provide about 40 man-months of consultantservices to supplement IDB assistance by preparing specific priorityprojects.

Trade Regiam

7. The TAL would provide about 27 man-months to: (i) carry outa study of trade and related policies, including the impact ondomestic industries of removing items from the negative list and thepractical significance for T&T's regional competitiveness of theexisting duty exemption regime; and for measurement of the direct andindirect content of indirect taxes in exports; (ii) assist in theestablishment of the Automated System for Customs Data and thestrengthening of tariff administration and anti-dumping arrangements;and (iii) carry out studies for the preparation of possible trade andfinance and industrial restructuring operations.

Petroleum Sector

8. The TAL would provide 12 man-months ox consultants to reviewlegislation affecting concession licensing, contracts, royalties andtaxation to help the Government assess the country's competitivenessfor encouraging increased private investment in the sector, and tomake recommendations for improvement, where necessary.

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