IMF warns Trinidad and Tobago foreign reserves draining fast

The IMF has warned that Trinidad and Tobago's foreign reserves are being steadily drained by central bank dollar sales to defend the fixed exchange rate, with reserves projected to fall to US$4.6 billion by 2026 unless the government tightens fiscal policy and raises interest rates.

The IMF's 2026 Article IV mission to Trinidad and Tobago has concluded that maintaining the country's fixed exchange rate arrangement will require significantly tighter fiscal and monetary policy. Gross official reserves have fallen from US$6.88 billion in 2021 to US$5.37 billion in 2025, projected to drop further to US$4.61 billion in 2026, representing approximately 5.4 months of import cover. The central government's overall fiscal deficit stood at 5.5 percent of GDP in FY2025, and IMF staff project it will remain near 5.0 percent in FY2026 under current policies — far from the government's official target of 2.2 percent. Public sector debt has risen to 84.2 percent of GDP, up from 81.8 percent a year earlier. The Central Bank of Trinidad and Tobago has maintained its repo rate at 3.5 percent since March 2020, despite a widening negative interest rate differential with the United States. Economic growth is estimated at just 0.8 percent in 2025, moderating to 0.7 percent in 2026. The IMF suggested that allowing greater exchange rate flexibility could ease pressure on reserves and permit a more gradual fiscal consolidation of about 0.4 percent of GDP per year over five years. In January 2026, the government issued a US$1 billion 10-year international bond that was 2.5 times oversubscribed, though both Standard and Poor's and Moody's have revised their outlooks to negative.

Trinidad and Tobago's reserve position is deteriorating at a pace that narrows the country's room for manoeuvre. A projected decline of over US$2.2 billion in reserves between 2021 and 2026 underscores the unsustainable cost of defending the currency peg without complementary fiscal and monetary tightening. The growing sovereign-financial nexus — where domestic banks hold increasing amounts of government debt — creates feedback risks should confidence waver.

"Gross official reserves have fallen from US$6,880 million in 2021 to US$5,369 million in 2025 and are projected to drop further to US$4,607 million in 2026 — about 5.4 months of import cover."

— IMF 2026 Article IV Mission

Maintain the peg with tighter policy: The IMF acknowledges the authorities' commitment to the fixed exchange rate but insists it requires sizeable, front-loaded fiscal consolidation combined with higher interest rates to narrow the US-TT differential. The Fund recommends targeting a 3.5 percent of GDP deficit and implementing 1.5 percent of GDP in additional measures.

Allow greater exchange rate flexibility: IMF staff also presented an alternative view: greater exchange rate flexibility would allow a more gradual fiscal adjustment of 0.4 percent of GDP per year over five years, stimulate exports, reduce imports, and enable more countercyclical monetary policy, though it could bring short-term volatility.

Economic revitalisation through diversification: The new administration, which took office in May 2025, is focusing on energy sector revitalisation through deepwater exploration and regional collaboration with Suriname, Guyana, and Venezuela, while promoting non-energy growth through improved business environment, trade, foreign investment, and economic diversification.

The numbers tell a story Trinidad and Tobago's policymakers can no longer talk around. Foreign reserves built on borrowing are not reserves at all — they are a line of credit with an expiry date. The US$1 billion bond issued in January may have been oversubscribed, but it effectively replaced sovereign savings with sovereign debt. Meanwhile, holding the repo rate at 3.5 percent while the US offers higher yields is an open invitation for capital to leave.

For the wider Caribbean, this is a cautionary tale. T&T has long been the region's wealthiest per-capita economy, cushioned by energy revenues and a substantial stabilisation fund. If even Port of Spain struggles to reconcile fixed exchange rates with fiscal reality, smaller islands with fewer buffers should take note. The IMF has offered a clear menu of options — tighten the belt or loosen the peg. Doing neither is no longer viable.