On Thurs­day, it was ar­gued in this space, that one of the ways of in­creas­ing the at­trac­tive­ness of TT-dol­lar as­sets was by the Gov­ern­ment plac­ing some more high-qual­i­ty state-owned or af­fli­at­ed com­pa­nies on to the lo­cal stock mar­ket.That point was made due to the fact that the Gov­er­nor of T&T's Cen­tral Bank had not­ed that "US dol­lar as­sets are more at­trac­tive than TT dol­lar as­sets, prompt­ing move­ments of port­fo­lio cap­i­tal in search of high­er yields."

As var­i­ous au­thors have not­ed, one of the ways of treat­ing with "the move­ments of port­fo­lio cap­i­tal" out of the coun­try is to al­low the de­pre­ci­a­tion of the do­mes­tic cur­recy as coun­tries as di­verse as Cana­da, Nor­way, Mex­i­co, Nige­ria and Co­lum­bia have done.It is note­wor­thy that T&T's cur­rent for­eign ex­change sys­tem is nom­i­nal­ly a float­ing cur­ren­cy, the pur­pose of which is that the TT-dol­lar is sup­posed to de­pre­ci­ate when the econ­o­my is weak and ap­pre­ci­ate when the econ­o­my is strong.

The fact is that the Cen­tral Bank has tak­en a con­scious pol­i­cy de­ci­sion to prop up the TT dol­lar by flood­ing the coun­try with as much US dol­lars as pru­dence and watch­ful­ness over the stock of for­eign re­serves dic­tate. Some de­scribe this as a "dirty" float.It is, how­ev­er, not the on­ly op­tion.

An­oth­er op­tion would be for the Cen­tral Bank to mod­er­ate its in­ter­ven­tions in the for­eign ex­change mar­ket and al­low the TT dol­lar to find a lev­el that more ac­cu­rate­ly re­flects cur­rent macro-eco­nom­ic re­al­i­ties.One of the ad­van­tages of al­low­ing a cur­ren­cy like the TT dol­lar to de­pre­ci­ate is that it would al­low the Gov­ern­ment to gen­er­ate more TT dol­lars for the US dol­lars it earns from tax­es on en­er­gy ex­ports.

For ex­am­ple, for the 2015 fi­nan­cial year, the Gov­ern­ment ex­pects to earn about US$3.5 bil­lion in tax­es from the en­er­gy sec­tor.At the cur­rent ex­change rate–the com­mer­cial bank buy­ing rate of $6.25 to US$1–that works out to be about $21.9 bil­lion.If the TT dol­lar were to de­pre­ci­ate by 20 per cent–that is from $6.25 to $7.5 to US$1–the amount of TT dol­lars gen­er­at­ed from the US$3.5 bil­lion in en­er­gy tax­es would be $26.25 bil­lion.

But with sharp de­clines in the prices of oil and nat­ur­al gas, it is quite like­ly that T&T will not earn US$3.5 bil­lion from en­er­gy tax­es dur­ing the 2015 fi­nan­cial year.If tax­es from en­er­gy rev­enues de­clined by 20 per cent–that is by US$700 mil­lion from US$3.5 bil­lion to US$2.8 bil­lion–at the cur­rent ex­change rate, the amount of en­er­gy tax­es col­lect­ed would de­cline to $17.5 bil­lion. This would in­crease the Gov­ern­ment's fis­cal deficit for 2015 from $6 bil­lion to $10.3 bil­lion.

As­sum­ing a 20 per cent de­cline in en­er­gy tax rev­enues, at the de­pre­ci­at­ed ex­change rate, the amount of en­er­gy tax rev­enue the Gov­ern­ment would col­lect (US$2.8 bil­lion X $7.5) would be $21 bil­lion, which is quite sim­i­lar to the orig­i­nal rev­enue es­ti­mate.The prob­lem with al­low­ing the TT dol­lar to de­pre­ci­ate is that it would in­crease the cost of every­thing that is im­port­ed in­to T&T.

That would in­clude every­thing from Car­ni­val cos­tumes to most of the food in su­per­mar­kets to big-tick­et items like cars and white ap­pli­ances (re­frig­er­a­tors, stoves, wash­ing ma­chines) and air­line tick­ets.By im­me­di­ate­ly in­creas­ing the cost of most of the food the coun­try im­ports, a de­pre­ci­a­tion of the TT cur­ren­cy would have a neg­a­tive im­pact on low-to-mid­dle in­come wage earn­ers, who would im­me­di­ate­ly see an in­crease in their food bills and there­fore a re­duc­tion in their dis­pos­able in­come.

The de­pre­ci­a­tion in the TT dol­lar, in the­o­ry, would make wheat, oil and rice more ex­pen­sive, which would au­to­mat­i­cal­ly in­crease the cost of some of this coun­try's favourite dish­es such as ro­tis, dou­bles, bakes and pelau. The cost of eat­ing out would go up com­men­su­rate with the size of the de­pre­ci­a­tion.

Al­so like­ly to face im­me­di­ate in­creas­es would be the cost of trans­porta­tion for peo­ple who de­pend on taxis and maxi-taxis to get to and from work as the own­ers and/or dri­vers would ar­gue that the rise in the cost of their spare parts should be com­pen­sat­ed by them be­ing al­lowed to charge more.In that sense, be­cause a de­pre­ci­a­tion would lead to in­creas­es in food and trans­porta­tion costs, it would be viewed as a neg­a­tive and po­lit­i­cal­ly un­de­sir­able.

Al­low­ing the de­pre­ci­a­tion of the TT dol­lar, there­fore, is not some­thing that any prime min­is­ter or po­lit­i­cal par­ty in pow­er would be able to stom­ach com­fort­ably in the year of a gen­er­al elec­tion. Es­pe­cial­ly a prime min­is­ter, like Mrs Per­sad-Bisses­sar, who seems ex­treme­ly wary of deal­ing with any­thing that may be the least bit con­tro­ver­sial.

But on the oth­er hand, faced with sharp in­creas­es in the cost of im­port­ed prod­ucts, the ra­tio­nal con­sumer would switch to lo­cal­ly pro­duced veg­eta­bles and food and post­pone the big-tick­et items (such as the ac­qui­si­tion of the new cars, white ap­pli­ances and for­eign va­ca­tions).This may lead, for ex­am­ple, to con­sumers choos­ing to buy few­er ro­tis and pelau (made from im­port­ed rice) and choos­ing in­stead more lo­cal­ly pro­duced veg­eta­bles and rice.

There is al­so a pos­si­bil­i­ty of the Gov­ern­ment pro­vid­ing a di­rect sub­sidy to the Na­tion­al Flour Mills, along the lines of the three price dis­counts that the ma­jor­i­ty state-owned milling com­pa­ny was man­dat­ed to pro­vide in the last 12 months.The re­sponse by con­sumers to high­er prices of im­port­ed goods and ser­vices would lead to a re­duc­tion, over time, in the de­mand for for­eign ex­change.

It would al­so spur the pro­duc­tion by the do­mes­tic man­u­fac­tur­ing and ser­vice sec­tors of lo­cal re­place­ments of for­eign goods and ser­vices, as hap­pened when the TT dol­lar was orig­i­nal­ly float­ed in April 1993.By in­creas­ing the cost of ac­quir­ing US dol­lars, a de­pre­ci­a­tion is al­so like­ly to mean a slow­down in the cap­i­tal flight that Cen­tral Bank Gov­er­nor Jwala Ram­bar­ran ref­er­enced in his now con­tro­ver­sial De­cem­ber 1 speech in Ch­agua­nas.

If al­lied with poli­cies that in­crease the at­trac­tive­ness of TT-dol­lar as­sets–both bonds and eq­ui­ties–al­low­ing a de­pre­ci­a­tion of TT-dol­lar may ac­tu­al­ly lead to a re­ver­sal of cap­i­tal flight as lo­cal man­agers of port­fo­lios and high-net worth in­di­vid­u­als see op­por­tu­ni­ties to make mon­ey.But the ques­tion that T&T needs to ask and an­swer is whether al­low­ing a de­pre­ci­a­tion of the TT dol­lar would have a neg­a­tive and long-term im­pact on the rate of in­fla­tion.

Dr Ter­rence Far­rell, in a news­pa­per com­men­tary to mark the 20th an­niver­sary of the flota­tion in April 2013, re­minds us that the Arthur NR Robin­son ad­min­is­tra­tion "uni­fied the dual ex­change rate at $3.60 to US$1 in Jan­u­ary 1987, and then de­val­ued to $4.25 in April 1988." This means there was an 18 per cent de­val­u­a­tion of the TT dol­lar in April 1988.

Ac­cord­ing to the Cen­tral Bank's Ju­ly 2006 Pub­lic Ed­u­ca­tion Pam­phlet on "In­fla­tion," the in­fla­tion rate in 1988 was 7.8 per cent and in the two years fol­low­ing it was 11.4 per cent and 11 per cent.Far­rell al­so notes that the April 1993 flota­tion led to an im­me­di­ate ad­just­ment of the ex­change rate from $4.25 to $5.76 to US$1–which was a 35.5 per cent de­pre­ci­a­tion, by my cal­cu­la­tions.

The Cen­tral Bank doc­u­ment states that in 1992, the year be­fore the flota­tion, T&T's in­fla­tion rate was 6.5 per cent. It in­creased to 10.8 per cent in 1993 (the year of the flota­tion), but de­clined to 8.8 per cent, 5.3 per cent and 3.3 per cent in 1994, 1995 and 1996.

This seems to in­di­cate that al­though the T&T dol­lar de­pre­ci­at­ed by 35 per cent in 1993, the im­pact of the price ad­just­ments was on­ly ex­pe­ri­enced in the year of the flota­tion and there­after in­fla­tion mod­er­at­ed. (The rate of in­fla­tion in 1997 and 1998 was 3.6 per cent and 5.6 per cent).

Deputy Cen­tral Bank Gov­er­nor, Dr Alvin Hi­laire, in an April 2000 IMF work­ing pa­per ti­tled Caribbean Ap­proach­es to Eco­nom­ic Sta­bil­i­sa­tion, com­pared the ap­proach­es of four Caribbean na­tions, Bar­ba­dos, Ja­maica, Guyana and T&T, to struc­tur­al ad­just­ment in the 1980s.

Hi­laire states that T&T chose dis­crete de­val­u­a­tions in 1985 and 1988 and then float­ed the cur­ren­cy in 1993. He said that be­tween 1987 and 1998, the val­ue of the T&T dol­lar to the US dol­lar moved from $3.6 to $6.3–which from my cal­cu­la­tion is a 75 per cent de­cline.

This is not to make the point that the flota­tion alone was re­spon­si­ble for the mod­er­a­tion of prices in T&T as the coun­try ex­pe­ri­enced sig­nif­i­cant trade lib­er­al­i­sa­tion as well as fis­cal ad­just­ments in that pe­ri­od (such as the sim­pli­fi­ca­tion and re­duc­tion in the in­come tax sys­tem and the in­tro­duc­tion of the Val­ue Added Tax sys­tem).It is on­ly to make the point that, in cer­tain cir­cum­stances, spi­ralling in­fla­tion is not a nec­es­sary con­se­quence of de­pre­ci­a­tion.