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Is devaluation the answer?
The issue of the value of currencies is back on the regional and international agenda, given the decision by Venezuela earlier this month to devalue the bolivar by 32 per cent, the competitive depreciation of the yen by the new Japanese government and the slide in the value of the sterling since the beginning of this year.
The issue of the value of domestic currencies is also relevant to regional discourse given the position taken by the Government of Barbados, as outlined by the Governor of the Central Bank there (see page 14), the 9.3 per cent slippage in the value of the Jamaican dollar in the last 11 months and because T&T marks the 20th anniversary of the flotation of the TT dollar in April.
It is clear that the flotation of the TT dollar in April 1993—along with other measures aimed at liberalising the domestic economy, such as the reduction in tariffs and the introduction of VAT in 1990—was partly instrumental in increasing the competitiveness of the local manufacturing sector.
T&T’s manufacturers quickly became the dominant force in the Caricom region, as anyone who has been into a supermarket anywhere in the Eastern Caribbean at any time in the last decade and a half can testify, partly as a result of the fact that devaluation made domestic manufactured exports more competitive on the regional market.
It is noteworthy, by the way, that what is described as the "dirty" float of the TT dollar—which means that the value of exchange rates are determined not by demand and supply of foreign currencies but by Central Bank intervention in the currency market to control the appreciation or depreciation of the TT dollar—has been remarkably stable.
Guardian files indicate that the US dollar was sold for $6.30 for first time on March 7, 2005, which means that in the last eight years, that exchange rate has moved by 2.06 per cent. By way of comparison, the value of the sterling, which is the UK currency, has declined by about 7 per cent against the US dollar in the last two months.
Countries devalue their currencies, or allow their currencies to depreciate through market forces, in order to make their exports more competitive and their imports more expensive—which was the case of T&T in 1993 and Japan now. To put it another way, devaluation or depreciation make the acquisition of foreign currencies more expensive and increase the amount of the domestic currency from the same amount of foreign currency.
This is because, for example, if the Barbados dollar went from trading at US$1 equals Bds$2 to US$1 equals Bds$4, the amount of Barbados dollars that the island receives for US$5 billion in foreign currency earnings goes from Bds$10 billion to Bds$20 billion, all things being equal.
As a result of the impact on the price of foreign currency, a depreciation or devaluation of a currency can have a positive impact for both the balance of payments—which includes exports and imports of goods, services, financial capital, and financial transfers—and the fiscal account, which is the difference between the amount of money that a country earns and the amount it spends.
Venezuela, for example, devalued because it wanted to generate more bolivars from its oil revenues in order to address its double-digit fiscal deficit.
For T&T, neither devaluation nor further depreciation is the answer because the country does not have a balance of payment problem and it does not have a fiscal deficit problem that cannot be cured by the elimination of the fuel subsidies and the introduction of the property tax system.
In terms of the balance of payment, T&T has recorded an overall positive balance on its payments in four of the last five years. In the seven quarters between the first quarter of 2011 and the third quarter of 2012, the overall balance of payments was positive during four quarters and negative for three.
Here is what January’s Economic Bulletin, published by the Central Bank has to say about T&T’s balance of payments: “In the third quarter of 2012, the external current account is estimated to have recorded a surplus of $1.8 billion. The balance on the current account worsened in the third quarter of 2012 compared to the third quarter of 2011, mostly on account of lower export volumes of energy and energy related products.
“Also, the investment income account registered a higher net outflow of US$1,298.0 million compared with US$898.6 million in the corresponding period of 2011. This higher net outflow was on account of significantly larger reinvested earnings in foreign direct investment enterprises – US$855.1 million in the third quarter of 2012 compared with US$235.9 million a year earlier.”
In all likelihood, the maintenance work that the oil majors carried out last year would have contributed to the lower current account balance.
On the fiscal side, as the Minister of Finance indicated in his presentation of the Supplementation and Variation of Appropriation bill on January 25, the final fiscal outturn for 2012 is a deficit of $3.1 billion, which was significantly less than the anticipated deficit of $7.6 billion. This was based on actual 2012 revenue of $48.9 billion and actual expenditure of $52 billion. At 2.02 per cent of GDP, T&T’s 2012 fiscal deficit is well short of the 3 per cent deficit level that the international financial institutions and economists warn countries against.
On the other hand, the January Economic Bulletin indicates that T&T’s trade-weighted real effective exchange rate appreciated by 5.8 per cent in the 12 months to November 2012.
I am told that, other things being equal, this means that the purchasing power of the TT dollar strengthened by nearly 6 per cent against the country’s trading partners in the period, which has the tendency to reduce the relative cost of imports and to undermine the relative competitiveness of exports.
According to the bulletin: “The main contributory factor to the appreciation in real effective terms of the Trinidad and Tobago dollar was the rise in domestic inflation compared to price increases in partner countries. Domestic inflation averaged 9.1 per cent over the 12-month review period, significantly higher than the average weighted inflation rate of 5.5 per cent for our major trading partners.”
Apart from the economic data, there is no evidence that further depreciation of the TT dollar will make local manufactured exports any more competitive in the region. This is because of the economic problems that many Caricom countries face, which has increased unemployment and lowered demand for T&T’s non-energy manufactured goods.
T&T’s energy exports, which are quoted in US dollars, are not at a competitive disadvantage to the world in terms of price and therefore there would be no need to adjust price levels of buttress their positions.
By virtue of increasing the cost of imports, depreciation or devaluation also have a negative impact on those who are least able to afford—a group that both the current administration and the previous one have bent over backwards to avoid hurting.
Devaluation is not the answer to T&T’s problems.
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