On Monday, the Central Bank of Nigeria allowed the currency of the West African oil-producing nation to float freely against the US dollar, following Governor Godwin Emefiele's announcement last week that the exchange rate "would be purely market driven," in an "open, transparent two-way system."
In opting for a free-floating naira–one in which the price of the Nigerian currency is determined by supply and demand–the Central Bank there abolished its policy of attempting to defend the naira/US dollar peg at 197 to 199 per US$1 and the naira depreciated by 40 per cent on Monday.
Nigeria joins a growing list of oil and natural gas exporters that have allowed their currencies to absorb some of the shock that they have experienced as a result of the sharp decline in the price of the commodities since the end of 2014.
These countries include: Norway, Canada, Colombia, Russia, Kazakhstan, Azerbaijan, Angola and Venezuela.
But not Trinidad and Tobago.
Unlike other oil and natural gas producing countries, T&T's Minister of Finance, Colm Imbert, has stubbornly refused to budge from his position of allowing the Central Bank to defend the TT dollar by controlling the price of the exchange rate.
The irony of this situation is that Imbert has repeatedly said the current administration is not in the business of controlling prices on any product sold in T&T, while he insists on controlling the exchange rate of the US dollar.
An indication of price control, within a wider band, is Mr Imbert's announcement during his April 8 speech that the Government intended to take "appropriate measures" to ensure that the exchange rate does not move by more than 3.3 per cent from the $6.61 to US$1.
Defence of the TT dollar and maintaining the stability of the TT/US exchange rate has come at a terrible cost to the country.
The country's foreign reserves declined by US$1.83 billion, or over 16 per cent, from US$11.31 billion in December 2014 to US$9.47 billion in May 2016.
The main cause of this decline in foreign reserves, of course, is that T&T–like Nigeria–is earning much less US dollars from taxes on the sale of oil and gas in the 2016 fiscal year than it did, for example, in 2013.
In 2013, according to the 2015 Review of the Economy, T&T earned $26.4 billion (US$4.1 billion) in current energy sector revenue. This year, T&T expects to earn less than US$750 million, a reduction in energy revenues of over 80 per cent.
The plunge in foreign exchange revenues earned by the Government has meant that the Central Bank has much less foreign exchange coming into its accounts with which to defend and stabilise the exchange rate.
During the January to May 2016 period, the Central Bank's injections of foreign exchange into the system declined by 42.5 per cent to US$572 million from US$995 million in the comparable period in 2015.
The sale of foreign exchange by authorised forex dealers in 2016 was 28 per cent lower in 2016 at US$2.27 billion than the US$3.16 billion sold in the January to May 2015 period.
While T&T is earning much less foreign exchange in 2016 than it did in 2013–as a result of lower prices, lower production and the 100 per cent capital allowance granted to energy companies–the total demand for foreign exchange in the economy remains unchanged, or may have increased because of scarcity.
That's mainly because the exchange rate–the price of US dollars–is not only controlled, it is also artificial, in that it bears no relationship to the demand and supply of foreign exchange or, to put it another way, to T&T's macro-economic fundamentals.
In most markets, when the supply of something is reduced but the demand remains constant, there is an immediate adjustment in the price. This demand/supply equation–which is at the heart of economics–has been applied everywhere throughout history.
If you think about US dollars like tomatoes, you would realise that the price of the fruit is low in the dry season, because of an overabundance of supply, and high in the wet season, as a result of reduced supply.
Faced with a dramatic decline in foreign exchange supply and demand that remains constant or has increased, the Central Bank and the Ministry of Finance are attempting to maintain a stable and predictable exchange rate, which is only allowed to decline to $6.828 to US$1.
T&T's exchange rate–artificially propped up and price-controlled–subsidises imports and penalises exports, to borrow from the headline of a commentary in the Business Guardian last year–one of at least 20 columns in 2015 in which I advocated a free-floating exchange rate.
Mr Imbert's policy of defending and stabilising the exchange rate has led to severe rationing and long queues for foreign exchange, the creation of an active black market and the embarrassing situation of importers being unable to settle their bills and invoices when due.
As Nigeria realised last week, after 16 months of a fixed peg to the US dollar, in situations of reduced supply of foreign exchange, it is much less costly and fairer to control demand by making foreign exchange more expensive than by rationing and queues.
One of the few downsides of a free-floating exchange rate is that it makes imports more expensive and will lead to a short-term increase in the rate of inflation.
But higher import costs are also one of the main benefits of a free-floating exchange rate because demand for foreign exchange to fund non-essential imports–such as foreign beer, bagels, strawberries and Angus beef–will be reduced as a result of the demand/supply equation for foreign exchange being brought back into equilibrium.
As Mr Imbert gets ready to pack his bags for the roadshow to North America to drum up foreign investor interest in the US$1 billion bond (TT$6.6 billion) that T&T proposes to raise in the international capital market, he should be aware of certain things.
If Mr Imbert does not have a Plan B for raising $6.6 billion to fund the 2016 fiscal deficit, he will be at the mercy of the international capital market which will not hesitate to impose "unacceptable" terms on T&T, especially with regard to the interest rate that will be recommended.
In terms of a possible Plan B:
�2 Mr Imbert has said no to privatisation;
�2 He has said no to accepting a US$3 billion cheque for Clico assets and returning the company to its owners;
�2 He has said no to serious fiscal consolidation, which would reduce the deficit to an amount that can be sourced locally or with a smaller US dollar loan;
�2 And, most importantly, Mr Imbert has said no to a market-based exchange rate, which would increase the amount of TT dollars the Government gets from the energy sector, reduce the demand for imports and provide non-oil exporters with a price advantage.
Bond traders at international banks know:
1. That the Government desperately needs the US$1 billion ($6.6 billion) to fund the 2016 budget deficit;
2. They know that having raised $3.16 billion in two bonds on the local market, it would be difficult for the Government to raise more money locally.
3. They know, as well, that the one-off sources of capital revenue have dried up.
4. The maxing out of the government's overdraft at the Central Bank is known;
5. The Government's problems in paying monies owed to contractors and public officers are well known to international bond traders and analysts; and
6. The seeming reluctance of the Government to impose further fiscal adjustment on the population by reducing transfers and subsidies and increasing taxes.
On the other hand, the international capital market is aware of the fact that, despite the Moody's downgrade in April, T&T still maintains investment grade status.
And, although depleted, the country still has more than 11 months of foreign reserve import cover and foreign debt that is below 15 per cent of GDP.
Faced with a bond issuer with limited options for sourcing $6.6 billion, what interest rate do you think bond traders will demand that T&T pay on the US$1 billion bond?
For me, the benchmark that should be applied to Mr Imbert's roadshow is whether he is able to use his powers of persuasion to convince international bond traders to lend T&T money at or below the 4.75 per cent interest rate that the Government is paying on the 12-year, fixed rate TT-dollar bond raised last month.
It is noteworthy that a US-dollar bond issued by the T&T government maturing in 2027, 11 years from now, has a yield bid of 4.42 per cent
One local investment banker said on Tuesday, that given T&T's credit rating, the 12-year, fixed rate US$1 billion bond should be priced at 275 to 300 basis points over US 10-year Treasuries. This means a rate of between 4.43 and 4.68 per cent.
However, he noted, that because this is the first time T&T is looking to borrow US$1 billion, "we may have to provide a higher spread of about 325 to capture the incremental buyers, which puts the price at 4.93 per cent."
We will see, won't we?