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Freely floating currency unwise for T&T

Friday, October 13, 2017
EDAB chairman:

It would make “no sense” if T&T floats its currency freely said Dr. Terrence Farrell, Chairman of the Economic Development Advisory Board (EDB).

“When we instituted the system we had in 1993, we instituted a system of managed floating. Free floating of the exchange rate in this economy makes absolutely no sense. The exchange rate cannot be made to float freely. If it floats freely it will sink. It has to managed,” he said.

Farrell spoke yesterday on the second day of the Conference on the Economy, hosted by the Department of Economics, the University of the West Indies (UWI), St Augustine.

He said T&T has a structure where the Central Bank gets a lot of the foreign exchange and is allowed to manage the foreign exchange.

“The Central Bank has to manage the exchange rate and do a number of things including the possibilities for diversification and growing exports. Between 1993 and 2002, what the Central Bank did successfully was that it adjusted the exchange rate very gradually and people did not notice. It started at $5.76 and there were no complaints when it reached over $6 at $6.40. There was no outcry or talk of devaluation.”

He said unfortunately the Central Bank did not maintain that process and did not follow a rule on how it should have moved the exchange rate.

“So by the time the crisis came along in 2014, the exchange rate should have already been over $7. If they had followed a simple rule to move the exchange rate every year by the difference between the inflation rate of the trading partners in the United States and the core inflation rate in T&T, if that was done then the rate would have depreciated quietly by one percent annually and there would have been no outcry.”

He said now the currency is “significantly overvalued” and the possibility of a sharp adjustment is now required to stabilise the exchange rate and economy.

Nirad Tewarie, CEO, American Chamber of Industry and Commerce (AMCHAM), who also spoke on the panel said T&T must modernize the way it does business.

“We are still having the conversations today that we had in the 1960s and 1970s." he said