Last Monday, the staff team from the International Monetary Fund (IMF) staff team published the concluding statement following its discussions on the 2024 Article IV consultation with Trinidad and Tobago’s authorities.
Throughout the world, concluding statements following Article IV consultations are published with the consent of the local authorities. In our case that would be our Minister of Finance, Colm Imbert.
As he has done in the past, Mr Imbert published a news release shortly after the IMF’s concluding statement, in which he highlighted all of the positive things the IMF said about T&T.
As usual, he ignored any issues the Washington DC-based lender of last resort may have had with T&T’s management of the economy, such as addressing the foreign exchange shortages and possibly increasing National Insurance contributions.
Now, as Minister of Finance, Mr Imbert is, of course, entitled to choose what he wants to put in a news release. Just as newspapers are entitled to highlight what they deem to be the most important aspects of the IMF’s concluding statement.
On Tuesday, Mr Imbert placed the following statement on X, the social media platform previously called Twitter:
“The IMF has declared that T&T is undergoing a sustained recovery, with growth in our non-energy sector. Yet, true to form, the Express has no interest in highlighting this good news while the Guardian has rushed to publish the usual negative comments from a UWI economist.”
Guardian Media did not rush to publish the comments of Dr Vaalmikki Arjoon and his reaction was not, in my view, the “usual negative comments.”
He simply pointed out that after a period in which the T&T economy declined, a period of recovery is to be expected.
While I do not agree with him that T&T’s net foreign reserves stand at approximately US$600M, as some aspects of foreign debt are always and everywhere included in reserves, he is entitled to his views and we are entitled to publish same.
By the way, whether T&T’s recovery can be sustained remains to be seen. In my view, the recovery can be slowed by the actions taken by Mr Imbert for the rest of the 2024 fiscal year and in the 2025 fiscal year, during which a general election is expected.
In its statement on Monday, the IMF staff noted that the decision by the Central Bank of Trinidad and Tobago (CBTT) to maintain its repo policy rate fixed at 3.5 per cent since March 2020 has the potential to encourage capital flight.
“With the US monetary policy tightening, the US-TT interest rate differentials widened. While these differentials have narrowed more recently, they incentivise potential capital outflows. Although this risk currently remains contained, the CBTT is encouraged to remain vigilant and stand ready to increase its policy rate if this risk intensifies,” said the IMF team.
The IMF’s argument that the difference in the interest rates on three-month treasury bills offered in TT and US dollar, “incentivise(s) potential capital outflows” is based on the fact that the interest rate differential was above four per cent for all of 2023:
According to the Central Bank’s monetary policy announcements, the difference in three-month treasuries in T&T and the US between November 2022 and November 2023 was:
• 3.87 per cent in November 2022
• 4.29 per cent in February 2023
• 4.76 per cent in May 2023;
• ↓4.64 per cent in August 2023; and
• 4.40 per cent in November 2023.
What this means is that a local investor could have earned 4.40 per cent more, on an annualised basis, by buying a three-month US treasury bill in November 2023 than buying a similar three-month T&T treasury bill.
What the IMF is saying is that this large difference in the interest rates between three-month interest rates provides an incentive for capital flight (capital outflows in the IMF’s language), but that the risk remains “contained” at this time.
If, however, the risk of capital flight “intensifies,” the IMF is advising the Central Bank to increase its repo rate from 3.50 per cent to ensure that the difference between the T&T and US three-month treasury bill rate is reduced.
The theory behind the IMF’s advice to the Central Bank, that the T&T institution may need to increase interest rates to address capital flight, is simple: Money moves to where it receives the highest reward for the least risk.
In an interview on January 19, 2024, the Business Guardian questioned Central Bank Governor, Dr Alvin Hilaire, on the impact that the difference in the interest rates offered on TT and US dollar three-month treasuries has on investment decisions:
Q: Is there not a sense in which the differential between T&T and US interest rates disincentivises T&T nationals from saving money in TT dollars, or alternatively, incentivises locals to make investments and save in US dollars?
A: (Dr Hilaire gives a lengthy and insightful explanation about the evolution of T&T’s monetary policy in the last three years, before getting to the question)
We do observe, and we are clear, that because our interest rates are lower than internationally, we have this differential. This is something exercising the Monetary Policy Committee (the T&T body that sets interest rates) at each turn.
We have observed a couple of things:
1. The actual rates on our treasury bills have started to nudge up, principally because of the Government’s domestic borrowing;
2. The widening of the differential between T&T and US three-month treasury bills has started to narrow, because US interest rates have kept steady for the last several months...We think there will be a lowering of that differential over time.
Do we think there will still be an incentive? Potentially.
Do we think it will reduce to zero? We don’t know.
Is this something we are aware and are thinking about? Certainly.
In the whole scheme of things, the differential is one of several considerations that we need to balance now and over time, including do we raise interest rates and choke off what may be a nascent economic recovery or deal with some of the asymmetry and distributional impact that we are thinking about?
It is a whole balancing act, but I guarantee you that we look at the differential between T&T and US three-month treasuries very carefully.
Our considerations are deliberate, but we are also prepared to adjust as necessary, based on the circumstances.
Q: The differential between T&T and US three-month treasuries in November was 440 basis points (4.40 per cent), down from 464 basis points (4.64 per cent) in August. But that is still very substantial.
So the question is does that substantial differential encourage people to park their money outside and also what is the extent of capital flight in T&T at this point?
A: I think other things being equal someone would go to a place with higher returns.
But other things may not be equal because they may have expenses in T&T. They may have things to do, so they may have to bring back their money. So they may say it does not make sense to do that (investing in short-term US treasuries to get a better return).
On the issue of capital flight, we do not have a sense that there has been any meaningful change in people’s distribution of how they park their funds as it were.
Anyone who has money abroad would ask themselves, ‘Do I keep the money abroad at a higher rate or do I bring it in at a lower rate?’ They may keep it abroad. So that is natural.
But for people who already have their assets organised in T&T, I don’t think there would be influenced (to convert to US dollars).”
Given the wide disparity between short-term TT and US interest rates, the question is why has the risk of capital flight been “contained” up to now...and will that change going forward?