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US currency policy needed urgently

Sunday, August 20, 2017

The clamour for the Central Bank to release larger quantities of foreign exchange to the market and the simultaneous urging of the monetary and fiscal authorities to allow the value of the TT dollar to slide in relation to the US dollar have been loud and consistent. Missing, however, has been a constructive discussion on the policy initiatives and innovative disposition needed for the economy to earn replacement US dollars.

It is as if we all want increased quantities of foreign currency for narrow purposes, even if we have to pay a dollar or two more to secure it; but we are not interested in the deep consequences involved in running-down the reserves at an accelerated rate while we do nothing to widen and deepen the export base to earn US dollars.

Local economists and international agencies have said that the TT dollar is overvalued. Many complain that the low exchange rate is facilitating the movement outwards of US dollars purchased here at bargain prices; that high volumes of credit card purchases are siphoning millions of US dollars out of the economy for the benefit of foreign producers; that there are those who are taking advantage of the low cost of foreign exchange for speculation and to salt-away US dollars; that the low exchange rate and relative easy access to foreign currency are encouraging the import sector; and that our manufacturing sector is not taking up the opportunities to purchase intermediate goods at low rates to manufacture competitively for the export market.

On one side of the argument therefore, the need is to increase the exchange rate to act as a disincentive to casual purchases; to orient consumers to local products; to cut the easy profit out of the commercial and speculative trade, and to create disincentives to the use of our vital foreign exchange without replacement returns. Maybe, the argument goes, if the incentives for simple buy and sell operations are removed, it will force into existence an entrepreneurial and innovative class willing to take risks to produce local goods and services to replace foreign products.

All of the above have relevance. However, what is logically needed as a priori measure to devaluation is for the construction of a viable export platform. One critical element of that platform is to cultivate creative and innovative thinking to be applied to production of the goods and services that can take advantage of a devalued TT dollar in the export market.

Simply to cause a devaluation in the TT dollar, without having the capacity to make use of the opportunity to produce competitively priced goods and services for export, will result in a few things: the increase in the cost of pharmaceuticals, certain construction materials, and other vitally important goods and services which we do not and cannot now produce locally.

Just managing the outflow of foreign exchange in the immediate is not a viable option for the medium to long-term. At the present rate of usage of the reserves, which the Central Bank estimates to be approximately US$9 billion, without a steady and increased rate of replenishment from a diversified and competitive export sector, will sooner rather than later force the monetary and fiscal authorities to allow the TT dollar to slide in relation to the US dollar. And this is likely to occur notwithstanding the projections by the Central Bank and the International Monetary Fund for improvements in the economy into 2018/2019.

The imperative here is for the Government and the private sector and all of us to take proactive and productive action rather than have further austerity measures forced upon the economy and society.

Sure, the recent news from bpTT that the Juniper Project will come on stream in 2017/18 and produce 590 million standard, cubic feet of gas per day will fill holes in the supply of gas to downstream projects, provide jobs and earn foreign exchange for the economy.

However, the quantity of foreign exchange needed to continue holding the exchange rate at the present level goes beyond what Juniper can provide in the short-term.

The critical issue is for us to begin constructing the capacity to earn foreign exchange outside of the traditional energy sector. The monetary and fiscal authorities must surely take the measures needed now with a purpose, and with some measure of control over the slide in the value of the TT dollar, before the crisis presents itself, and we have to face the consequences if and when unplanned devaluation is forced upon us.

To begin laying down the basis of an export economy, a directed science and technology programme in our institutions of learning is absolutely essential. Beyond the formal education system, the encouragement of critical thinking, questioning of the status quo, the cultivation of inquiring minds in both the physical and social sciences, in work, in play, in pursuing leisure and entertainment must all be ignited beyond the present.

This fostering of innovation in the formal and informal sectors is vital, and should be put into action before we systematically begin devaluing the TT dollar.

Innovation, states the 2016 World Innovation Report, continues to be the critical element to foster economic growth in industrial and developing countries.

It is easy to say that such measures should have been taken over the last 15 years, and they should have been. The reality though is they are needed now.