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Devaluation could work in T&T’s favour

Saturday, January 7, 2017

In spite of the machinations in the global marketplace by both OPEC and non-OPEC countries to cut oil production in an effort to stabilise price, it appears that the new normal in terms of oil price may settle at only about $60 per barrel in the short to medium term.

Given this scenario most countries in similar situations will tend to cut down on capital expenditure/projects in favour of meeting its recurrent expenditure. This is indeed a balancing act at this time.

The question is: should government postpone the capital outlay on the highway to Toco at this time as it seeks to meet its recurrent expenses? What is the opportunity cost of this new project? Would it be more economical/cost effective to repair existing roadways in the area and employ a dedicated pot-hole crew in all other areas to provide routine maintenance to our existing road network which is in dire need of repair?

Devaluation is often viewed as a bad word by many and is often linked to IMF conditionalities, but this is not necessarily so. Devaluation often becomes necessary whenever there is a sustained balance of payments deficit, when the value of a country’s imports exceeds the value of its exports.

But, some countries have been known to devalue their currency deliberately for various reasons including: a) to combat a black market with respect to foreign exchange and b) to improve its export competitiveness.

On the contrary, however, devaluation could work in the country’s favour although it will make the value of exports cheaper and that of imports more expensive. It all depends on the net import versus export position. Government and experts need to take a critical look in this regard.

With foreign exchange in short supply, devaluation could also discourage the importation of unnecessary and now more expensive foreign goods and service in favour of local goods and services and, as the economy returns to growth, there can be a gradual revaluation or upward movement in the value of the local currency. When foreign exchange is scarce it is to a country’s benefit for citizens to buy local.

But, devaluation is not the only option. Government, by executive order, could determine a list of priority items towards which foreign exchange shall be allocated in an effort to ration out scarce resources. Desperate times calls for desperate measures!




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