In a tweet on Tuesday, the Minister of Finance, Colm Imbert, wrote: “Mischievous commentators keep pushing hard for devaluation. One commentator is insinuating that the country thrived after we floated the dollar in 1993. In truth, inflation in 1993 jumped from six per cent to 11 per cent, the economy declined and unemployment was 20 per cent. We are NOT going back there.”
I believe Mr Imbert was referring to me because on Monday afternoon, at a virtual news conference, I asked him whether there was skyrocketing inflation and a recession following the April 1993 flotation of the TT dollar.
Mr Imbert’s response was: “The simple answer to that is yes. But that is not the point, we are now in 2023. I can’t look at what went on 30 years ago and construct a hypothetical scenario.
“I am telling you, I am not asking you, that if we were to devalue the TT dollar to TT$10 to US$1, for example, which would be a 50 or 40 per cent devaluation, we would have an immediate increase in the cost of imported goods and we would have immediate demands from the labour unions, which would be very difficult to challenge, for increased wages. That would have a cyclical effect and a domino effect on inflation.
“So, I don’t think that is a serious question. I think any serious person would know that if we devalue the dollar, there would be significant inflation and it would send many people into poverty. I don’t think you need to do the maths for that, but if you would like me to do a mathematical calculation as to what the estimated inflation would be if we were to do a devaluation of the TT dollar by 40 to 50 per cent, I would ask the Central Bank to do that for me, and I will share it with you.”
The minister’s offer to ask the Central Bank to do an estimate of the impact of an exchange rate of TT$10 to US$1 on inflation is both timely, welcome and necessary.
But, in addition to that, T&T’s Central Bank should look at ALL aspects of the impact of the April 1993 flotation on the T&T economy, which took place 30 years ago next month.
If the Central Bank were to undertake an analysis of the impact of the flotation in April 1993, it would examine data BEFORE as well as AFTER the flotation.
As it stands, the Central Bank website has a Handbook of Key Economic and Financial Statistics, which is very helpful.
In that handbook, there is a section entitled, “Selected macro-economic indicators,” which contains useful information.
Inflation
The data in that chart indicates that the rate of inflation in the three years before 1993 was 11 per cent (1990), 3.9 per cent (1991) and 6.5 per cent (1993).
In 1993, the year of the flotation, inflation was 10.9 per cent.
In the three years after 1993, inflation dropped to 9.0 per cent in 1994, 5.3 per cent in 1995 and 3.3 per cent in 1996.
To be absolutely transparent, in the Prices database of the Central Bank’s Statistics, there is a better indication of the immediate impact of the flotation of April 1993 on inflation.
The year-on-year percentage change in the inflation rate for the three months before the April 1993 flotation was 7.2 per cent in January 1993, 6.8 per cent in February and 6.7 per cent in March. In April 1993, the rate of inflation was 7.6 per cent, it peaked at 15 per cent in October 1993, but declined steadily to 6.9 per cent in August 1994.
CONCLUSION: Based on the Central Bank data, after the flotation inflation rose, peaking six months later and then it declined steadily. I believe the takeaway here is that a country that floats its currency experiences a TEMPORARY increase in inflation. Also, I do not believe that our history supports the notion that most of T&T’s trade unions were able to negotiate higher wages in the wake of the flotation.
Economy
In the columns pertaining to GDP, the following is outlined by the Central Bank:
• In 1990, GDP current price was TT$21,539.3; the percentage change in constant GDP was 1.5 per cent and the GDP per capita was US$4,134.6;
• In 1991, the GDP current price was TT$22,558.6; the percentage change in constant GDP was 2.7 per cent and the GDP per capita was US$4,316.3;
• The GDP current price in 1992 was TT$23,118.1 , the percentage change in constant GDP was -1.6 per cent and the GDP per capita was US$4,370;
In 1993, the year of the flotation, the GDP current price was TT$24,986.9, which was a decline of 1.5 per cent in percentage change in constant GDP, with GDP per capita dropping to US$3,535.2
In the three years after the year of flotation, GDP in current prices was TT$29,311.7 (1994), TT$31,697 (1995) and TT$34,568.6 (1996).
The percentage change in constant GDP in the three years after the flotation was 3.6 per cent (1994), 3.8 per cent (1995) and 7.1 per cent (1996).
The GDP per capita in 1994 was US$3,994.2, in 1995 it was US$4,268.4 and in 1996 it was US$4,570.
CONCLUSION: Any or all of these three measurements indicated that the T&T economy grew after the year of flotation in 1993.
Unemployment
On the issue of unemployment, the Central Bank document indicates that it was 20 per cent, 18.5 per cent and 19.6 per cent in the three years before the flotation. It was 19.8 per cent in 1993, the year of the flotation.
In the three years after the year of flotation, unemployment dropped to 18.4 per cent in 1994, 17.2 per cent in 1995 and 16.3 per cent in 1996.
CONCLUSION: It is fair to say, therefore, that the unemployment rate in T&T declined following the flotation in 1993.
Next week, the flotation’s impact on T&T’s fiscal situation, foreign debt and foreign reserves.