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How can we fix the forex situation?

Thursday, July 19, 2018

T&T is now well into the fourth year of a foreign exchange shortage that has not only imposed severe spending restrictions on the average citizen, but has given rise to a black market which, if left unchecked, will be a real threat to our long-term economic stability.

Our forex troubles are directly linked to the steep drop in energy prices, starting in 2016, which struck directly at our main source of revenue. Remember, we get about 80 per cent of our national income from oil and gas. The resulting economic downturn, from which the country is only just beginning to emerge, brought on some painful cutbacks and adjustments, not the least of which has been curbing the national appetite for foreign fare.

We are now at the time of the year when the effects of the forex shortages are laid bare, as citizens scramble to accumulate enough currency for travel abroad, for tuition fees and for other transactions that cannot be completed using TT dollars.

However, even on an average day, some grim reminder can crop up of the forex crisis that has been with us for too long. Some items are either in short supply, or not available at all, due to difficulties being experienced by importers and retailers to secure sufficient foreign currency. Some, unable to pay overseas creditors, have been forced to scale back or shut down their operations.

Lucky for us that the situation of bare supermarket shelves has not become a reality here. That threat is never far away, however, because this country is still vulnerable to external threats and, even with the latest favourable IMF projections for a return to economic growth, we are still an energy dependent economic, subject to the volatility of that commodity.

The challenge we need to overcome is sliding into a situation of tight currency controls that make it extremely difficult for citizens to buy foreign currencies with our TT dollars at the official exchange rate. To some extent, that is already happening through an emerging forex black market, with US currency in particular priced at a significant premium because of the prevailing demand-supply imbalance.

If that situation is allowed to slip any further out of control, we could end up like our nearby South American neighbour, Venezuela, where currency controls have made it almost impossible for residents to purchase foreign currencies— just one source of pain in the economic, political and social turmoil gripping that nation.

The thing with forex instability is that it is not just a simple matter of buying and selling, or having to curb demand for some imported items and services. The repercussions are far more severe than that.

Late last year, United States chargé d’affaires John McIntyre warned that this country’s persistent foreign exchange shortage is an impediment to investment.

It is a fact that foreign investors seek out stable countries with strong economic performance in which to invest their capital, so T&T is at high risk of losing out if the current situation is not fixed.

Of course, we have been down this road before. The last time T&T experienced a major economic and financial crisis was in the second half of the 1980s following a slump in energy prices—as is the case now.

Back then, efforts to address acute balance of payments and debt servicing challenges included introduction of a dual exchange rate and exchange control systems to curtail foreign exchange outflows.

Sounds familiar?

An EC zero system was implemented. This strict foreign exchange budgeting allowed authorised importers to access foreign currency allocations on a quarterly basis.

For the average citizen, the result was the pain of a bureaucratic system for securing currency for travel and other foreign transactions, including enduring long lines at the Central Bank during times of peak demand.

These controls were not effective however, and since then there have been efforts to liberalise the financial system.

One of the most significant developments came about in April 1993 when T&T adopted a floating exchange regime, so the TT dollar appreciates or depreciates in response to changes in supply and demand conditions in the forex market.

There are now suggestions in some quarters that the TT dollar may currently be overvalued.

Some have even hinted that the true exchange rate should be TT$13 to US$1, while others warn of dire consequences should this country go the route of currency devaluation.

The Central Bank, which is responsible for managing the forex market, has the authority to intervene in the event of undue volatility in the exchange rate and in the current situation of foreign currency shortages, has actually allowed the TT dollar to slowly depreciate.

In fact, the local currency has it has declined by approximately seven per cent against the US dollar since mid-2016. With the current shortages, particularly in US dollars which are usually in high demand, black market transactions have become more common. So it is time to bring the situation under control.

But, to date, there have been no clear signals from the Government on what action will be taken to address the situation.

When he presented the 2018 Budget, Minister of Finance Colm Imbert said: “The exchange rate will move more in step with demand and supply and the availability of foreign exchange.”

That statement is open to all kinds of interpretations. Could it be that a free-floating foreign exchange rate might be in T&T’s immediate future?

Of course, there is also the undesirable option of a devaluation which has been recommended by some local economists. However, that measure can be politically expensive since a devalued currency rarely returns to its original value and there will be some major economic pain involved. There was a time, believe it or not, when the TT dollar traded at $2.42 to US$1. The chances of the currency regaining that strength are almost nil.

In any case, I don’t believe the citizenry has the appetite to swallow any more tough economic pills. Instead, what T&T should be aiming for is the kind of economic activity, particularly in the nonoil sector, that will substantially increase foreign currency inflows and keep the exchange rate stable.

We need to get to the place of stability and economic growth where T&T becomes attractive enough to draw the investment funds needed for long-term prosperity.

The D word that needs to come into play is diversification, not devaluation. That is key for the economic revitalisation and transformation T&T urgently needs at this stage in the nation’s development.

We need to aim for the economy to become more open, for our foreign exchange reserves to increase and for a return of confidence in the domestic currency sufficient to shut down the black market and meet commercial and other demands.

Will some forex remedy be part of the fiscal package to be presented in September? It should be.

I wait to see how Mr Imbert will address our persistent forex problem.


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