GEISHA KOW­LESSAR ALON­ZO

With the Gov­ern­ment prepar­ing to de­liv­er its na­tion­al bud­get next week Mon­day, amid per­sis­tent for­eign ex­change short­ages, econ­o­mists and a busi­ness leader are urg­ing pol­i­cy­mak­ers to con­front one of the coun­try’s most dif­fi­cult eco­nom­ic ques­tions: whether the T&T dol­lar re­mains ap­pro­pri­ate­ly val­ued.

While some have called for an ob­jec­tive as­sess­ment of the ex­change rate, busi­ness­es warn that de­val­u­a­tion alone would not re­solve the chron­ic short­age of US dol­lars and could in­stead in­crease the cost of food, med­i­cine and oth­er es­sen­tial im­ports.

Econ­o­mists Dr Ronald Ramkissoon, Mar­la Dukha­ran and for­mer fi­nance min­is­ter Sel­by Wil­son ar­gue that the is­sue de­serves se­ri­ous con­sid­er­a­tion as busi­ness­es and house­holds con­tin­ue to face dif­fi­cul­ties ac­cess­ing for­eign cur­ren­cy through the of­fi­cial bank­ing sys­tem, while an ac­tive par­al­lel mar­ket per­sists.

Ramkissoon said much of the pub­lic dis­cus­sion has fo­cused on the term “de­val­u­a­tion,” when econ­o­mists typ­i­cal­ly dis­tin­guish be­tween a de­val­u­a­tion in a fixed ex­change-rate sys­tem and a de­pre­ci­a­tion un­der a man­aged or float­ing ex­change-rate regime.

“The ex­change rate regime is a man­aged float. That is how Gov­ern­ment calls it. But is the ex­change rate float­ing? The an­swer is no,” he said as he fur­ther not­ed that while T&T of­fi­cial­ly op­er­ates a man­aged float sys­tem, the ex­change rate has re­mained vir­tu­al­ly un­changed for years.

“By law, we have a man­aged float. The ap­pro­pri­ate word to use if you’re go­ing to get mul­ti­ple dol­lars for a US dol­lar is de­pre­ci­a­tion,” Ramkissoon said adding, “But what is in fact hap­pen­ing is our ex­change rate is stuck at more or less 6.76, 6.77, 6.78. So, in fact, the rate is fixed. There­fore, if it is fixed de fac­to, then we might as well call it a de­val­u­a­tion.”

His com­ments comes as the for­eign ex­change short­age re­mains one of the most com­mon­ly cit­ed con­cerns among man­u­fac­tur­ers, im­porters, ex­porters and re­tail­ers.

Busi­ness groups have re­peat­ed­ly point­ed to lim­it­ed ac­cess to US dol­lars as a ma­jor ob­sta­cle to in­vest­ment, ex­pan­sion and in­ter­na­tion­al trade, while con­sumers have in­creas­ing­ly turned to un­of­fi­cial chan­nels to ob­tain for­eign cur­ren­cy.

Re­turn to auc­tion mech­a­nism pro­posed

Dukha­ran said she has long favoured a de­pre­ci­a­tion of the cur­ren­cy through mar­ket mech­a­nisms rather than a sud­den pol­i­cy-dri­ven de­val­u­a­tion.

“A de­val­u­a­tion, which we have had in the past, is where the ex­change rate is amend­ed to re­flect more TT$ in ex­change for one USD, our bench­mark cur­ren­cy. This change is not a mar­ket dri­ven but pol­i­cy-dri­ven change in the ex­change rate and is usu­al­ly a fair­ly big change - five per cent or more in the val­ue of the lo­cal cur­ren­cy against the bench­mark. Now, I do not re­call ad­vo­cat­ing for a de­val­u­a­tion, though I have been mis­quot­ed many times. I have been ad­vo­cat­ing for a de­pre­ci­a­tion, which is slight­ly dif­fer­ent.

“A de­pre­ci­a­tion is more mar­ket dri­ven vs pol­i­cy dri­ven, and the change is much small­er and more fre­quent, which is what we had with the auc­tion mech­a­nism which was re­moved by this ad­min­is­tra­tion dur­ing their last term, in June 2014.

“The auc­tion mech­a­nism al­lowed for the au­tho­rised for­eign ex­change deal­ers ie the mar­ket, to price their bids for US dol­lars from the Cen­tral Bank based on the de­mand and sup­ply of US dol­lar they had on their books. And on the ba­sis of the bids they re­ceived, the Cen­tral Bank sold US$ to the mar­ket, at prices that al­lowed for small changes (de­pre­ci­a­tion or ap­pre­ci­a­tion) in the ex­change rate rel­a­tive to the last trad­ing day. This is a sim­pli­fi­ca­tion, of course, but this is ba­si­cal­ly how it worked,” she told the Sun­day Busi­ness Guardian.

Dukha­ran added that she has been ad­vo­cat­ing for a re­turn to the auc­tion mech­a­nism which worked well but “was dis­man­tled for no ap­par­ent rea­son or ex­pla­na­tion.”

She not­ed it al­lowed for small de­pre­ci­a­tions in the TT dol­lar over time which re­lieved any over­val­u­a­tion or un­der­val­u­a­tion rel­a­tive to the US dol­lar and avoid­ed a black mar­ket.

Dukha­ran al­so not­ed that when the PNM re­turned to of­fice in 2015, the then fi­nance min­is­ter in­di­cat­ed the mech­a­nism would be rein­tro­duced.

“Not sure why that nev­er hap­pened, to this day,” she said.

Black mar­ket points to grow­ing pres­sure

While Dukha­ran has tra­di­tion­al­ly sup­port­ed grad­ual mar­ket-based ad­just­ments, she said the scale of dis­tor­tions in the for­eign ex­change mar­ket has led her to re­con­sid­er her po­si­tion.

“At this point, based on the se­vere over­val­u­a­tion of the TT dol­lar and the mas­sive and thriv­ing black mar­ket, which has an un­of­fi­cial ex­change rate of about $8 to $9 to US$1, I ac­tu­al­ly now think we might need a de­val­u­a­tion to TT$8 per US dol­lar and then al­low for slow and steady change over time via an auc­tion mech­a­nism.”

Ramkissoon sim­i­lar­ly point­ed to par­al­lel mar­ket ac­tiv­i­ty as a sig­nal that the ex­change rate may not ac­cu­rate­ly re­flect mar­ket con­di­tions.

Asked what the ex­change rate might be if it were al­lowed to move more freely, he not­ed that some in­di­vid­u­als are al­ready pay­ing around TT$7.50 for a US dol­lar on the un­of­fi­cial mar­ket.

Trade-offs for in­fla­tion and growth

Both econ­o­mists cau­tioned that any de­pre­ci­a­tion or de­val­u­a­tion would bring high­er prices, par­tic­u­lar­ly in the short term.

“One of the rea­sons some econ­o­mists ar­gue we should not de­pre­ci­ate or de­val­ue is be­cause prices are al­ready high. And that is a fact,” Ramkissoon said.

How­ev­er, he ar­gued that main­tain­ing the cur­rent ex­change rate may be mak­ing im­port­ed goods ar­ti­fi­cial­ly in­ex­pen­sive and re­duc­ing in­cen­tives for do­mes­tic pro­duc­tion.

“When im­porters can bring it in at a par­tic­u­lar price be­cause the im­port price is rel­a­tive­ly cheap, the guy pro­duc­ing it here has to pro­duce it at a few cents more. That means the do­mes­tic farmer can­not com­pete with im­port­ed agri­cul­tur­al prod­ucts.”

Ramkissoon said ex­change-rate ad­just­ments alone would not solve the coun­try’s eco­nom­ic chal­lenges and would need to be ac­com­pa­nied by mea­sures to im­prove agri­cul­tur­al pro­duc­tiv­i­ty and ad­dress in­fra­struc­ture de­fi­cien­cies.

“If you on­ly ad­just the ex­change rate, but the man’s crop floods be­cause they would not re­pair the sluice gate, is the ex­change rate help­ing? The prob­lem is not on­ly the ex­change rate,” he added.

Dukha­ran said a weak­er cur­ren­cy could pro­vide an im­me­di­ate fis­cal ben­e­fit to the Gov­ern­ment be­cause en­er­gy-sec­tor rev­enues are large­ly earned in US dol­lars.

“One good thing about a de­val­u­a­tion or de­pre­ci­a­tion of the TT dol­lar is that the Gov­ern­ment gets more TT dol­lar equiv­a­lent tax rev­enue per US dol­lar it col­lects in tax­es from the en­er­gy sec­tor. So this is an im­me­di­ate boost to fis­cal rev­enue in TT dol­lars,” she said.

How­ev­er, she warned that pol­i­cy­mak­ers must al­so con­sid­er the im­pact on ex­ter­nal bal­ances and for­eign re­serves.

“If our Mar­shall-Lern­er con­di­tion is not met, mean­ing that if a de­val­u­a­tion ac­tu­al­ly caus­es a larg­er net out­flow of US dol­lars via high­er im­port prices for rel­a­tive­ly in­elas­tic de­mand for im­ports, then a de­val­u­a­tion will ac­tu­al­ly make our over­all lev­el of re­serves de­cline more rapid­ly, then we should not de­val­ue.”

“I do not know and don’t have enough da­ta to de­ter­mine whether we meet the Mar­shall-Lern­er con­di­tion, but I am sure the Cen­tral Bank does,” Dukha­ran said.

Econ­o­mist Sel­by Wil­son al­so agreed that pol­i­cy­mak­ers should ob­jec­tive­ly as­sess whether the cur­rent val­ue of the cur­ren­cy re­mains ap­pro­pri­ate.

“They should not dis­count the fact that they need to take an ob­jec­tive look at the val­ue of our cur­ren­cy and de­ter­mine whether it needs to be de­val­ued or main­tained,” Wil­son said.

With bud­get day ap­proach­ing and the for­eign ex­change short­age con­tin­u­ing to af­fect busi­ness­es, con­sumers and in­vestors, econ­o­mists say the ques­tion fac­ing pol­i­cy­mak­ers is not on­ly whether the cur­rent ex­change rate frame­work re­mains sus­tain­able, but whether de­lay­ing re­forms could re­sult in more dif­fi­cult ad­just­ments lat­er.

Char­ran: De­val­u­a­tion alone would not solve forex short­age

Con­fed­er­a­tion of Re­gion­al Busi­ness Cham­bers chair­man Vivek Char­ran said the coun­try’s for­eign ex­change dif­fi­cul­ties stem pri­mar­i­ly from a mis­match be­tween sup­ply and de­mand rather than the lev­el at which the T&T dol­lar is cur­rent­ly val­ued.

Char­ran ar­gued that a de­val­u­a­tion would do lit­tle to ad­dress the core is­sue fac­ing the econ­o­my if com­pa­nies re­main un­able to ac­cess suf­fi­cient for­eign ex­change to meet their needs.

“Much of the cur­rent de­mand for for­eign ex­change is for es­sen­tial im­ports, in­clud­ing food, grain used in lo­cal­ly pro­duced poul­try, phar­ma­ceu­ti­cals and oth­er ne­ces­si­ties. A sig­nif­i­cant de­val­u­a­tion at this stage could there­fore trans­late in­to high­er prices for these es­sen­tial goods, fur­ther re­duc­ing con­sumers’ dis­pos­able in­come in an econ­o­my where spend­ing is al­ready un­der pres­sure,” he said.

Ac­cord­ing to Char­ran, the na­tion­al con­ver­sa­tion should fo­cus not on­ly on whether the cur­ren­cy should be de­val­ued but on what prac­ti­cal out­comes such a move would de­liv­er.

“If busi­ness­es still can­not ob­tain the for­eign ex­change they need, chang­ing the ex­change rate does not nec­es­sar­i­ly solve the sup­ply prob­lem. It could in­stead in­crease the Trinidad and To­ba­go dol­lar cost of im­ports, cre­at­ing ad­di­tion­al in­fla­tion­ary pres­sure while busi­ness­es con­tin­ue to com­pete for a lim­it­ed pool of for­eign cur­ren­cy,” Char­ran added.

He said the coun­try must recog­nise that a de­val­u­a­tion can­not cre­ate for­eign ex­change or in­crease the vol­ume of US dol­lars avail­able with­in the fi­nan­cial sys­tem.

“In the end, de­val­u­a­tion is not ac­tu­al­ly a so­lu­tion to the short­age. It can ef­fec­tive­ly tight­en ac­cess by mak­ing for­eign ex­change more ex­pen­sive in Trinidad and To­ba­go dol­lar terms. Busi­ness­es would still have to com­pete for the avail­able for­eign ex­change, but would now need more T&T to pur­chase the same quan­ti­ty of goods,” Char­ran ad­vised.

Rather than con­cen­trat­ing sole­ly on ex­change rate ad­just­ments, Char­ran fur­ther rec­om­mend­ed pol­i­cy­mak­ers should fo­cus on strate­gies that ex­pand for­eign ex­change earn­ings and re­duce the coun­try’s re­liance on im­port­ed goods.