I want you to con­sid­er the third term vic­to­ry for the Ja­maica Labour Par­ty (JLP) in last week’s gen­er­al elec­tion in Ja­maica, and what it meant in terms of an eco­nom­ic and po­lit­i­cal analy­sis in T&T.

The JLP came in­to of­fice in 2016 on the back of a pre-ex­ist­ing In­ter­na­tion­al Mon­e­tary Fund (IMF) pro­gramme. This is not too dif­fer­ent from the T&T sce­nario where af­ter a crip­pling col­lapse in en­er­gy prices in 2014, a new Gov­ern­ment was elect­ed in 2015.

Both of these ad­min­is­tra­tions had 10 years to move their re­spec­tive economies for­ward. On­ly one man­aged to get re-elect­ed for a third term. The JLP em­braced the IMF con­di­tion­al­i­ties they in­her­it­ed. They de­vel­oped a com­mit­ment to fis­cal pru­dence, re­duced debt while still pur­su­ing their own man­i­festo goals and ob­jec­tives. Re­cent­ly, they man­aged to en­gi­neer a sig­nif­i­cant re­duc­tion in crime.

They faced all the chal­lenges that T&T faced and more, while we had sig­nif­i­cant­ly more eco­nom­ic space and room to ma­neu­ver than they did. High­er oil and gas prices, which as we saw in 2022 was a boom for us, pre­sent­ed a sig­nif­i­cant chal­lenge for them. They had COVID-19 to deal with, just as we did, and may have been more im­pact­ed by virtue of the shut down of their tourism sec­tor for a sig­nif­i­cant pe­ri­od of time. Plus, they are in the hur­ri­cane zone.

Yet de­spite this the Ja­maica econ­o­my is ac­tu­al­ly out­per­form­ing ours. Imag­ine Ja­maica hav­ing a low­er debt to GDP ra­tio than T&T in a few years time. The bot­tom line is that Ja­maica dealt with their chal­lenges in a sub­stan­tive man­ner while in T&T’s case there was the in­ces­sant whin­ing and fear mon­ger­ing of “not want­i­ng T&T to end up in the clutch­es of the IMF” and lit­tle else.

The dif­fer­ence in the qual­i­ty of gov­er­nance be­tween the two coun­tries is there for any ob­jec­tive ob­serv­er to as­sess and quan­ti­fy and it can be summed up very sim­ply. Ja­maica com­mit­ted to fis­cal dis­ci­pline and then em­braced the forces of the fi­nan­cial mar­ket to bring about the eco­nom­ic op­por­tu­ni­ties that their cit­i­zens re­quired. They em­ployed more mar­ket-dri­ven mon­e­tary poli­cies, and they tapped in­to the cap­i­tal mar­kets proac­tive­ly to pro­duce eco­nom­ic re­turns.

From my in­ter­ac­tions, they have a clear un­der­stand­ing, in cir­cles that mat­ter, of how fi­nan­cial mar­kets work and how to har­ness its pow­er in or­der to achieve eco­nom­ic out­comes. In short their Gov­ern­ment does not have to do as much heavy lift­ing be­cause they un­der­stand how to pro­duce the lever­age they need to achieve eco­nom­ic growth and de­vel­op­ment.

Lack­ing

That knowl­edge of the mar­ket and how to pos­i­tive­ly cede to the forces of the mar­ket is sad­ly lack­ing in T&T. This ex­tends across the board and brings us to the rag­ing de­bate around the for­eign ex­change sit­u­a­tion in T&T.

The truth is the prob­lem isn’t just with the politi­cians. I have read with in­ter­est the com­men­tary on the for­eign ex­change sit­u­a­tion by many of the econ­o­mists who are pro­vid­ed with me­dia cov­er­age and there is an ap­par­ent lack of un­der­stand­ing of how mar­kets ac­tu­al­ly func­tion and the mech­a­nisms and levers that are avail­able to us.

The like­ly rea­son is we live in an en­vi­ron­ment of ar­ti­fi­cial­ly sta­ble ex­change rates, in­ter­est rates, price con­trols on fu­el, along with a se­ries of sub­si­dies and trans­fers. We know how to “fix,” but we do not know how to “float”. We un­der­stand “stock” (what ex­ists at a point in time), we do not un­der­stand “flow” (how things change over time).

This dis­tinc­tion be­tween stock and flow think­ing rep­re­sents one of the most fun­da­men­tal gaps in our eco­nom­ic dis­course. Stock think­ing fo­cuss­es on what we have to­day, our cur­rent lev­el of re­serves, our ex­ist­ing in­fra­struc­ture, our present debt lev­el. Flow think­ing ex­am­ines the di­rec­tion and speed of change, whether re­serves are ris­ing or falling, whether our eco­nom­ic fun­da­men­tals are im­prov­ing or de­te­ri­o­rat­ing, whether our fis­cal tra­jec­to­ry is sus­tain­able or un­sus­tain­able, and then most im­por­tant­ly mak­ing the nec­es­sary ad­just­ments.

The thing is mar­kets are al­ways mov­ing, even if we are not. Eco­nom­ics oc­curs on the mar­gin so flow mat­ters more than stock. This lack of un­der­stand­ing of the in­ter­ac­tion of stock ver­sus flow is the rea­son why we have a for­eign ex­change chal­lenge to­day. I have tried to ex­plain this con­cept many times in the past.

Let me take you through a chronol­o­gy of com­ments made by then Min­is­ter of Fi­nance, Colm Im­bert.

(Sun­day Guardian (06/12/15)) “[Trinidad & To­ba­go’s] lev­el of for­eign re­serves was still at 11 months of im­port cov­er, well above the com­mon stan­dard that re­serves cov­er­ing three months’ worth of im­ports were ad­e­quate… At this stage we have no plans to move the ex­change rate…’”

You should note that around this time the IMF was mov­ing away from the rule-of-thumb yard­stick of three months im­port cov­er and to­wards a more risk-based ap­proach called the As­sess­ing of Re­serve Ad­e­qua­cy (ARA) met­ric. Ap­pre­ci­ate that risk-based mea­sures as op­posed to rules of thumb are a fea­ture of mod­ern day fi­nance and gov­er­nance.

A few months lat­er, at the 2016 mid-year bud­get the Min­is­ter in­di­cat­ed that: “As Min­is­ter of Fi­nance, I am of the view, af­ter con­sid­er­a­tion of all rel­e­vant fac­tors and af­ter seek­ing the ad­vice of ex­perts, both here in Trinidad and over­seas, that our ex­change rate should not fluc­tu­ate at this time by more than 7 per cent from the rate of ex­change that pre­vailed in Sep­tem­ber 2015.”

The cur­rent in­fla­tion fear­mon­gers, should take note, giv­en that in­fla­tion is ex­act­ly the same now as it was when the rate was al­lowed to move to 6.80, the dif­fer­ence is that our for­eign ex­change re­serves are now sub­stan­tial­ly low­er.

The Fix

Mak­ing an ad­just­ment is one thing, fix­ing the un­der­ly­ing is­sues is an­oth­er. This we did not do. The ad­just­ment was treat­ed as a one-off event rather than part of a com­pre­hen­sive re­form pro­gramme. There was no fol­low through on struc­tur­al re­forms that would have ad­dressed the un­der­ly­ing im­bal­ances caus­ing the for­eign ex­change pres­sures in the first place.

Here is an ex­tract from the News­day, 19/04/19.

“Cit­ing the Cen­tral Bank’s records, Im­bert told re­porters dur­ing a press con­fer­ence at the min­istry yes­ter­day that the coun­try’s net re­serves are US$7.5 bil­lion or 8 months’ im­port cov­er, well be­yond the in­ter­na­tion­al stan­dard.”

Then in the 2023 bud­get speech:

“Net of­fi­cial for­eign re­serves as of Au­gust 2022 stood at US$6.8 bil­lion, rep­re­sent­ing 8.5 months of im­port cov­er, well above the in­ter­na­tion­al bench­mark of three months.”

The then min­is­ter kept sug­gest­ing to the pop­u­la­tion an out­dat­ed and no longer used bench­mark of three months. His ap­proach as out­lined above car­ried with it one fa­tal flaw and demon­strates what I mean by un­der­stand­ing stock but not flow.

As­sume you have a coun­try with net re­serves of one month im­port cov­er. The pol­i­cy ac­tions and be­hav­iors need­ed to go from one month to three months of im­port cov­er and main­tain at around three months is go­ing to be com­plete­ly dif­fer­ent to an econ­o­my where you start from 11 and move to five on the way to the same three-month tar­get.

The fun­da­men­tal ques­tion that the for­mer min­is­ter need­ed to an­swer, even now, was what were the mea­sures and mech­a­nisms he had in place to stop on the way down.

That’s what we ef­fec­tive­ly have to do now. It is use­less to say that we are well above the in­ter­na­tion­al bench­mark on the way down with­out demon­strat­ing a co­her­ent and ac­tion­able plan around how to sta­bil­i­ae at that point. Fur­ther, if we had such a plan why not ef­fect the sta­bil­i­sa­tion at eight months or six, in­stead of kick­ing the can and re­duc­ing the buffers fur­ther and try­ing to do so at three months.

You should al­so ap­pre­ci­ate that as you get clos­er to a neg­a­tive bench­mark, the rate of change ac­cel­er­ates. Stock prices de­cline faster than it ap­pre­ci­ates. Those who un­der­stand how mar­kets work would have rec­og­nized the dan­gers that mov­ing from 11 to six pos­es on the way to three.

This ac­cel­er­a­tion prin­ci­ple ap­plies to for­eign ex­change re­serves as much as it does to any oth­er fi­nan­cial as­set, which is why de­mand is in­creas­ing. The clos­er you get to crit­i­cal thresh­olds, the faster con­fi­dence can erode, and the more dra­mat­ic the re­quired pol­i­cy re­spons­es be­come. What might have re­quired gen­tler pol­i­cy ad­just­ments at 11 months of im­port cov­er could re­quire dras­tic mea­sures at three months.

The tragedy is that we had the time and the re­sources but we chose to de­fend an in­creas­ing­ly un­sus­tain­able po­si­tion. This is the essence of poor gov­er­nance, al­low­ing prob­lems to fes­ter un­til cri­sis forces your hand, rather than uti­liz­ing more open and mar­ket dri­ven ap­proach­es while you still have room to ma­neu­ver. That was the les­son from Ja­maica.

Last week I point­ed out how we made a mess of Petrotrin. This week it’s the turn of the for­eign ex­change sit­u­a­tion. Next week my aim is to dis­cuss how we can move for­ward from here.

Ian Nar­ine is a fi­nan­cial con­sul­tant of­fer­ing an ex­change that may seem for­eign. Please send your com­ments to ian@ian­nar­ine.com