Fol­low­ing years of what it de­scribed as “a se­vere and es­ca­lat­ing for­eign ex­change (forex or FX) cri­sis,” the T&T Cham­ber of In­dus­try and Com­merce yes­ter­day ad­vo­cat­ed the im­ple­men­ta­tion of an ex­change rate in which the TT dol­lar is aligned to de­mand and sup­ply, which the pri­vate sec­tor or­gan­i­sa­tion says would of­fer “a prag­mat­ic ap­proach to restor­ing bal­ance in the forex mar­ket.”

In a work­ing pa­per pub­lished yes­ter­day en­ti­tled Ad­dress­ing forex chal­lenges: The way for­ward, the T&T Cham­ber said the pri­vate sec­tor, par­tic­u­lar­ly SMEs, man­u­fac­tur­ers and new or emerg­ing ex­porters across both goods and ser­vices face mount­ing dif­fi­cul­ty ac­cess­ing forex when need­ed. This un­der­mines their abil­i­ty to op­er­ate, com­pete and scale in­to in­ter­na­tion­al mar­kets, the body said.

The work­ing pa­per out­lines that one of the key dri­vers of T&T’s forex cri­sis is the cur­rent ex­change-rate regime, “which has re­sult­ed in the Trinidad and To­ba­go dol­lar be­ing over­val­ued for more than a decade.

“There should be an align­ment of the ex­change rate to match de­mand and sup­ply, and an ur­gent need for an equi­lib­ri­um re­set of the ex­change rate.”

The or­gan­i­sa­tion said an over­val­ued cur­ren­cy ef­fec­tive­ly sub­sidis­es im­ports, while pe­nal­is­ing ex­port-led growth, “mak­ing the econ­o­my more de­pen­dent on for­eign goods and lim­it­ing the de­vel­op­ment of non-en­er­gy in­dus­tries that could oth­er­wise earn forex.

“In this en­vi­ron­ment, busi­ness­es face chron­ic de­lays and un­cer­tain­ty in ac­cess­ing forex, while the Cen­tral Bank is pres­sured to in­ter­vene con­tin­u­ous­ly, fur­ther strain­ing lim­it­ed re­serves.”

The T&T Cham­ber ar­gues that a mar­ket-aligned ex­change rate could ease pres­sure on the Cen­tral Bank re­serves and im­prove the over­all func­tion­ing of the sys­tem.

“Such a frame­work would re­store con­fi­dence and pro­vide con­fi­dence in for­eign ex­change flows to busi­ness­es, at more pre­dictable and trans­par­ent prices, en­abling them to plan, man­age costs and avoid op­er­a­tional dis­rup­tions,” said the body.

Ad­dress­ing fears about the im­pact on the cost of liv­ing in a mar­ket-aligned ex­change rate regime, the T&T Cham­ber said the biggest con­cern with al­low­ing the cur­ren­cy to de­pre­ci­ate, al­beit with­in a con­trolled band, is the threat of in­fla­tion.

It stat­ed that the fear of out-of-con­trol in­fla­tion is large­ly over­stat­ed, giv­en T&T’s own his­to­ry.

The or­gan­i­sa­tion said de­val­u­a­tions in 1988 and 1993 re­sult­ed in mod­er­ate and man­age­able in­fla­tion rather than the dra­mat­ic spikes of­ten as­sumed.

“Many be­lieve a 10 per cent de­val­u­a­tion au­to­mat­i­cal­ly pro­duces 10 per cent in­fla­tion, but the ev­i­dence does not sup­port this. In 1988, for ex­am­ple, the 18 per cent de­val­u­a­tion from TT$3.60 to TT$4.25 was fol­lowed by in­fla­tion rates of 7.8 per cent, 11.4 per cent and 11 per cent over the next three years, com­pared to 10.5 per cent the year be­fore the ad­just­ment.

“Sim­i­lar­ly, the 35 per cent de­pre­ci­a­tion in 1993 from TT$4.25 to TT$5.76 saw in­fla­tion rise from 6.5 per cent to 10.8 per cent be­fore de­clin­ing steadi­ly to 8.8 per cent, 5.3 per cent and 3.3 per cent be­tween 1994 and 1996.”

The work­ing pa­per ad­vo­cates that along­side changes to the ex­change rate regime, the Gov­ern­ment should un­der­take a three-year pro­gramme to dri­ve ef­fi­cien­cy in­to pub­lic ser­vice op­er­a­tions, “in­clud­ing pri­ori­tis­ing a full dig­i­tal trans­for­ma­tion of cus­toms and port op­er­a­tions, in­clud­ing end-to-end elec­tron­ic pro­cess­ing, risk-based in­spec­tions and in­te­grat­ed in­for­ma­tion-shar­ing across agen­cies in­volved in bor­der con­trol.”

The work­ing pa­per al­so called for T&T to fast-track long de­layed Ease of Do­ing Busi­ness re­forms, while align­ing in­vest­ment in­cen­tives with ex­port gen­er­a­tion.

The T&T Cham­ber al­so ar­gues that an ex­change rate aligned with mar­ket de­mand and sup­ply now is safer, less cost­ly, and more or­der­ly than a forced cor­rec­tion lat­er.

“The Cham­ber’s po­si­tion is that al­low­ing the ex­change rate to ad­just to­ward its mar­ket-clear­ing lev­el, guid­ed by trans­par­ent mon­e­tary pol­i­cy and sup­port­ed by struc­tur­al re­forms, of­fers the most cred­i­ble and sus­tain­able path to restor­ing sta­bil­i­ty in the for­eign ex­change mar­ket.

“A proac­tive move to­ward a de­mand-and-sup­ply-aligned ex­change rate would re­duce dis­tor­tions, im­prove for­eign ex­change avail­abil­i­ty and re­store con­fi­dence, rather than per­pet­u­at­ing short­ages that ul­ti­mate­ly trig­ger a dis­or­der­ly cor­rec­tion.”

Box

Asked whether the T&T Cham­ber is call­ing for con­sid­er­a­tion of a de­val­u­a­tion or a flota­tion, the or­gan­i­sa­tion’s CEO Vashti Guyadeen said, “ The Cham­ber is not call­ing for a one-off de­val­u­a­tion. Our po­si­tion is for a mea­sured tran­si­tion to a mar­ket-aligned ex­change rate, where the TT dol­lar ad­justs in line with de­mand and sup­ply, rather than re­main­ing ad­min­is­tra­tive­ly fixed.

“This is clear­ly ar­tic­u­lat­ed in the Cham­ber’s work­ing pa­per, which points to a rules-based, trans­par­ent frame­work, po­ten­tial­ly with­in a band, to re­store bal­ance to the forex mar­ket.”

A de­val­u­a­tion is a one-off event in which the ex­change rate is de­pre­ci­at­ed, while a flota­tion in­volves a con­tin­u­ous re­align­ment of the ex­change rate.