This column has previously noted that GORTT’s fiscal position has been in persistent deficit (22 out of 25 years). Deficits increase domestic expenditure. Because every dollar spent has a high import coefficient, deficits increase foreign exchange demand.
Since natural gas production and the export of gas derivatives account for 70-80 per cent of all foreign exchange generated, a production or price decline will reduce foreign exchange earnings and increase its scarcity.
Buyers and sellers make a market. A market presumes the existence of a surplus, which is saleable to those who need or want to acquire the surplus. Where there is a market imbalance, the product price will change until equilibrium is achieved, matching buyers and sellers. The official forex market comprises licenced dealers who sell the forex surplus they get from exporters, et al. The Central Bank (CBTT) only sells a limited amount monthly to commercial banks and sets the exchange rate.
Natural gas production has been declining since 2013, and energy prices declined in 2014 and remained “soft”, except for a temporary spike in prices in 2022/3.
Forex became less accessible and a source of contention. On December 31, 2014, the official foreign reserves amounted to USD 11.497 billion or 12.9 months’ import cover. On March 31, 2025, the reserves amounted to USD 5.27 billion or 7.5 months’ import cover. Since the reserves are controlled by the CBTT, and it only sells a limited amount monthly to commercial banks, we can presume that the market is in deficit.
Using import cover as a dummy variable for all foreign exchange demand, the estimated monthly demand for USD amounted to USD 891.2 million in 2014, compared to USD 703 million on March 31, 2025.
However crude the calculation, it indicates that demand for USD has declined by roughly 21 per cent. If foreign exchange demand declined, why is foreign exchange still inaccessible or at least very difficult for most people to access?
The reason is that demand still outstrips the available forex supply, even if absolute demand has declined. In a normal market, scarcity means rising prices, yet the exchange rate remains fixed at the “official” rate of $6.78 TT to US $1.
As noted last week, the TT exchange rate for other currencies (British pound, Euro, Yen, etc) fluctuates because the US dollar fluctuates daily against other major currencies.
Internationally, the USD has declined by approximately 7.5 per cent in 2025. (Morning Star). The fixed rate to USD masks the fluctuation of the TT dollar against other currencies.
A JP Morgan Asset Management research note in March 2025, “Where is the US dollar headed in 2025”, noted that “the US’ persistent trade balance deficit, at 4.2 per cent of GDP as of September 2024, poses a long-term constraint, highlighting a structural challenge that could eventually pressure the currency.”
The point is that most widely traded currencies fluctuate daily in response to many factors such as monetary policy variables (inflation, interest rates), economic stability and growth, trade balances, and fiscal deficits.
Interest rate differences provide an incentive to invest in other jurisdictions which offer higher rates on deposits or bonds. Anecdotal evidence suggests that the exchange rate for the TT dollar is out of sync with market conditions and the rate should be depreciated. For example, many shops carry a sign indicating that they accept USD and give a rate.
What exchange rate would give price stability and economic growth, encourage foreign investment and remove trade imbalances?
The answer is an optimal exchange rate which, in economic theory, aligns with the equilibrium rate–the rate where supply and demand for a currency are balanced–or one that reflects purchasing power parity (PPP), where identical goods cost the same across countries when priced in the same currency.
The rate could be weaker than the existing rate, which makes exports relatively cheaper and imports more expensive. It could be stronger and make imports cheaper and exports more expensive or less competitive. How is such a rate identified or calculated?
Economists refer to the Real Effective Exchange Rate (REER) as the closest to an optimal rate. It is a weighted average of a country’s currency relative to a basket of other currencies, adjusted for inflation differences.
It’s a comprehensive approach to assessing a country’s currency value relative to global trade competitiveness. It is a crucial indicator as it adjusts the nominal exchange rate for inflation differences between countries, providing a more accurate measure of a currency’s international competitiveness.
An increase in the REER suggests that a country’s goods and services have become more expensive relative to those of its trading partners, potentially affecting export performance.
The IMF’s Article IV consultation reports (2017, 2023, 2024) have consistently highlighted that the TT dollar is significantly overvalued. The 2017 report estimated that the overvaluation is between 21 and 50 per cent.
In 2023 it emphasised that this exchange rate misalignment posed risks which were accentuated by the heavy reliance on energy exports and the price volatility of those exports. Without examining the technical merits or demerits of the calculation, we know that the informal market price is different from the official $6.78 rate.
This forex market imbalance will persist and worsen as long as the forex pricing mechanism is divorced from a market-based solution or T&T export earnings remain depressed. What is an appropriate mechanism, and how to increase exports are complex questions for another article.
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business.
