Home' Trinidad and Tobago Guardian : January 4th 2015 Contents JANUARY 04 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COMMENTARY | 3SBG
On Thursday, it was argued in
this space, that one of the
ways of increasing the attrac-
tiveness of TT-dollar assets
was by the Government plac-
ing some more high-quality state-owned or
affliated companies on to the local stock mar-
That point was made due to the fact that
the Governor of T&T's Central Bank had noted
that "US dollar assets are more attractive than
TT dollar assets, prompting movements of
portfolio capital in search of higher yields."
As various authors have noted, one of the
ways of treating with "the movements of port-
folio capital" out of the country is to allow
the depreciation of the domestic currecy as
countries as diverse as Canada, Norway, Mex-
ico, Nigeria and Columbia have done.
It is noteworthy that T&T's current foreign
exchange system is nominally a floating cur-
rency, the purpose of which is that the TT-
dollar is supposed to depreciate when the
economy is weak and appreciate when the
economy is strong.
The fact is that the Central Bank has taken
a conscious policy decision to prop up the TT
dollar by flooding the country with as much
US dollars as prudence and watchfulness over
the stock of foreign reserves dictate. Some
describe this as a "dirty" float.
It is, however, not the only option.
Another option would be for the Central
Bank to moderate its interventions in the for-
eign exchange market and allow the TT dollar
to find a level that more accurately reflects
current macro-economic realities.
One of the advantages of allowing a currency
like the TT dollar to depreciate is that it would
allow the Government to generate more TT
dollars for the US dollars it earns from taxes
on energy exports.
For example, for the 2015 financial year, the
Government expects to earn about US$3.5 bil-
lion in taxes from the energy sector.
At the current exchange rate---the commer-
cial bank buying rate of $6.25 to US$1---that
works out to be about $21.9 billion.
If the TT dollar were to depreciate by 20
per cent---that is from $6.25 to $7.5 to US$1---
the amount of TT dollars generated from the
US$3.5 billion in energy taxes would be $26.25
But with sharp declines in the prices of oil
and natural gas, it is quite likely that T&T will
not earn US$3.5 billion from energy taxes dur-
ing the 2015 financial year.
If taxes from energy revenues declined by
20 per cent---that is by US$700 million from
US$3.5 billion to US$2.8 billion---at the current
exchange rate, the amount of energy taxes
collected would decline to $17.5 billion. This
would increase the Government's fiscal deficit
for 2015 from $6 billion to $10.3 billion.
Assuming a 20 per cent decline in energy
tax revenues, at the depreciated exchange rate,
the amount of energy tax revenue the Gov-
ernment would collect (US$2.8 billion X $7.5)
would be $21 billion, which is quite similar to
the original revenue estimate.
The problem with allowing the TT dollar
to depreciate is that it would increase the cost
of everything that is imported into T&T.
That would include everything from Carnival
costumes to most of the food in supermarkets
to big-ticket items like cars and white appli-
ances (refrigerators, stoves, washing machines)
and airline tickets.
By immediately increasing the cost of most
of the food the country imports, a depreciation
of the TT currency would have a negative
impact on low-to-middle income wage earners,
who would immediately see an increase in
their food bills and therefore a reduction in
their disposable income.
The depreciation in the TT dollar, in theory,
would make wheat, oil and rice more expensive,
which would automatically increase the cost
of some of this country's favourite dishes such
as rotis, doubles, bakes and pelau. The cost
of eating out would go up commensurate with
the size of the depreciation.
Also likely to face immediate increases would
be the cost of transportation for people who
depend on taxis and maxi-taxis to get to and
from work as the owners and/or drivers would
argue that the rise in the cost of their spare
parts should be compensated by them being
allowed to charge more.
In that sense, because a depreciation would
lead to increases in food and transportation
costs, it would be viewed as a negative and
Allowing the depreciation of the TT dollar,
therefore, is not something that any prime
minister or political party in power would be
able to stomach comfortably in the year of a
general election. Especially a prime minister,
like Mrs Persad-Bissessar, who seems extremely
wary of dealing with anything that may be
the least bit controversial.
But on the other hand, faced with sharp
increases in the cost of imported products,
the rational consumer would switch to locally
produced vegetables and food and postpone
the big-ticket items (such as the acquisition
of the new cars, white appliances and foreign
This may lead, for example, to consumers
choosing to buy fewer rotis and pelau (made
from imported rice) and choosing instead more
locally produced vegetables and rice.
There is also a possibility of the Government
providing a direct subsidy to the National
Flour Mills, along the lines of the three price
discounts that the majority state-owned milling
company was mandated to provide in the last
The response by consumers to higher prices
of imported goods and services would lead to
a reduction, over time, in the demand for for-
It would also spur the production by the
domestic manufacturing and service sectors
of local replacements of foreign goods and
services, as happened when the TT dollar was
originally floated in April 1993.
By increasing the cost of acquiring US dol-
lars, a depreciation is also likely to mean a
slowdown in the capital flight that Central
Bank Governor Jwala Rambarran referenced
in his now controversial December 1 speech
If allied with policies that increase the attrac-
tiveness of TT-dollar assets---both bonds and
equities---allowing a depreciation of TT-dollar
may actually lead to a reversal of capital flight
as local managers of portfolios and high-net
worth individuals see opportunities to make
But the question that T&T needs to ask and
answer is whether allowing a depreciation of
the TT dollar would have a negative and long-
term impact on the rate of inflation.
Dr Terrence Farrell, in a newspaper com-
mentary to mark the 20th anniversary of the
flotation in April 2013, reminds us that the
Arthur NR Robinson administration "unified
the dual exchange rate at $3.60 to US$1 in
January 1987, and then devalued to $4.25 in
April 1988." This means there was an 18 per
cent devaluation of the TT dollar in April 1988.
According to the Central Bank's July 2006
Public Education Pamphlet on "Inflation," the
inflation rate in 1988 was 7.8 per cent and in
the two years following it was 11.4 per cent
and 11 per cent.
Farrell also notes that the April 1993 flotation
led to an immediate adjustment of the
exchange rate from $4.25 to $5.76 to US$1---
which was a 35.5 per cent depreciation, by my
The Central Bank document states that in
1992, the year before the flotation, T&T's
inflation rate was 6.5 per cent. It increased to
10.8 per cent in 1993 (the year of the flotation),
but declined to 8.8 per cent, 5.3 per cent and
3.3 per cent in 1994, 1995 and 1996.
This seems to indicate that although the
T&T dollar depreciated by 35 per cent in 1993,
the impact of the price adjustments was only
experienced in the year of the flotation and
thereafter inflation moderated. (The rate of
inflation in 1997 and 1998 was 3.6 per cent
and 5.6 per cent).
Deputy Central Bank Governor, Dr Alvin
Hilaire, in an April 2000 IMF working paper
titled Caribbean Approaches to Economic Sta-
bilisation, compared the approaches of four
Caribbean nations, Barbados, Jamaica, Guyana
and T&T, to structural adjustment in the 1980s.
Hilaire states that T&T chose discrete deval-
uations in 1985 and 1988 and then floated the
currency in 1993. He said that between 1987
and 1998, the value of the T&T dollar to the
US dollar moved from $3.6 to $6.3---which
from my calculation is a 75 per cent decline.
This is not to make the point that the flota-
tion alone was responsible for the moderation
of prices in T&T as the country experienced
significant trade liberalisation as well as fiscal
adjustments in that period (such as the sim-
plification and reduction in the income tax
system and the introduction of the Value Added
It is only to make the point that, in certain
circumstances, spiralling inflation is not a nec-
essary consequence of depreciation.
Should T&T fear currency depreciation?
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