Home' Trinidad and Tobago Guardian : August 13th 2015 Contents Even though, post 2009, the rate of change was
not at the same pace as before, the absolute amount
going into the system each year and accumulating
was significant. What has therefore impacted us over
the past five years has been the cumulative growth
in liquidity to the extent that during the course of
last year surplus liquidity in the banking system alone
topped $8 billion.
It would have been difficult to reduce the size of
the non-energy deficit in the years following the col-
lapse of CL Financial as the economy was in recession
and cuts would have deepened that recession. It
means that from 2009 to around 2013 we were
between a rock and a hard place.
Today, we must recognise that the situation of
surplus TT liquidity fuelled by a $20-billion plus
non-energy deficit cannot continue and, at this stage,
the Central Bank seems to have recognised that.
The build up of TT dollar liquidity
means, in simple English, that there
are more TT dollars in the system with
the implication that our currency was,
in effect, depreciating even as we main-
tain a steady quoted exchange rate.
One also needs to understand the
issue of inflation, which is essentially
the result of more TT dollars chasing
after the same amount of goods and
services causing prices to rise.
Appreciate that inflation is cumula-
tive. If prices are at $100 in 2002 and
increase each year, the purchasing power
of that $100 by 2006 would be approx-
imately $75. (See table on Page 15) That
loss is borne by you the general public
and it got worse after 2006.
As the build up of TT dollar liquidity
continued, the stock market overheated
by 2005 and then went into decline.
The property market soon followed
with the lasting effect being the elevated
level of property prices today.
In short, investment opportunities
during that time were, generally speak-
ing, not keeping pace with the increase
in TT-dollar liquidity.
Appreciate, therefore, the correlation
Are we that unique? That was the
question posed to the Governor of
the Central Bank by Anthony Wil-
son in the Sunday Business
Guardian on August 2, 2015. The
question was in relation to the fact
that the Central Bank is the only central bank in the
world to raise its policy interest rates six times in the
last ten months. In August last year the repo rate set
by the Central Bank was at 2.75 per cent. Today, that
rate stands at 4.25 per cent.
The answer to the question posed is: "yes, we are
We are unique because of years of dysfunction in
terms of fiscal policy that have created significant
policy challenges for the monetary authorities. The
reality is that in the face of reduced revenues from
oil and gas, the chickens are now coming home to
roost. I have written on this ad nauseam but not in
the detail that is to follow. The problem lies in how
much attention and debate we give to matters such
The Government collects revenue from the energy
sector (offshore sector) and from domestic activity
(onshore sector). Revenues from the onshore sector,
in the form of duties and taxes, are collected in TT
dollars. Revenues from the offshore sector are pre-
dominantly based in US dollars.
If the Government were to only spend the revenues
collected from the onshore sector then TT dollar liq-
uidity will mostly increase through credit creation
within the banking sector. The Central Bank would
be able to manage liquidity by managing credit
demand and the mechanism to do so would be to
influence interest rates in TT dollars.
If, however, our national expenditure levels are
higher than the revenues earned from the onshore
sector then we are running a non-energy fiscal deficit.
The key issue is not so much having a non-energy
deficit but rather how big that deficit is, at a point
in time, and the rate at which that deficit is changing
year on year. Up until 2004 the T&T economy largely
functioned in a fairly stable manner as it relates to
the size and rate of change of our non-energy deficit.
Due to the controversial nature of this topic---espe-
cially given the season that we are in---I am inclined
to reference from Central Bank and other published
sources as opposed to internally generated data in
order to explain how we are unique in terms of global
From the table above, note that from 2004 to 2006
the size of the non-energy deficit doubled. That
means that significantly more US dollars were, in
effect, being converted into TT dollars and spent in
the T&T economy. We have always run a "managed"
floating currency and it has mostly been the case
that there was insufficient US dollars available to
satisfy the level of demand. Having been a private
banker during the period 2007 to 2010, I know very
well the issue of clients having to go on a queue and
provide invoices in order to get US dollars. These are
not new occurrences.
The US dollars from the offshore sector, after being
converted into the TT dollar onshore sector, becomes
trapped as it is not readily reconverted to US dollars
because of the way we managed our foreign currency
reserves. That resulted in a build up of TT dollar liq-
A 100 per cent increase in the non-energy deficit
from 2004 to 2006 is, to put it mildly, quite irre-
sponsible as it creates dislocations with negative con-
sequences. By 2009 that deficit had moved to around
$23 billion, which represented a 200 per cent increase
from 2004 levels. For reference, the deficit in 2012
was around $24 billion and so the rate of change
from 2009 to 2012 was nominal.
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 13 • 2015
What is the
Central Bank up to?
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