Home' Trinidad and Tobago Guardian : October 11th 2015 Contents LIMA, Peru---For the period from April 2014
to June 2015, T&T s total exports were $30
billion less than in the comparable period a
year earlier, according to the 2015 Review of
the Economy, which also indicates that for
the 2015 fiscal year, the T&T economy is esti-
mated to have experienced a 43 per cent decline
in its energy revenue.
It is clear that all of the local analysts of
the T&T economy agree that the most impor-
tant questions are how long will this period
of reduced export revenue continue and what
are the best policy responses to adjust to this
sharp decline in the country s revenues.
These two issues are linked because, while
no one but the Saudi King knows how long
the period of low international energy prices
will last, the severity of adjustment measures
is a function of the period the country must
live on reduced revenue.
In other words, if energy revenues are lower
for longer---because of lower prices, reduced
production and tax write-offs---it may be more
appropriate for major adjustments to be made
now rather than later, when adjustments
become politically less palatable.
It is noteworthy that most local analysts
believe that the new administration s 2016
budget did not impose enough adjustment on
aggregate demand in the T&T economy, but
it is unclear the extent to which these protes-
tations may be politically inspired.
On the other hand, given the country s pro-
ductivity and competitiveness problems, an
argument can be made that however long the
period of reduced energy revenue lasts, there
are certain adjustments that ought to be made
for the long-term benefit, and in the best
national interest of, T&T.
But it also needs to be noted that the advice
from the international financial institutions
here in Lima, Peru, where the IMF and the
World Bank are holding their annual autumn
meetings, is that T&T is in the financial posi-
tion of being able to adjust gradually.
As Elie Canetti, the IMF s mission chief for
T&T, said in an interview with the Business
Guardian in St Kitts last month: "In the 2014
staff report, we took the position that the
cyclical position of the economy was strong
enough that the tightening of belts could begin.
The message is that the sooner you start doing
it, the more gradual it can be.
"What you don t want is to put off fiscal
reforms for another two years because then
the problem gets larger and the adjustment
process does have to be greater."
And Daniel Lederman, the deputy chief
economist of the World Bank for the Latin
America and the Caribbean region, told the
Business Guardian in Lima on Friday: "As far
as I know, T&T did a relatively good job in
increasing public saving through debt reduction
during the period of the boom. It has probably
also accumulated reserves.
"So it can afford, for some time, but not
forever, to maintain a gradual, smooth path
to fiscal consolidation. The alternative is to
allow public debt to increase, but you don t
want to get into a situation where you are
dependent on foreign lenders to keep you
On Wednesday, in presenting the Regional
Economic Outlook (REO) for the Western
Hemisphere, the director of the International
Monetary Fund s Western Hemisphere depart-
ment, Alejandro Werner, pointed to a number
of countries in the hemisphere that had suf-
fered depreciations of their currencies in the
last 12 months, which did not trigger a sig-
nificant increase in inflation.
Werner said: "With regard to inflation, in
almost every one of those cases, we see this
within the range established by the central
bank. The inflation objectives that have been
established by the respective central banks are
being met, which shows again that the
exchange rate policy is playing the expected
By referring to the counter-cyclical role of
the exchange rate policy, Werner was suggesting
that the depreciations that these three countries
experienced in the last 12 month were helping
them promote growth in the context of the
sharp decline in revenues that they had suffered
as a result of the collapse of prices of their
According to Werner, Brazil s currency
depreciated by between 60 and 70 per cent
in the last 12 month, while the REO document
reveals that the country is expected to expe-
rience inflation of 9.3 per cent for 2015. Colom-
bia s currency declined by 60 per cent, with
its inflation rate targeted at 4.2 per cent for
2015. And Mexico s peso depreciated by 22
or 23 per cent and its 2015 rate of inflation is
estimated to be 2.6 per cent.
So, how is it possible that some countries
are able to allow their floating currencies to
depreciate without the consequences of much
In the question and answer period following
his presentation, Werner was asked by a T&T
journalist to explain what accounted for the
fact that these countries had sharp depreci-
ations with a limited impact on their inflation
Werner explained that in some cases (Mex-
ico) countries have chosen to live with inflation
targeting and a floating exchange rate.
And although, like T&T, those countries
have been affected by a terms of trade shock,
the authorities have been able to anchor infla-
tionary expectations, which means depreciation
does not generate "these negative feedback
loops from exchange rate depreciation to infla-
tion to depreciation."
He also noted that countries that have
adopted a fixed exchange rate have to work
two or three times as hard when they suffer
a negative terms of trade shock.
Interestingly, the just released Regional Eco-
nomic Outlook for the Western Hemisphere
has a selected economic and social indicators
chart, which has a column on trade openness,
which is defined as exports plus imports on
goods and services in percent of GDP.
That data indicate that Mexico s trade open-
ness is 60.6 per cent of GDP, Brazil s is 24.2
per cent and Colombia s is 35.6 per cent.
In the Caribbean, the trade openness of
Barbados is 98.1 per cent of GDP, Jamaica is
90.4 per cent, the Eastern Caribbean Currency
Union is 110.7 per cent and T&T is 97.8 per
Asked about this, Lederman said: "The
extent of pass through effect of depreciations
on domestic prices can vary across countries...
The smaller the economy, the higher the pass
through of depreciation to inflation is expected
to be. Smaller economies tend to have a higher
share of their output traded and a higher share
of what they consume is traded goods."
Giving a hypothetical example, Lederman
said: "If everything that the country produces
is a tradable good and everything that your
population consumes is an import and there-
fore a tradable good, then the exchange rate
depreciation is, in fact, the inflation rate."
Another point Lederman raised was labour,
which is considered to be a non-tradable factor
of production. If employees in a small, open
economy are paid in the domestic currency,
that country would see a gain in competitive-
ness as a result of depreciation, especially if
labour costs, which is the income of the pop-
ulation, do not rise to compensate for higher
He said allowing a floating exchange rate
to depreciate ensures adjustment if it is effective
at two things:
• if the depreciation addresses competi-
tiveness, which means that the exchange rate
has to depreciate more than domestic prices,
particularly production costs;
• The conditions of the domestic financial
system and the extent of dollarisation of
domestic financial contracts, which relates to
the extent to which actors in the economy
have US dollar loans, income or savings.
He said countries that are faced with a sharp
decline in their revenues either have to make
the adjustment by the price mechanism (depre-
ciation) or by reductions in expenditure.
OCTOBER 11 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COMMENTARY | SBG3
Does a 'floating' rate
that's fixed make sense?
International Monetary Fund managing
director, Christine Lagarde, attends a forum in
Lima, Peru, last Thursday, during the annual
meetings of the World Bank Group and the
IMF. (AP PHOTO)
Journalists participating in the fellowship programme pose for a photo op with Christine Lagarde.
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