Home' Trinidad and Tobago Guardian : March 30th 2017 Contents BG14 | FINANCE
BUSINESS GUARDIAN guardian.co.tt MARCH 30 • 2017
Every day in the news one group
or the other in T&T is calling
for the dollar to be depreciated
against the United States cur-
rency. The rationale is based on
the acute shortage of US dollars
in the system and the evidence is that it is get-
ting worse rather than better.
These shortages have resulted in businesses
not being able to pay for goods on time; losing
both their credit and creditability with sup-
pliers. It has also impacted many other sectors
and certainly has stifled or stymied many en-
Priority of access to foreign exchange is now
being proposed for manufacturers on the as-
sumption that they will generate additional
foreign exchange via their exports. Previously
there was also talk of priority being given to
persons in need of foreign exchange for medical
purposes and for school fees.
The reality is that when there is priority for
one group over another, the shortage is exac-
erbated. An even greater reality is that when a
market is unable to find its level, the behav-
iours that are introduced into the system are
so suboptimal that shortages increase rather
than decrease and the situation gets worse
rather than better.
Frequent tinkering and trying to manage the
supply means there is uncertainty about who
is going to get, how much and when. That is
not a good business environment. The result
is hoarding and capital flight which puts ad-
ditional and, in many instances, unnecessary
strain on the foreign currency position.
The simple answer---as many have put for-
ward and continue to do daily---is to depreci-
ate the currency to a level where supply meets
demand and all will be fine.
I disagree. Such a move will see a 50 per cent
devaluation and the shock of such a move will
create even more challenges.
We are in too deep. We must stay on the
current course and address the fundamen-
tal issues that led to our currency becoming
overvalued. This is the only way to bring back
some exchange rate stability.
For better or worse
Let me be clear. There is no doubt the T&T
dollar is overvalued against the US dollar.
The chart provides a graphical description
of the extent of the overvaluation relative to
Let me further point out that I have made
this argument numerous times going back over
a decade and have, at various points, suggest-
ed a devaluation was not just appropriate but
necessary. At this point in time, however, given
where we are, it may not be prudent to engage
in this type of policy.
Depending on the way it is calculated, the
consensus view is the fair value for the T&T
dollar is in the region of $8.50 to $9.50. In
rough terms, we are taking about a 30 to 40
per cent depreciation in the currency which
goes on top a five to seven per cent move over
the past 15 months; this in order to get to a fair
As was the case on previous occasions, the
rate continued to slip after a devaluation so we
are talking about a 50 per cent move. This is
going to have significant dislocations especially
for an economy heavily dependent on imports.
Some have argued for a more measured
adjustment to take place so the rate goes to,
say, $7.50 which would take off some of the
immediate pressures but not cause the level of
disruption that a move to $9.50 would engineer.
If this was the immediate course of action, then
that may have been appropriate. However, at
this stage, the key question is whether such
a move will inspire confidence or erode con-
fidence to the point where the situation gets
worse instead of gets better.
At his first budget presentation, the Minister
of Finance Colm Imbert gave an undertaking
that the TT dollar will be managed within a
range such that it would not depreciate be-
yond seven per cent from its then position.
This gave a ceiling of 6.82 as the exchange rate.
The minister has been true to his word since.
Imbert did not give a timeline but clearly
articulated government's policy and further
suggested that the administration was prepared
to utilise the foreign reserves to three to six
months of import cover, borrow in US dol-
lars and draw on the Heritage and Stabilisation
Fund in order to support the reserve position.
In the last budget presentation, the minister
shifted the responsibility for the management
of the exchange rate back to the Central Bank---
which is where it should be---but the original
policy articulated by the government remains
in effect until we are told otherwise.
In the face of the measures established to
support the current exchange rate, to go against
that within 24 months of making such pro-
nouncements will result in serious credibility
issues that will likely prove counter productive;
moreso if the measure does not take us to the
level where our currency is fairly valued.
For example, a move to $7.50 will signal
that the administration has changed course,
something that will then affect the credibility
of any further pronouncements.
This lack of consistent direction will likely
prompt further suboptimal market behaviour
with increased hoarding being the most visible
repercussion. The market would know that the
new exchange rate would still be below the fair
value and would now anticipate the moves to
fair value with greater urgency. The shortages
will likely continue.
The trick is obviously to get in front of the
curve but, after at least 15 years, we are current-
ly so far behind that such an attempt will likely
cause more problems than it solves, especially
to an already creaking social fabric.
An analysis of the facts will show our cur-
rency started its course for depreciation in
2005/6 when we embarked on a rapid spending
spree that pushed up our inflation levels, saw
a reduction in productivity and left a signif-
icant and ever growing amount of TT dollar
liquidity trapped in our system with limited
local investment opportunities.
It meant that, ultimately, this would be
channelled into increased consumption with
increased demand for imports or capital flight
as funds allocated to investments sought a hard
currency in order to generate an acceptable
Our ability to take up TT dollar liquidity
into long term---especially equity-type in-
vestments---is a fundamental policy response
to our current dilemma and one which I have
been advocating for well over a decade. This is
especially the case for a society where around
40 per cent of our population is over the age
of 40 and retirement is close at hand.
A devaluation is also likely to decimate the
10 per cent of the population over the age of
65, especially when the social safety net is
If there is going to be a move to give prefer-
ential access to foreign currency to manufac-
turers then that should be part of a targeted
approach for manufactures that allows public
equity participation in their company. A move
such as this shifts the focus from consumption
to investments. It requires manufacturers to
become more transparent which means they
themselves would not be hoarding US dollars
they obtain and it also means better tax col-
lection on the part of the authorities.
Similarly, we must appreciate that prior to
2005 our unit labour costs were below that of
the United States.
This meant we could have produced the same
goods and services cheaper setting aside tech-
nology for the moment. Today, we are well past
that stage and a fundamental discussion with
the union and the general population---includ-
ing the public service---is needed.
We need to get our levels of productivity up
significantly or the consequence is a sharp and
steep devaluation that will negatively affect
most citizens in this country.
Finally, a main reason why labour rates are
so high is the rapid rise in property prices over
the past 15 years. This has had a knock-on ef-
fect on home ownership costs and rents, which
increases the cost of living.
The cost of retail space has increased ex-
ponentially which then translates into higher
costs for goods and services. This is the fun-
damental reason why it is cheaper to purchase
online than in a local retail outlet. These costs
translate into higher wages in order to maintain
consumption and was easy to do when there
were strong inflows from the energy sector.
This is no longer the case.
It means, therefore, as difficult as it may be
for the political and financial elite to accept,
measures to gradually deflate property prices
need to be considered so as to bring down the
overall cost of living which will then allow for a
lower wage environment. When coupled with
increased productivity and more equity invest-
ment opportunities, it offers some alternative
to simply devaluing the currency.
This, of course, requires tough, co-ordinat-
ed and consistent decision making, some of
which will be unpopular. Even if one disagrees
with the headline, addressing the root cause of
our currency becoming overvalued should be
considered if we are serious about spreading
the burden of adjustment.
Ian Narine can be contacted at
A devaluation is also
likely to decimate
the 10 per cent of the
population over the age
of 65, especially when
the social safety net is
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