“[…] To make these already bad matters worse, there was Covid-19. The unplanned relief measures put in place for this epidemic have exacerbated an already difficult budgetary position.
“[…] From all appearances, having already overstayed its welcome, Covid-19 has no plans to take its leave soon… The survival strategies are based on securing domestic supplies of basics: namely food, energy, shelter and clothing.
“[…] There is a lot to be said for the notion of developing greater internal dynamics in the local economy—that is to say, consuming more of what we produce and producing more of what we consume. We have to find ways of maintaining and developing the circular flow of income…”
In the following letter to the editor, contributor Warren Thompson looks forward to the 2021 Budget and suggests why devaluation is a bad idea for Trinidad and Tobago, and the agricultural industry can be pivotal:
Whenever the economy is in a downturn, the issues of devaluation and diversification usually raise their heads from different corners of the society. Invariably, the government of the day comes under pressure to devalue the currency and to diversify the economy or for having failed to do so.
For the moment, we shall let the issue of diversification go without comment and keep our focus on the question of devaluation.
Writing a year ago (12 April, 2019) in the Trinidad Guardian under the headline ‘Devaluation coming’, Curtis Williams put the country on notice that the Central Bank of Trinidad and Tobago is likely to devalue the Trinidad and Tobago dollar in the medium term. Williams was reporting on the Fitch Solutions Country Risk Report for Trinidad and Tobago which, according to the article, had been commissioned by the Ministry of Finance.
The Report’s conclusion was that Trinidad and Tobago’s external accounts would remain weak. This would put downward pressure on the exchange rate and so undermine the authorities’ ability to support the TT dollar at the current level over the medium term.
Currently, the official exchange rate is $TT6.78 to $US1.00 but the going unofficial rate in stores, supermarkets, etc. is 7:1.
Let us place the TT dollar in the context of the international currency market. There are over 185 currencies the world over, the majority of which are used only within the political boundaries of their own countries.
The de facto global currency is the US dollar, which accounts for about 64% of all known central bank foreign currency reserves. The Euro is next with about 20% of known central bank foreign currency reserves. The dollar remains by far the most traded currency in the world, accounting for more than 85% of forex trading. And, of course, all the major commodities continue to be traded in US dollars.
In its analysis of Effective Exchange Rates, the Central Bank’s Economic Bulletin of January 2019 noted that T&T’s inflation rate for the first 11 months of 2018 averaged 1.0 compared to a weighted average of 3.3 for its major trading partners. This implied that Trinidad and Tobago’s exports were more price competitive in some markets.
On page 33 of its Staff Report of September 2018, the IMF reports ‘no progress’, with respect to the Monetary and Exchange Rate policy recommendation (arising out of its 2017 Article IV Consultation) to: ‘Pursue a substantial depreciation and allow the exchange rate to fluctuate within a band’.
There was no agreement by the authorities that a ‘significant exchange rate adjustment is beneficial’.
Here, it is useful to borrow an analogy from the late Dennis Pantin, who likened the T&T dollar to casino chips. When you enter the casino, you exchange your $TT cash for chips; when you leave, you convert your chips to TT dollars.
Outside the casino, your chips are no use to you. So it is no less useful, I submit, to take a hard look at the reality outside the casino.
The fundamental problem is the supply of foreign currency, in particular, the US dollar. Reducing the price of the TT dollar (that is, effecting a devaluation) is not going to increase that supply.
An increase in the supply of foreign exchange (in the short term) is a function of factors external to the Trinidad and Tobago economy, namely, the international prices of crude oil and natural gas. The effects of this have been compounded by declining levels of domestic production.
But increasing the cost of foreign exchange does not reduce demand as such demand is inelastic. Devaluation, therefore, merely opens the floodgates to further devaluation, as the official exchange rate tries to catch up with the unofficial rate. A dog trying to catch its own tail.
So as not to belabour the point, we see no need to go into the common consequences of devaluation such as hoarding, price gouging, runaway inflation and unemployment. It is necessary, however, to point out that any devaluation now or soon would come on top of very difficult economic circumstances over the last five years.
To make these already bad matters worse, there was Covid-19. The unplanned relief measures put in place for this epidemic have exacerbated an already difficult budgetary position. And, as Prime Minister Dr Keith Rowley noted in his victory speech on that fateful Monday evening, now that the election is out of the way, the next milestone is the 2021 Budget.
Which brings us to the Road to Recovery. I heard the prime minister and Professor Gerry Brooks speak about the findings and recommendations of the Recovery Committee. Some of the policy recommendations are interesting, even exciting, I daresay; there is hope for a post-Covid-19 future.
But the cut arse is what to do with the Covid-19 economy. From all appearances, having already overstayed its welcome, Covid-19 has no plans to take its leave soon. If indeed, the pandemic is here to stay and will be with us for the foreseeable future—the experts as yet have no timeframe on its disappearance—how do we survive during it?
The global economy has contracted and continues to contract as each country seeks to protect its own interests and pursues survival strategies. The survival strategies are based on securing domestic supplies of basics: namely food, energy, shelter and clothing. This, of course, constrains our opportunities for non-oil export-led growth.
My hope was that the committee would have focused on establishing and strengthening the domestic economy during the time of the pandemic so that we may emerge from it ready and able to compete on the global stage.
There is a lot to be said for the notion of developing greater internal dynamics in the local economy—that is to say, consuming more of what we produce and producing more of what we consume. Put another way, we have to increase the ratio of inputs from local sources and so generate more intercourse among the domestic sectors.
We have to find ways of maintaining and developing the circular flow of income. In other words, we must keep the economy turning round and round.
In this regard, the Central Bank’s reduction of the commercial banks’ reserve requirement from 17% to 14% is a step in the right direction. As is the government’s $TT100 loan support to the credit unions. The trick is to funnel these financial resources in the right direction.
Agriculture provides the best example for this policy approach to surviving and thriving in the pandemic season. There are opportunities to create greater linkages between agricultural production and industry, agricultural production and food processing and agricultural production and distribution—all of which reduce the demand for foreign exchange to meet import requirements of raw materials and finished products.
The agricultural sector got a very important signal from the Prime Minister on the campaign trail, when he mentioned guaranteed prices. They cost the state but because they work, they are an important cog in the wheel. Experience has shown that farmers will meet the requisite production standard once there is a price guarantee.
The Energy sector provides scope for developing greater linkages as well. Greater use of renewable sources of energy would allow more of our hydrocarbon resources to be monetised for hard currency where this is possible, given the state of the international market. I am thinking here of wind and solar resources in particular.
Depending on the policy mix and technological applications, individuals and businesses can benefit by supplying themselves and feeding their surplus to the national grid as happens in other jurisdictions.
In my considered view, Covid-19 leaves us no choice! The time for ole talk done! The time to act is now!
We must bear in mind that all other countries are suffering the same fate. At the end of the day, for those of us who survive, there is likely to be a very different world economic order, although exactly what form and shape it will take is left to be seen.
I think the authorities initially did a very good job in dealing with the pandemic. The recent spike in cases suggests that the job has become even more challenging. Because in our country politics gets in the way of everything, the governance challenge will get no easier now that the 23-18 ratio has been reduced—temporarily?—to 22–19.
So don’t expect Dr Rowley and his new finance minister to make life even harder for himself and for us by opting for a devaluation.