Here we go again!
In the Business Guardian of Thursday 8 April 2021, Joel Julien reports on the virtual Demas/Rampersad Seminar Series under the aegis of The UWI St Augustine Department of Economics. ‘Foreign Exchange Challenges in Trinidad and Tobago: What are the real implications?’ the title asks.
Let us begin by quoting Dr DeLisle Worrell, former governor of the Central Bank of Barbados:
‘Small very open economies are different from large economies in that they face a foreign exchange constraint that cannot be alleviated by depreciation of the real exchange rate or by other policies.’
In these former colonies of the European powers, our very existence is defined by this constraint. In colonial times, there was little or no need for currency, let alone foreign exchange. With Independence came the trappings of nationhood: national anthem, national flag, national currency, Central Bank and our own exchange rate. We had arrived!
In small open monoculture economies such as ours, the lead sector earns the lion’s share of the foreign currency required by the rest of the economy to do everything else. In colonial times, it did not matter; with Independence, it did. We now had to earn our keep in the international community.
Here again is Dr Worrell:
‘With respect to monetary/fiscal/exchange rate policy, the most accessible framework for such economies is an exchange rate anchor, where the foreign currency market is balanced by managing aggregate demand, using fiscal policy.’
So ‘Foreign Exchange Challenges’? After more than half a century, it is disconcerting to see the words ‘Foreign Exchange Challenges’ as though it was something new, new as in spawned by the existing pandemic. Foreign exchange has always been a challenge—our major challenge from day one.
One point made at the virtual seminar is that in 1993 there was a managed float and the economy performed superbly in the decade between that year and 2003. I concur. But, I ask, was the economy’s superb performance due entirely to the 1993 managed float when the exchange rate moved from $4.2872 to $5.6727 and to $6.7799 where it stands at present?
Might it not have also been due to other factors, conspicuous by their omission from the discussion?
Here are three:
- During the period, GDP at current prices almost tripled (a multiple of 2.84), moving from $TT24.9bn to $TT71.2bn
- Total Central Government expenditure doubled (a multiple of 2.36), going from $TT6,783.3bn to $TT16,023.5bn.
- Oil prices: WTI (spot price fob) moved from $US18.43/barrel to $US31.08/barrel and Brent (spot price fob) from $US17.01/barrel to $US28.85/barrel.
Let me add here that there is strong correlation between government expenditure and GDP whether at current or constant prices (in the order of 0.99 short term—(1993-2003) and 0.96 (longer term) when compared to GDP and the foreign exchange rate. The latter varies from 0.71 at current prices and 0.75 at constant prices.
At constant prices, the foreign exchange correlation with GDP is weaker over the longer term (40-yr data series) at 0.67. Between GDP and oil prices, the rate is similar to government expenditure, that is, in the order of 0.92.
A second point identified at the virtual seminar is that the foreign exchange situation is not dissimilar to what occurs with public utilities like WASA and T&TEC in that the lower the price, the greater the waste. With the utilities, removing the subsidies so that prices reflect the true economic cost is an internal reallocation of resources.
The state, I argue not for the first time, can no longer afford to maintain that level of subsidy; the required revenue is simply not available.
The foreign exchange reality is altogether different. Is it a question of wastage because it’s too cheap (that is, the TT dollar is overvalued) and if we make it more expensive (that is, reflect its true value), usage will become more efficient? Not at all!
It is a question of supply, where supply is a function not of price (that is, the exchange rate) but how much of it we earn. The real problem is demand. Whether the price is $4.25, $5.67, $6.78 or $10.00, the demand for foreign exchange will not change. As already stated, we require foreign exchange to do everything, including earning the very foreign exchange itself (imports of intermediate goods).
So would wastage be eliminated if we make it more expensive? Because in so doing, we make everything more expensive, not just the wastage!
But there is another issue here. The data for the period 1993-2003 suggest that inflation actually declined from 10.9% to 3.8% to average 5.3% for the period, compared to 9.8% average for the period 1983 to 1992.
Referring to the period 1993-2004, page 6 of the Central Bank of Trinidad and Tobago ‘Public Education Pamphlet of Inflation 2006’ says this:
‘Since 1993, Trinidad and Tobago has been experiencing significantly lower inflation. This can be traced to the pursuit of more disciplined demand management policies and the process of trade liberalisation which has facilitated an increase in imports.’
Then, as now, where inflation is 1.0% per annum, disciplined demand management policies had the effect of reducing inflation and keeping it down.
Julien’s report highlights a third point—the use of sleight of hand: allowing the exchange rate to descend slowly and imperceptibly.Imperceptibly? Wishful thinking!So the public won’t discern what is happening?
People look at the exchange rates every day. They scour the parallel market for $US! Already on the black market, the $US is fetching $8.00-$8.50.
One panellist referenced what the IMF was saying in 2017 about the real effective exchange rate, which is that the $TT was 43% overvalued. That yields an exchange rate close to $TT10 to $US1 ($9.6954).
So can the $TT descend ‘imperceptibly’ from $6.78 to $10.00?
The report alludes to a statement by one of the panellists that the authorities know the $TT should be depreciated or devalued but know as well that that would be political suicide. The authorities are equally well aware, I humbly submit, that not only would it be political suicide but social and economic suicide as well.
The authorities have managed both the foreign exchange challenge and inflation by managing aggregate demand, assigning priority to essential areas of imports. I suggest further that the authorities are quite aware and wary of the imperceptible descent becoming a slide.
In 1977, the Jamaican dollar was $J0.91 to $US1.00; it is now $J143 to $US1.00. Guyana’s dollar, is now about $GY210 to $US1.00.
Given the slippery slope of an ongoing pandemic, who dares guarantee that we will be able to arrest any such slide?
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