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“[…] Basic economic theory does not always manifest in practice—in fact, it rarely does. To understand if or by how much exports/imports change requires an understanding of how responsive exports/imports are to price changes. This is called elasticity in economics.
“[…] Alongside this, the constantly changing geopolitical environment must be considered. Imagine a devaluation to improve export competitiveness and then sweeping tariffs that negatively affects exports—the net results could be nil…”
The following guest column on the pros and cons of a devaluation of the TT dollar was submitted to Wired868 by Dr Jamelia Harris, an economist:
The debates on whether the TT dollar should be devalued have raged for several years. It is well known that we have a higher demand for forex compared to what we currently earn.
It is a fundamental economic problem: demand outstrips supply. In a purely free market, prices would rise to establish equilibrium. But we operate a managed float exchange rate regime, and the government has to decide if to devalue the TT dollar or not.
Devaluing the dollar is simply an increase in the price. Now, we pay about TT$6.7 for US$1. A devaluation could mean TT$8, $9 or $10 dollars for US$1 (purely hypothetical).
Basic economic theory suggest that a devaluation should improve our trade balance. A devaluation makes exports more competitive (cheaper) globally, so exports should rise.
The flip side is that imports become more expensive, so the value of imports should fall. Together the trade balance and balance of payments should improve.
But basic economic theory does not always manifest in practice—in fact, it rarely does. To understand if or by how much exports/imports change requires an understanding of how responsive exports/imports are to price changes. This is called elasticity in economics.
We must also be mindful that many exporters import raw materials so they will also face higher costs. Because of this, the effect across different exporting sectors will vary.
A devaluation may also negatively affect investor confidence, which can harm foreign direct investment (FDI). This too has implications for foreign exchange inflows and the balance of payments.
Alongside this, the constantly changing geopolitical environment must be considered. Imagine a devaluation to improve export competitiveness and then sweeping tariffs that negatively affects exports—the net results could be nil.
(via NYT.)
Time lags also need to be recognised. One theoretical prediction (that is highly credible) is the “J-curve”, signalling a worsening of the trade balance and balance of payment in the short-term, with gains materialising in the long-term.
In short, both the theoretical and empirical literature on exchange rate devaluation (and the more common depreciation) does not give a clear answer on what a devaluation means for the trade balance and balance of payments.
When all changes are considered (or in general equilibrium) the effect is what we would call ambiguous—economic speak for: we don’t know.
Sophisticated economic modelling should take account of some of these ifs and maybes and be able to predict what should happen to our trade balance in TT. The CBTT and CSO should be able to do this.
But at the end of the day, models are models, and history has shown us that even the most sophisticated economic models can be wrong—the 2008 global financial crisis is a prime example of economic models gone wrong. And again, given geo-political uncertainty, even the best models can fall down.
What is less uncertain, is that a devaluation is inflationary, especially for high-importing countries like TT. According to CBTT data, imports was US$7.5bn in 2024, up from US$5bn in 2020.
A devaluation will mean that food will be more expensive, clothes will be more expensive, furniture will be more expensive, cars will be more expensive. We import all of these things.
Poorer people will feel the pinch more, as is always the case.
What is also less uncertain, though often unsaid, is the effect of a devaluation on public debt and by extension government finances. No economic model is needed here, just simple maths.
Copyright: Office of Parliament 2025.
According to Ministry of Finance data, external debt was about TT$38bn in 2024 or 26% of total public debt and 20% of GDP.
In June 2024, the government issued a US$750million, 10-year, 6.40 percent Eurobond on the international capital market. In TT$, that bond is currently valued at about TT$5bn.
Imagine a devaluation to TT$9 (see story in the Sunday Express 7th September), this same bond would now be TT$6.8bn. A 36% increase in the principal amount.
The same would happen for other debt instruments in the external debt portfolio. Our debt to GDP ratio would rise, and debt servicing would increase. No new borrowing, just higher debt and debt servicing from a devaluation.
A devaluation is complex. It is not just about businesses. Everyone will be impacted—each and every citizen. Either directly through prices, or indirectly as we collectively repay our higher external debt burden.
Thus, the decision to devalue or not should be based on sound analysis guided by macro-fiscal forecasting and collective national interests. Not by the loud voices of a dominant few.
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