Last Thurs­day morn­ing, in a re­ac­tion to the com­men­tary in this space head­lined, “Would float­ing the TT$ solve our fis­cal prob­lem?” Min­is­ter of Fi­nance Colm Im­bert wrote the fol­low­ing on the X (for­mer­ly Twit­ter) so­cial me­dia plat­form, “The Guardian is urg­ing the Gov­ern­ment to de­val­ue the TT dol­lar based on its own bo­gus cal­cu­la­tions. When­ev­er that pa­per does that, sev­er­al things come to mind: 1) Do they care that de­val­u­a­tion will in­flict hard­ship on or­di­nary peo­ple? 2) Whose ben­e­fit is their ad­vice serv­ing?

Now, as far as I am con­cerned, that 46-word com­ment on X con­tained four er­rors of fact:

* The T&T Guardian news­pa­per did not opine on the is­sue of T&T’s cur­rent ex­change rate regime. I did. The Guardian pub­lish­es the opin­ions of the news­pa­per, sev­en days a week, 365 days of the year in a space called the ed­i­to­r­i­al. As far as I am aware, and I may be wrong, this news­pa­per has not ed­i­to­ri­alised on the ap­pro­pri­ate­ness of this coun­try’s ex­change rate regime...in the re­cent past;

* Last week’s com­men­tary did not urge any ac­tion. The most that can be said of the com­men­tary is that it point­ed out that if the ex­change rate were al­lowed to float to $9 to US$1, a sig­nif­i­cant part of T&T’s fis­cal deficit prob­lem could be elim­i­nat­ed. That is be­cause at $9 to US$1, the TT-dol­lar rev­enue gen­er­at­ed from T&T’s en­er­gy and non-en­er­gy ex­ports would in­crease. The com­men­tary was hinged on com­ments made by Prime Min­is­ter Dr Kei­th Row­ley at a fundrais­ing break­fast meet­ing in June that a de­val­u­a­tion would not re­sult in T&T earn­ing any more US dol­lars. My re­sponse to Dr Row­ley’s com­ment on the is­sue was to state that he is cor­rect, but that float­ing the ex­change rate would gen­er­ate more TT dol­lars;

* The com­men­tary in this space last week, made clear, to most read­ers, that the ref­er­ence to the ex­change rate was to a flota­tion of the TT dol­lar and NOT to a de­val­u­a­tion. A flota­tion is a con­tin­u­ous process, while a de­val­u­a­tion is a dis­crete (one-and-done) process. The head­line of the col­umn was, 'Would float­ing the TT$ solve our fis­cal prob­lem?' and not 'Would de­valu­ing the TT$ solve our fis­cal prob­lem?'

* My com­men­tary last week stat­ed that the num­bers in it, in par­tic­u­lar the US$4 bil­lion es­ti­mate of the US-dol­lar earn­ings of the Gov­ern­ment, were based on a sim­ple mod­el.

On the is­sue of a flota­tion in­flict­ing hard­ship on or­di­nary peo­ple, last week’s piece opined that some of the ad­di­tion­al rev­enue gen­er­at­ed by a flota­tion of the TT/US ex­change rate could be used to ease the bur­den on those who would be hard­est hit by mak­ing im­ports more ex­pen­sive.

Al­so, in re­sponse to Mr Im­bert’s ques­tion about whose ben­e­fit a flota­tion would serve, it was made pel­lu­cid­ly clear that the en­ti­ty that stands to ben­e­fit the most is the Gov­ern­ment that Mr Im­bert serves. That is be­cause the Min­istry of Fi­nance’s Board of In­land Rev­enue col­lects more US dol­lars than any oth­er en­ti­ty in this coun­try. As far as I am aware, the en­er­gy rev­enues col­lect­ed by the State are most­ly held at the Cen­tral Bank as for­eign re­serves.

T&T’s for­eign re­serves

Ac­cord­ing to the Cen­tral Bank’s da­ta cen­tre, when the cur­rent ad­min­is­tra­tion as­sumed of­fice in Sep­tem­ber 2015, it in­her­it­ed net of­fi­cial for­eign re­serves of US$10.53 bil­lion, which was then equal to 12.1 months of im­port cov­er.

At the end of June 2024, T&T’s net of­fi­cial for­eign re­serves slumped to US$5.98 bil­lion, equal to 8.4 months of im­port cov­er. That means T&T’s for­eign re­serves were 43.2 per cent low­er in June 2024 than in Au­gust 2015.

And the June 2024 for­eign re­serves fig­ure was like­ly boost­ed by the 10-year US$750 mil­lion bond that Mr Im­bert suc­cess­ful­ly raised on the in­ter­na­tion­al cap­i­tal mar­ket on June 18 at an in­ter­est rate of 6.40 per cent, which was about 2.0 per cent above the open­ing rate of 10-year US Trea­sury Bills on the date of is­sue.

But why would T&T’s net of­fi­cial for­eign re­serves have de­clined by 43.2 per cent be­tween the end of Au­gust 2015 and the end of June 2024?

In its 2015 An­nu­al Eco­nom­ic Sur­vey, the Cen­tral Bank out­lined, “Falling en­er­gy prices cou­pled with low­er lev­els of do­mes­tic pro­duc­tion trans­lat­ed in­to de­clin­ing en­er­gy ex­ports in 2015. This con­strained for­eign cur­ren­cy in­flows in the do­mes­tic econ­o­my over the year, and there­by re­sult­ed in some tight­ness in the do­mes­tic for­eign ex­change mar­ket.”

In 2015, ac­cord­ing to the Cen­tral Bank re­port, the pub­lic sold US$4.95 bil­lion to au­tho­rised deal­ers of for­eign ex­change, with 68.1 per cent, or US$3.36 bil­lion com­ing from con­ver­sions by the en­er­gy sec­tor. That was the sup­ply of for­eign ex­change.

On the oth­er hand, in 2015, pur­chas­es of for­eign ex­change from au­tho­rised deal­ers to­talled US$7.38 bil­lion. That was the de­mand for for­eign ex­change. That re­sult­ed in a gap be­tween the sup­ply and de­mand of for­eign ex­change of US$2.44 bil­lion, com­pared to US$1.43 bil­lion in 2014.

“In 2015, the Cen­tral Bank sup­port­ed the mar­ket with sales of US$2.59 bil­lion to au­tho­rised deal­ers, an in­crease of 51 per cent over the US$1.71 bil­lion sold in 2014,” ac­cord­ing to the Cen­tral Bank’s 2015 An­nu­al Eco­nom­ic Sur­vey.

In its 2023 An­nu­al Eco­nom­ic Sur­vey, the Cen­tral Bank not­ed that the sale of for­eign ex­change by the pub­lic to au­tho­rised deal­ers amount­ed to US$4.61 bil­lion and the pur­chase of for­eign ex­change by the pub­lic from the au­tho­rised deal­ers reached US$6.22 bil­lion.

That meant the net sales gap for 2023 to­talled US$1.61 bil­lion, for which the Cen­tral Bank sup­plied US$1.34 bil­lion.

There are three im­por­tant points to note:

* For every year from 2015 to 2023, and quite like­ly be­fore, the de­mand for for­eign ex­change by the pub­lic out­stripped the sup­ply of for­eign ex­change from the pub­lic.

This im­bal­ance be­tween de­mand and sup­ply was even true in 2022, the year in which en­er­gy com­pa­nies would have en­joyed wind­fall prof­its. In 2022, net sales gap to­talled US$1.02 bil­lion, with the Cen­tral Bank sell­ing US$1.27 bil­lion to au­tho­rised deal­ers;

* When the Cen­tral Bank sells for­eign ex­change to au­tho­rised deal­ers in or­der to fill the net sales gap be­tween sup­ply and de­mand, that mon­ey, most­ly US dol­lars, comes from T&T’s net of­fi­cial for­eign re­serves, there­by de­plet­ing those re­serves over time; and

* The for­eign ex­change the Cen­tral Bank sells to au­tho­rised deal­ers is at a price fixed by the Bank, which has not ever ex­ceed­ed the ceil­ing of $6.7993 to US$1.

My ar­gu­ment is that the price at which the Cen­tral Bank sells for­eign ex­change to au­tho­rised deal­ers should be set at the float­ing rate at which de­mand meets sup­ply. Us­ing 2023 num­bers, when the sup­ply of for­eign ex­change was US$4.61 bil­lion, that means the for­eign ex­change prices set by the Bank should be at a lev­el where the de­mand would be about US$4.61 bil­lion.

And, of course, the for­eign ex­change prices should be re­set based on the rev­enue pro­jec­tions of the Min­istry of Fi­nance, with the Cen­tral Bank ad­just­ing in­ter­est rates to en­sure that the rates on TT-dol­lar bonds are al­ways high­er than rates of for­eign, in par­tic­u­lar US, bonds.

With a mar­ket-de­ter­mined ex­change rate regime—which would be sim­i­lar in many ways to float­ing-rate regime in­tro­duced in April 1993 by the Cen­tral Bank un­der then gov­er­nor Ainsworth Hare­wood and for­mer deputy gov­er­nor, Ter­rence Far­rell, with Wen­dell Mot­t­ley as min­is­ter of fi­nance—the Bank would not have to sell about US$100 mil­lion a month (or US$1.2 bil­lion a year) to the au­tho­rised deal­ers of for­eign ex­change.

Those sales of for­eign ex­change, of course, de­plete T&T’s re­serves.