An­tho­ny Wil­son

Con­sul­tant Busi­ness Ed­i­tor

an­tho­ny.wil­son@guardian.co.tt

Two of T&T’s most re­spect­ed econ­o­mists, for­mer min­is­ter of fi­nance Wen­dell Mot­t­ley and for­mer Cen­tral Bank gov­er­nor Eu­ric Bobb, are call­ing for a re­turn of the man­aged flota­tion of the TT dol­lar that was first in­tro­duced in April 1993.

They ar­gued that the man­aged flota­tion of the TT dol­lar “worked rea­son­ably well for over two decades, a pe­ri­od dur­ing which a re­mark­able in­dus­tri­al pol­i­cy saw T&T be­come a gas-based econ­o­my with a world-class pres­ence in the mar­kets for LNG, am­mo­nia, methanol, UAN, and melamine.”

Mot­t­ley served as T&T’s min­is­ter of fi­nance be­tween 1991 and 1995, dur­ing which he over­saw the flota­tion of the TT dol­lar. He re­ceived the Or­der of the Re­pub­lic of Trinidad and To­ba­go (ORTT), this coun­try’s high­est ho­n­our, on No­vem­ber 1, 2018.

Dr Eu­ric Bobb is a Cam­bridge-trained econ­o­mist who served as gov­er­nor of the Cen­tral Bank of T&T from 1984 to 1988. He re­ceived the Cha­co­nia Medal (gold), T&T’s sec­ond high­est ho­n­our, in 1994.

Last Fri­day, the In­ter­na­tion­al Mon­e­tary Fund is­sued a state­ment to Guardian Me­dia point­ing out that T&T’s for­eign ex­change re­stric­tions are in­con­sis­tent with the IMF’s Ar­ti­cles of Agree­ment.

In a news re­lease on Sun­day, Min­is­ter of Fi­nance, Colm Im­bert, said the Gov­ern­ment had main­tained T&T’s fixed ex­change rate to con­trol in­fla­tion, which he claimed is now al­most the low­est in the world.

In a joint­ly au­thored es­say, Mot­t­ley and Bobb not­ed that in re­cent months, ac­cess to for­eign ex­change (forex) has be­come a ma­jor is­sue of pub­lic con­cern: “Par­ents wor­ry about pay­ing fees for chil­dren study­ing over­seas; busi­ness­men are dis­tressed at the prospect of not be­ing able to pay for­eign sup­pli­ers in a time­ly man­ner; house­hold­ers want to buy goods on­line for which they have enough lo­cal cur­ren­cy (TTD).

“Both of us have been there be­fore in our pro­fes­sion­al lives, no­tably in 1977, 1983 and 1991, when there was sim­i­lar loud clam­our for the Gov­ern­ment ‘to do some­thing’.

“There­fore, we con­sid­er it use­ful to il­lu­mi­nate the on­go­ing dis­cus­sion by lay­ing out, in sim­ple fash­ion, some of the ba­sic facts about the sup­ply of and de­mand for forex.”

They point­ed out that as a small, open econ­o­my, T&T must im­port goods and ser­vices to meet a sig­nif­i­cant share, at least 50 per cent, of its ex­pen­di­ture for con­sump­tion and in­vest­ment. The buoy­an­cy of this de­mand is de­ter­mined by the over­all state of the econ­o­my, while its com­po­si­tion shifts de­pend­ing on the mix be­tween in­vest­ment and con­sump­tion and the chang­ing pref­er­ences of con­sumers.

Un­der to­day’s eco­nom­ic cir­cum­stances, de­mand for forex ex­ceeds sup­ply. There is no rea­son why sup­ply and de­mand should au­tonomous­ly bal­ance over any giv­en pe­ri­od. Hence, mech­a­nisms are need­ed to al­lo­cate the sup­ply of for­eign ex­change among com­pet­ing de­mands.

The econ­o­mists point­ed out that in April 1993, T&T’s bu­reau­crat­ic sys­tem for the al­lo­ca­tion of for­eign ex­change, which was in force since 1942, was re­placed by a mar­ket-based sys­tem.

They said the ma­jor el­e­ments of the re­form were:

The ex­change rate would be de­ter­mined un­der a man­aged float in­flu­enced by over­all eco­nom­ic cir­cum­stances;

Con­trols on both cur­rent and cap­i­tal trans­ac­tions were abol­ished;

For­eign ex­change earn­ers were al­lowed to open US$ ac­counts in lo­cal banks or keep their funds over­seas; and

Lo­cal banks were de­clared au­tho­rised deal­ers to in­ter­act di­rect­ly with cus­tomers wish­ing to buy and sell for­eign ex­change.

Mot­t­ley and Bobb point­ed out that T&T’s world-class in­fra­struc­ture for the pro­duc­tion and mon­eti­sa­tion of nat­ur­al gas stim­u­lat­ed a strong in­flow of forex. They not­ed that the pro­duc­tion of nat­ur­al gas reached a peak of about 4 bil­lion stan­dard cu­bic feet per day (MM­SCF/D) in 2014 and is now ap­prox­i­mate­ly 2.491MM­SCF/D.

“While the sup­ply of forex has de­clined, de­mand has re­mained high. The pub­lic be­came ac­cus­tomed over a gen­er­a­tion to mar­ket con­di­tions that no longer ex­ist and have not adapt­ed to the changed cir­cum­stances,” they added.

They said that the sus­tained high de­mand for for­eign ex­change over re­cent years has in part been fu­elled by per­sis­tent fis­cal deficits, which feed liq­uid­i­ty in the bank­ing sys­tem. Mot­t­ley and Bobb al­so not­ed that over the last sev­er­al years, as the flow of for­eign ex­change fell short of de­mand, T&T drew on its stock of of­fi­cial for­eign ex­change re­serves, which fell from US$7 bil­lion at the end of 2020 to US$5.6 bil­lion in Au­gust 2024.

“This im­bal­ance be­tween cur­rent de­mand and cur­rent sup­ply can­not con­tin­ue at the ex­pense of fur­ther re­duc­tion of the stock of re­serves now at on­ly 7.8 months of im­port cov­er.”

They said while ex­port-led di­ver­si­fi­ca­tion was nec­es­sary as T&T looks to the fu­ture, the en­er­gy sec­tor will re­main the main source of for­eign ex­change for a long time, es­pe­cial­ly with the good prospect of in­creased gas sup­ply and, there­fore, forex earn­ings in the next few years.

“Even so, our eco­nom­ic his­to­ry teach­es us that we should not risk be­ing ful­ly re­liant on a resur­gent sup­ply of forex from the en­er­gy sec­tor. We face a struc­tur­al prob­lem that can be fixed on­ly by bring­ing de­mand in­to align­ment with sup­ply.

“Un­like the bib­li­cal mir­a­cle of the few loaves and fish­es that fed a mul­ti­tude, man­ag­ing an econ­o­my is about trade-offs among com­pet­ing de­mands. There is no mirac­u­lous so­lu­tion to the re­cur­ring short­age of forex.

“What­ev­er may be done to re­duce de­mand in the near term, there will re­main a clear need for a sys­tem of al­lo­cat­ing forex. As stake­hold­ers con­tin­ue to de­mand that ‘the Gov­ern­ment do some­thing’ we must not lose sight of the fact that ex­pe­ri­ence teach­es us that an ad­min­is­tra­tive sys­tem is bur­den­some, in­ef­fi­cient and less ef­fec­tive than the mar­ket-based sys­tem in place over most of the last few decades,” the econ­o­mists con­clud­ed. 

(See full com­men­tary

in Thurs­day’s

Busi­ness Guardian)