Last week, in this space, the com­men­tary looked at the im­pact of the flota­tion of the TT dol­lar in April 1993 on the coun­try's rate of in­fla­tion, the per­for­mance of T&T's gross do­mes­tic prod­uct (GDP), and em­ploy­ment.

The com­men­tary was in re­sponse to a tweet last week Tues­day by Min­is­ter of Fi­nance, Colm Im­bert, who wrote: “Mis­chie­vous com­men­ta­tors keep push­ing hard for de­val­u­a­tion. One com­men­ta­tor is in­sin­u­at­ing that the coun­try thrived af­ter we float­ed the dol­lar in 1993. In truth, in­fla­tion in 1993 jumped from six per cent to 11 per cent, the econ­o­my de­clined and un­em­ploy­ment was 20 per cent. We are NOT go­ing back there.”

From last week's ar­ti­cle, it is clear that Mr Im­bert is cor­rect that in­fla­tion jumped im­me­di­ate­ly af­ter the April 13, 1993 flota­tion. In fact, as was point­ed out, in­fla­tion peaked at 15 per cent in Oc­to­ber 1993, but de­clined steadi­ly there­after to 6.9 per cent in Au­gust 1994. That was close to the pre-flota­tion rate of in­fla­tion.

From the ev­i­dence pre­sent­ed last week, I do not be­lieve it is true to say that the econ­o­my de­clined af­ter the flota­tion. In fact, the ev­i­dence in­di­cates that the T&T econ­o­my grew af­ter April 1993.

On the is­sue of un­em­ploy­ment, it is clear that T&T's of­fi­cial rate of un­em­ploy­ment–as col­lat­ed by the Cen­tral Sta­tis­ti­cal Of­fice and re­port­ed in Cen­tral Bank doc­u­ments–was high in the three years be­fore 1993: 20 per cent in 1990; 18.5 per cent in 1991 and 19.6 per cent in 1992. Un­em­ploy­ment was 19.8 per cent in 1993, the year of the flota­tion, but in the three years af­ter the year of flota­tion, it dropped to 18.4 per cent in 1994, 17.2 per cent in 1995 and 16.3 per cent in 1996.

So, the ev­i­dence from the Cen­tral Bank da­ta in­di­cates that af­ter the April 13, 1993 flota­tion, the T&T econ­o­my grew, un­em­ploy­ment de­clined and in­fla­tion peaked six months af­ter the im­ple­men­ta­tion of the pol­i­cy de­ci­sion.

An im­por­tant point to note is that the flota­tion of the TT dol­lar ALONE did not con­tribute to the growth of the coun­try's econ­o­my and the de­cline in un­em­ploy­ment.

Be­fore April 1993, the 1986 to 1991 ad­min­is­tra­tion of the Na­tion­al Al­liance for Re­con­struc­tion and the Peo­ple's Na­tion­al Move­ment ad­min­is­tra­tion, which as­sumed of­fice in 1991, adopt­ed sev­er­al mea­sures that pro­mot­ed the growth of the do­mes­tic econ­o­my.

These mea­sures in­clud­ed the pri­vati­sa­tion of State-owned en­ter­pris­es, the re­moval of trade bar­ri­ers, the sim­pli­fi­ca­tion of the in­come tax regime and the in­tro­duc­tion of the Val­ue-Added Tax sys­tem.

In a very im­por­tant 2000 pa­per en­ti­tled Caribbean Ap­proach­es to Eco­nom­ic Sta­bil­i­sa­tion, Dr Alvin Hi­laire com­pared the ad­just­ment process­es that Bar­ba­dos, Guyana, Ja­maica, and T&T em­barked up­on in the pe­ri­od of the late 1980s to the ear­ly 1990s pe­ri­od when they got in­to se­vere eco­nom­ic dif­fi­cul­ties.

"Their en­su­ing eco­nom­ic strate­gies were all mar­ket-based, fea­tured fis­cal con­trac­tion and trade lib­er­al­i­sa­tion, mul­ti­lat­er­al sup­port loans and, lat­er on, tax and fi­nan­cial sec­tor re­forms," ar­gued Hi­laire, who was then a se­nior econ­o­mist in the West­ern Hemi­sphere de­part­ment of the In­ter­na­tion­al Mon­e­tary Fund. Dr Hi­laire is, of course, now T&T's Cen­tral Bank Gov­er­nor.

What hap­pened in April, 1993?

On April 13, 1993, the Gov­ern­ment re­moved ex­change con­trols and al­low the cur­ren­cy to float, which meant that the ex­change rate was de­ter­mined by the forces of de­mand and sup­ply of for­eign ex­change and the Cen­tral Bank’s will­ing­ness to in­ter­vene in the for­eign ex­change mar­ket by sell­ing US dol­lars to au­tho­rised deal­ers.

At the end of April 1993, the sell­ing rate was $5.6727 to US$1, (US$1 was equal to $0.1762), which in­di­cates a de­pre­ci­a­tion of 24.44 per cent.

For­eign re­serves

This week, the im­pact of the flota­tion on T&T's for­eign re­serves is ex­am­ined:

T&T’s net of­fi­cial for­eign re­serves were neg­a­tive for 17 con­sec­u­tive months up to March 1993, which was the month be­fore the flota­tion of the TT dol­lar in April 1993, ac­cord­ing to the Cen­tral Bank’s da­ta cen­tre. That means for every month from No­vem­ber 1991 to March 1993, the coun­try’s net of­fi­cial for­eign re­serves were neg­a­tive.

In March 1993, net of­fi­cial for­eign re­serves were neg­a­tive US$157.8 mil­lion.

The net of­fi­cial for­eign re­serves were neg­a­tive US$146.7 mil­lion in April 1993, the month of the flota­tion, and con­tin­ued to be in neg­a­tive ter­ri­to­ry un­til the end of Oc­to­ber 1993, when they turned pos­i­tive.

The net of­fi­cial for­eign re­serves were neg­a­tive for five months in 1994, but apart from that, have main­tained a pos­i­tive tra­jec­to­ry since Oc­to­ber 1993.

Looked at on an an­nu­al ba­sis, T&T’s net of­fi­cial for­eign re­serves were neg­a­tive for the two years be­fore the year of the flota­tion (-US$50.9 mil­lion in 1991 and -US$83.8 mil­lion in 1992) be­fore turn­ing pos­i­tive in 1993 (+US$74.5 mil­lion).

For the three years that fol­lowed 1993, net of­fi­cial re­serves ac­crued sig­nif­i­cant­ly, mov­ing from US$261.9 mil­lion in 1994, to US$346.2 mil­lion in 1995 and US$532.7 mil­lion in 1996. There was no in­for­ma­tion avail­able in the Cen­tral Bank’s da­ta cen­tre for 1990.

Con­clu­sion

It seems to me that there was a pos­i­tive cor­re­la­tion be­tween the flota­tion and T&T’s net of­fi­cial for­eign re­serves turn­ing from neg­a­tive for 17 months to pos­i­tive sev­en months af­ter the flota­tion.

But T&T's for­eign re­serves did not turn pos­i­tive ON­LY BE­CAUSE of the flota­tion? As men­tioned above, there were sev­er­al poli­cies meant to in­cen­tivise the pri­vate sec­tor that was in­tro­duced be­fore the flota­tion. A prop­er ex­am­i­na­tion by the Cen­tral Bank of the role of the flota­tion in the re­cov­ery of the T&T econ­o­my will, no doubt, dis­cuss the con­tri­bu­tion of all the mar­ket-based poli­cies.

Trade

For the three years be­fore the flota­tion of the TT dol­lar, the coun­try’s ex­ports av­er­aged $8.4 bil­lion (1990—$8.85 bil­lion, 1991—$8.43 bil­lion, 1992—$7.94 bil­lion.

In 1993, the year of the flota­tion, to­tal ex­ports rose to $8.53 bil­lion, rep­re­sent­ing an in­crease of 7.45 per cent.

In 1994, to­tal ex­ports rose to $11.57 bil­lion, which was 45.74 per cent more than in 1992. Ex­ports rose to $14.6 bil­lion in 1995 and $15.01 bil­lion in 1996.

Im­ports av­er­aged $6.18 bil­lion in the three years be­fore the year of the flota­tion, to­taled $7.42 bil­lion in 1993, and de­clined to $6.71 bil­lion in 1994. To­tal im­ports rose to $10.19 bil­lion in 1995 and $12.86 bil­lion in 1996.

Ac­cord­ing to the Cen­tral Bank da­ta, the bal­ance of to­tal vis­i­ble trade av­er­aged $2.1 bil­lion a year for the three years be­fore 1993. The bal­ance of to­tal vis­i­ble trade was $1.11 bil­lion in 1993, the year of the flota­tion. It in­creased to $4.85 bil­lion in 1994 and $4.41 bil­lion in 1995, be­fore drop­ping to $2.14 bil­lion in 1996.

Next week, the flota­tion’s im­pact on T&T’s fis­cal sit­u­a­tion and for­eign debt.