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.