In the last sev­en days, there have been three news­wor­thy de­vel­op­ments that have had a sig­nif­i­cant im­pact on the dis­cus­sions on the ap­pro­pri­ate­ness of T&T’s ex­change rate and its for­eign ex­change al­lo­ca­tion.

The first, and prob­a­bly the most im­por­tant, was the in­ter­ven­tion by Wen­dell Mot­t­ley and Dr Eu­ric Bobb, pub­lished in full in last Thurs­day’s Busi­ness Guardian, in which they ar­gued that “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 mar­ket-based sys­tem that those two em­i­nent econ­o­mists pro­pose is the man­aged flota­tion of the TT dol­lar that was first in­tro­duced in April 1993.

The sec­ond news­wor­thy de­vel­op­ment is a Face­book Live in­ter­view that Min­is­ter of Fi­nance, Colm Im­bert, did with a con­sul­tant who works close­ly with him.

The third de­vel­op­ment was Prime Min­is­ter Dr Kei­th Row­ley’s re­sponse to a ques­tion in Par­lia­ment on Mon­day.

Giv­en the im­por­tance of Dr Row­ley’s re­sponse—and based on the as­sump­tion that the prime min­is­ter is best placed to out­line his ad­min­is­tra­tion’s pol­i­cy—the in­ten­tion is to fo­cus on that re­sponse to­day, and Mr Im­bert’s next week.

Re­spond­ing to a ques­tion from an Op­po­si­tion MP on what ur­gent mea­sures the Gov­ern­ment plans to im­ple­ment to ad­dress the se­vere re­stric­tions to ac­cess to for­eign ex­change, Dr Row­ley said:

“...The amount of for­eign ex­change avail­able in the bank­ing sys­tem in 2023/2024 is about the same that was avail­able in 2014, which is ap­prox­i­mate­ly US$7 bil­lion. So there has been no re­duc­tion in the mar­ket­place of the Gov­ern­ment’s sup­port for for­eign ex­change.

“Of this to­tal, the Gov­ern­ment di­rect­ly in­jects US$2.5 bil­lion a year, with the re­main­ing US$4.5 bil­lion ac­quired by the banks di­rect­ly from their US-dol­lar-earn­ing clients.

“How­ev­er, in 2024, there is clear­ly an in­creased de­mand for for­eign ex­change, due to the growth in the econ­o­my, and an in­crease over the years in the taste for for­eign goods and for the use of on­line pur­chas­ing....

“There is a mis­align­ment be­tween the ap­petite to spend for­eign ex­change and the abil­i­ty to earn for­eign ex­change. We do not cre­ate for­eign ex­change in this coun­try ex­cept by earn­ing it. We can gen­er­ate an in­fi­nite ap­petite to spend it and that is where the man­age­ment sys­tem comes in. The Gov­ern­ment has cer­tain arrange­ments in place to en­sure that cer­tain ba­sics are fund­ed—like ba­sic foods, med­i­cines man­u­fac­tur­ing sup­port, and so on.

“We have no­ticed a de­lib­er­ate at­tempt in re­cent times to put pres­sure on the Gov­ern­ment to de­val­ue the cur­ren­cy. Let me save them from wast­ing their time, there will be no de­val­u­a­tion of the cur­ren­cy be­cause, Madame Speak­er, the pres­sure on the Gov­ern­ment to de­val­ue the cur­ren­cy is com­ing from peo­ple who have for­eign ex­change large­ly...ig­nor­ing the fact that any de­val­u­a­tion could on­ly re­sult in in­creased costs across the board. Of course, it will make those with for­eign ex­change wealth­i­er be­cause they will get more TT dol­lars. So to try to pres­sure the Gov­ern­ment to de­val­ue the cur­ren­cy; we must be the on­ly coun­try in the world where peo­ple are de­mand­ing to de­val­ue the cur­ren­cy and de­crease their wealth from those who have to pay it. This is spe­cial in­ter­est pres­sure and the Gov­ern­ment will not bow to it.”

Ques­tions

1) I am not sure I agree with Dr Row­ley that the Gov­ern­ment is be­ing pres­sured to de­val­ue the ex­change. And I cer­tain­ly part ways with him and his min­is­ter of fi­nance, that a mar­ket-based sys­tem (mean­ing a man­aged flota­tion) is the same as a de­val­u­a­tion. Does Dr Row­ley con­sid­er Mr Mot­t­ley and Dr Bobb to be part of some spe­cial in­ter­est group at­tempt­ing to pres­sure the Gov­ern­ment to adopt a man­aged flota­tion? Or are those econ­o­mists, recog­nised with T&T’s high­est and sec­ond high­est na­tion­al awards re­spec­tive­ly, sim­ply ar­tic­u­lat­ing what they per­ceive to be in this coun­try’s best long-term in­ter­est?

2) Our prime min­is­ter makes the point that the pres­sure to de­val­ue the cur­ren­cy (his phrase) is com­ing from those with for­eign ex­change, as it would make them wealth­i­er “be­cause they will get more TT dol­lars.”

Is this a con­ces­sion from Dr Row­ley that a man­aged float would prin­ci­pal­ly ben­e­fit the Gov­ern­ment, AS THE SIN­GLE LARGEST EARN­ER OF FOR­EIGN EX­CHANGE IN T&T?

3) And if a man­aged float gen­er­ates more TT dol­lars for the Gov­ern­ment, would it not al­so: re­duce T&T’s fis­cal deficit prob­lem; lessen the de­mand for for­eign ex­change (by mak­ing im­port prices high­er); as well as con­tribute to the low­er­ing in the de­ple­tion of T&T’s net of­fi­cial for­eign re­serves by about US$1.2 bil­lion a year that is be­ing re­plen­ished by for­eign bor­row­ing?

4) I com­plete­ly agree with Dr Row­ley that there is “a mis­align­ment be­tween the ap­petite to spend for­eign ex­change and the abil­i­ty to earn for­eign ex­change.” The ques­tion is where is this mis­align­ment com­ing from and how do Gov­ern­ment poli­cies con­tribute to the mis­align­ment be­tween de­mand for, and sup­ply of, for­eign ex­change?

Pol­i­cy-dri­ven forex ap­petite?

It is clear to me that al­low­ing the mar­ket to de­ter­mine the de­mand for for­eign ex­change (a man­aged float) is a very un­pop­u­lar idea. In my view, that is be­cause the pop­u­la­tion has be­come com­fort­able with the con­cept of a fixed ex­change rate, as Mr Im­bert has de­scribed it, and is to­tal­ly un­will­ing to con­sid­er the tem­po­rary ad­just­ment in their stan­dard of liv­ing that a man­aged float could en­tail.

It is quite like­ly that Gov­ern­ment poli­cies en­cour­age the “in­fi­nite ap­petite” (to quote Dr Row­ley) to spend for­eign ex­change in two main ways:

—By in­sist­ing that the Cen­tral Bank sell US dol­lars to the com­mer­cial banks at a price that re­sults in an ex­change rate of no more than $6.7993 to US$1, the Gov­ern­ment is, in ef­fect, sub­si­dis­ing the ex­change rate and the sale of for­eign ex­change to the pop­u­la­tion. By sub­si­dis­ing, I mean sell­ing for­eign ex­change for less than the mar­ket price.

In what mar­ket in the world, and over the long span of hu­man his­to­ry, would the de­mand for a scarce com­mod­i­ty (in this case for­eign ex­change) not sky­rock­et if that com­mod­i­ty is be­ing sold at a sub­sidised price?

That would be akin to the Gov­ern­ment in­sist­ing that toma­toes in the wet sea­son should be sold at the dry sea­son price, and pay­ing the farm­ers the dif­fer­ence.

—By main­tain­ing its trans­fers and sub­si­dies al­lo­ca­tion at above $30 bil­lion—which was an es­ti­mat­ed 52.92 per cent of to­tal ex­pen­di­ture in 2024—the Gov­ern­ment is en­cour­ag­ing the pop­u­la­tion to live be­yond its means.

By con­tin­u­ing to pro­vide bil­lions of dol­lars in trans­fers to en­sure that the costs of elec­tric­i­ty, wa­ter, health­care, and ed­u­ca­tion do not rise, the Gov­ern­ment is leav­ing more dis­pos­able in­come in the hands of the pop­u­la­tion, which al­lows peo­ple to go out and buy things, most of which are im­port­ed.

Be­cause the Gov­ern­ment’s spend­ing on trans­fers and sub­si­dies has re­sult­ed in fis­cal deficits in nine of the last ten years, T&T is, in ef­fect, bor­row­ing mon­ey to sus­tain the “in­fi­nite ap­petite” for im­ports and for­eign ex­change.

In de­liv­er­ing the 2025 bud­get, Mr Im­bert de­scribed the fol­low­ing as one of the cur­rent ad­min­is­tra­tion’s ‘re­mark­able achieve­ments,’ “We have al­so been able to in­crease ex­pen­di­ture from $50.8 bil­lion in 2019 to $59.7 bil­lion in 2025, thus putting al­most $9 bil­lion more in­to the lo­cal econ­o­my, which is a sig­nif­i­cant fac­tor con­tribut­ing to our sus­tained eco­nom­ic growth.”

How could spend­ing more than you earn be con­sid­ered a “re­mark­able achieve­ment,” if do­ing so means you have to bor­row or draw down on your sav­ings?

But it would be con­sid­ered a “re­mark­able achieve­ment,” by de­lay­ing the need for the pop­u­la­tion to ad­just un­til the wind­fall of for­eign ex­change from the sale of near-bor­der and cross-bor­der Venezue­lan nat­ur­al gas hits the coun­try in two years.

A very wise man told us in 2017 that we need to cut our size to fit our cloth.