With the foreign exchange shortage plaguing T&T for over a decade, one economist has suggested that a more permanent fix to the structural problems of the market is to reduce import intensity and speed up efforts at diversification, particularly in the tradeable sector.
The Sunday Business Guardian took a closer look at what continues to be a major problem for business owners and the public in accessing any amount of US currency.
Economist Dr Dave Seerattan identified the twin challenges of relatively low levels of economic diversification and few net foreign exchange-earning sectors, which predispose the economy to an imbalance in the foreign market where demand almost always exceeds supply.
He said this is accentuated by high-risk aversion among market agents, which manifests itself in a tendency to hoard forex even when their transaction demand is satisfied.
“Therefore, availability and cost are a key policy issue in small open economies. The primacy of this policy issue is also driven by the fact that what happens in the forex market in terms of price and liquidity has serious implications for the cost of living and poverty, equity (including intergenerational equity), and international competitiveness,” Seerattan detailed.
The only comfort in this context he pointed out, is that almost all small, open economies (SOEs) face similar challenges, that is, it is primarily a structural problem that can only be solved in the long term. In this context, the approach to managing the foreign exchange constraint must be very carefully calibrated.
Seerattan noted that over the period 2008 to 2023, the excess demand in the forex market averaged US$1.5 billion per year. This, he highlighted, amounted to a total of US$ 23.3 billion in excess foreign exchange demand over that period.
“In response, the Central Bank of Trinidad and Tobago supplied (sold) approximately US$25 billion to support the market. The authorities have therefore more than covered the excess demand in the market over this period. This excess demand for foreign exchange in the period 2008-2023 spanned two political administrations and periods when energy prices fluctuated widely,” Seerattan said.
He noted that for example, during this period the price of oil ranged from a high of US$105.01 in 2012 to a low of US$41.26 in 2020, while natural gas ranged in price from a high of US$8.86 in 2008 to a low of US$2.01 per MMBTU in 2020. This suggests that T&T has a structural problem that manifests itself in excess foreign exchange demand regardless of the level of energy prices because an increase in the supply of foreign exchange seems to be matched by an even larger increase in demand.
“This is due in large part to our high import intensity driven by consumption taste and preferences, as well as the structure of our economy where a whole range of intermediate inputs required for manufacturing and heavy industries are not produced locally. Until we can make headway in addressing these long-term structural weaknesses, these imbalances will be a fact of life,” the economist added.
Key sectors for earning foreign exchange
CEO of the T&T Chamber of Industry and Commerce, Vashti Guyadeen, indicated that the development of several strategic service sectors and industries can significantly reduce the country’s reliance on energy exports, diversify revenue streams, and enhance T&T’s participation in global markets.
She noted that efforts should be made to improve service quality, expand training opportunities, and support remote and digital service delivery to target international markets.
She also suggested more tax incentives and a streamlined regulatory environment, which would further attract foreign firms to set up regional headquarters in the country.
Further, Guyadeen said T&T has the potential to become a sought-after destination for both medical and literary tourism, capitalising on existing strengths while addressing current infrastructure limitations.
“San Fernando, St Augustine, and West Trinidad already offer medical services, attracting both local and international patients. However, enhancing the infrastructure in these areas and implementing strategic initiatives are necessary to maximise the sector’s potential and to achieve significant economic benefits,” she detailed.
Projections, she said, indicated that the global medical tourism market was valued at over US$100 billion in 2019 and continues to grow as patients seek cost-effective treatments abroad. T&T can position itself as a hub for medical tourism in the Caribbean by improving the infrastructure and services offered in key medical districts.
Energy services
She said that the energy-as-a-service market is projected to grow from US$57.6 billion in 2020 to US$106.6 billion by 2026, offering significant export opportunities and with T&T’s expertise in oil and gas, it can expand into energy consulting, renewable energy services, and maintenance for international clients.
Also, the chamber CEO outlined that collaborations with international firms for joint ventures in renewable energy and energy management can further diversify the sector’s offerings.
She highlighted that for this country to fully harness the potential of these sectors and mitigate the forex crisis; a coordinated approach is essential. The government, private sector, and other stakeholders must work together to:
• Address data gaps: Improving data collection on services exports will support evidence-based policymaking. The Chamber of Commerce can lead initiatives to develop a national services database.
• Support export promotion: Export promotion agencies should receive enhanced resources to prepare local firms for international markets. Creating export-readiness programmes and online platforms to showcase services will increase global visibility;
• Foster institutional collaboration: A whole-of-government approach, integrating the efforts of various ministries, will be necessary for effective export facilitation. Regulatory reforms to ease business operations and attract foreign investment should be prioritised;
• Prioritise renewable energy and conservation: Developing a strategy for energy conservation and promoting renewables can complement the growth of energy services, positioning the country as a leader in sustainable energy solutions.
No quick fix
Alleviating T&T’s foreign exchange crisis, Guyadeen said, will require more than quick fixes.
“While short-term solutions are important, sustained economic diversification must be prioritised to build resilience. Sectors such as business tourism, professional services, energy services, ICT, and agriculture hold significant promise for transforming the economy.”
“By implementing targeted strategies and aligning efforts across sectors, the country can reduce its reliance on energy exports, create new jobs, and secure a stable economic future,” she explained.
She also noted that the business community has a critical role to play in driving economic transformation.
“Urgent attention and a holistic plan to address crime is required to ensure investor confidence is high. Now is the time for bold actions. Expansion of high-potential sectors is key. With the right infrastructure, regulatory reforms, and support, T&T can unlock vast economic opportunities and alleviate its forex challenges for a sustainable future,” the chamber CEO said.
