I have spent the past cou­ple weeks de­bunk­ing some of the flawed eco­nom­ic ar­gu­ments re­lat­ed to our for­eign ex­change sit­u­a­tion that find their way in­to our na­tion­al dis­cus­sion. To­day we con­tin­ue in that vein.

It bears re­peat­ing that Trinidad and To­ba­go’s for­eign re­serves con­tin­ue their re­lent­less de­cline, hav­ing fall­en to US$4.806 bil­lion at the end of Ju­ly 2025, tak­ing us back to lev­els pre­dat­ing the es­tab­lish­ment of the Her­itage and Sta­bil­i­sa­tion Fund.

Giv­en this sta­tis­tic, the eco­nom­ic es­tab­lish­ment has co­a­lesced around a fa­mil­iar re­frain: we must di­ver­si­fy our econ­o­my to earn more for­eign ex­change. This propo­si­tion, re­peat­ed with re­li­gious fer­vor by lo­cal econ­o­mists in news­pa­per columns and tele­vi­sion in­ter­views, has be­come the ac­cept­ed wis­dom for ad­dress­ing our for­eign ex­change cri­sis.

There is just one fun­da­men­tal prob­lem with this log­ic: it is cir­cu­lar and based on our lived ex­pe­ri­ences doomed to fail un­der cur­rent con­di­tions.

The pre­vail­ing ar­gu­ment goes some­thing like this: Trinidad and To­ba­go must re­duce its de­pen­dence on en­er­gy ex­ports by de­vel­op­ing agri­cul­ture, man­u­fac­tur­ing, tourism, and ser­vices sec­tors that can gen­er­ate for­eign cur­ren­cy earn­ings. This di­ver­si­fi­ca­tion, we are told, will solve our for­eign ex­change short­age and re­duce our vul­ner­a­bil­i­ty to com­mod­i­ty price volatil­i­ty. It sounds rea­son­able, even in­evitable. It is al­so eco­nom­i­cal­ly im­prac­ti­cal.

Here’s what the di­ver­si­fi­ca­tion ad­vo­cates fun­da­men­tal­ly mis­un­der­stand: eco­nom­ic di­ver­si­fi­ca­tion does not oc­cur in a vac­u­um. More to the point, it can­not and will not oc­cur in any mean­ing­ful sense while we main­tain an over­val­ued cur­ren­cy. There are ba­sic prin­ci­ples that make this clear.

The ide­al sce­nario is for us to earn for­eign cur­ren­cy from in­puts that are in­dige­nous to Trinidad and To­ba­go. That means we don’t have to im­port much in or­der to ex­port. In such a sit­u­a­tion the ex­change rate over­val­u­a­tion means that you get less TT dol­lars when you con­vert to meet lo­cal costs and that com­press­es your mar­gins.

If the busi­ness im­ports in or­der to ex­port then the in­abil­i­ty to ac­cess for­eign ex­change to meet sup­pli­er terms is al­so a chal­lenge that im­pacts mar­gins. Fur­ther when our in­puts are im­port­ed and we are ra­tioned for for­eign ex­change, then on­ly ex­ist­ing par­tic­i­pants will have ac­cess to for­eign ex­change to im­port. Right away you sti­fle in­no­va­tion which is a key in­gre­di­ent in the com­pe­ti­tion re­quired to have bet­ter qual­i­ty prod­ucts for ex­ports.

Over­val­u­a­tion al­so means im­ports ap­pear ar­ti­fi­cial­ly cheap com­pared with lo­cal sub­sti­tute prod­ucts, there­by damp­en­ing in­vest­ments and jobs in the sec­tors that could pro­duce lo­cal­ly to com­pete against im­ports.

But the cir­cu­lar log­ic be­comes even more per­verse when we con­sid­er the sec­ond part of the di­ver­si­fi­ca­tion ar­gu­ment. Even if, against all eco­nom­ic log­ic, some lim­it­ed di­ver­si­fi­ca­tion were to oc­cur, what­ev­er for­eign ex­change these new sec­tors earned would be un­like­ly to flow in­to the for­mal bank­ing sys­tem. Why would any ra­tio­nal busi­ness own­er sell their hard-earned US dol­lars to a com­mer­cial bank at be­low $6.78 when they can eas­i­ly ob­tain $8.00 to $9.00 in the par­al­lel mar­ket that we doc­u­ment­ed last week?

We are es­sen­tial­ly ask­ing busi­ness­es to de­vel­op ex­port ca­pac­i­ty while si­mul­ta­ne­ous­ly en­sur­ing that do­ing so re­mains fi­nan­cial­ly un­vi­able and then ex­pect­ing them to vol­un­tar­i­ly sur­ren­der their for­eign cur­ren­cy earn­ings at be­low mar­ket rates. This is not eco­nom­ic pol­i­cy; it is eco­nom­ic fan­ta­sy. Those who ad­vo­cate for this don’t quite grasp the is­sue of “cause and ef­fect” or as I sug­gest­ed two weeks ago, how mar­kets ac­tu­al­ly work.

So­lu­tions

If we want to step out of eco­nom­ic fan­ta­sy and see an im­prove­ment in our for­eign ex­change po­si­tion then we have to start by pick­ing the low-hang­ing fruits that are avail­able to us. To me the low­est hang­ing fruit is the is­sue of trans­fer pric­ing in the en­er­gy sec­tor and this has to be ad­dressed in the up­com­ing na­tion­al bud­get.

The is­sue of trans­fer pric­ing was my sin­gu­lar com­men­tary on last year’s bud­get and it re­mains the most ur­gent is­sue fac­ing T&T at this time. While econ­o­mists con­tin­ue to de­bate the the­o­ret­i­cal mer­its of di­ver­si­fi­ca­tion, we are haem­or­rhag­ing for­eign ex­change through prac­tices that could be stopped im­me­di­ate­ly with prop­er en­force­ment of ex­ist­ing laws.

This was from last year’s bud­get : “The Gov­ern­ment un­der­scores that trans­fer pric­ing can al­low multi­na­tion­als to shift prof­its to low tax ju­ris­dic­tions, erod­ing T&T’s tax base. A com­pre­hen­sive regime is in­tend­ed to en­hance rev­enue and re­duce leak­ages while pro­mot­ing fair­ness and trans­paren­cy.”

The num­bers are stag­ger­ing and should shock any­one who un­der­stands their im­pli­ca­tions for our for­eign ex­change sit­u­a­tion. In March 2018, Prime Min­is­ter Kei­th Row­ley re­vealed that through trans­fer pric­ing and oth­er leak­ages, T&T had “lost al­most US$6 bil­lion” in po­ten­tial rev­enue. To put this in per­spec­tive, that sin­gle fig­ure rep­re­sents more than our en­tire cur­rent for­eign re­serve po­si­tion of US$4.6 bil­lion.

A 2021 study by the UN Eco­nom­ic Com­mis­sion for Latin Amer­i­ca and the Caribbean (ECLAC) es­ti­mat­ed that in 2018 alone, T&Ts rev­enue loss­es from trans­fer pric­ing in nat­ur­al gas ranged from TT$7.8 bil­lion to TT$13.7 bil­lion (ap­prox­i­mate­ly US$1.2–2.0 bil­lion). Cu­mu­la­tive­ly, ECLAC found T&T may have fore­gone near­ly TT$18 bil­lion (~US$2.6 bil­lion) over a pe­ri­od (not spec­i­fied) due to such prac­tices.

Think about those fig­ures in the con­text of our cur­rent for­eign ex­change short­age. Con­sid­er, as well, that the frame­work to ad­dress this al­ready ex­ists. The Pe­tro­le­um Tax­es Act con­tains ex­plic­it pro­vi­sions to pre­vent trans­fer pric­ing abuse, re­quir­ing arm’s length pric­ing and em­pow­er­ing the Board of In­land Rev­enue to sub­sti­tute fair mar­ket val­ues when sales oc­cur be­tween re­lat­ed par­ties at un­re­al­is­tic prices. The Act es­tab­lish­es a Per­ma­nent Pe­tro­le­um Pric­ing Com­mit­tee (PP­PC) specif­i­cal­ly to ad­vise on fair mar­ket val­ue and pric­ing for­mu­las.

Pro­duc­tion Shar­ing Con­tracts re­quire arm’s length val­u­a­tion of pe­tro­le­um, with ex­plic­it claus­es de­signed to en­sure the State’s share of pro­duc­tion is not di­lut­ed by trans­fer pric­ing arrange­ments. The Min­istry of En­er­gy’s PSC au­dit unit has the man­date to en­sure con­trac­tors ad­here to these con­tract terms, in­clud­ing ver­i­fi­ca­tion that all sales are made at arm’s-length prices.

En­force­ment

Here’s the crit­i­cal point: Re­cov­ery doesn’t start with com­plex di­ver­si­fi­ca­tion strate­gies. What we need is prop­er en­force­ment of ex­ist­ing laws and con­tracts.

The tragedy is that for years, these en­force­ment mech­a­nisms were large­ly dor­mant. The PP­PC, cre­at­ed in 1974 to pre­vent tax avoid­ance via trans­fer pric­ing, was in­ac­tive for over a decade. De­spite hav­ing clear le­gal au­thor­i­ty, the Board of In­land Rev­enue rarely in­voked its pow­er to sub­sti­tute mar­ket val­ues for non-arm’s length trans­ac­tions. The re­sult was mas­sive rev­enue leak­age that di­rect­ly con­tributed to our cur­rent for­eign ex­change chal­lenges.

Some cor­rec­tive ac­tion has been tak­en. The 2018-2019 rene­go­ti­a­tions with ma­jor multi­na­tion­als like BP and Shell re­sult­ed in im­proved LNG pric­ing for­mu­las and there have been one time pay­ments such as the TT$1 bil­lion from BP, which were made with­out prej­u­dice. But these were es­sen­tial­ly band aid so­lu­tions ad­dress­ing years of in­ad­e­quate en­force­ment.

The up­com­ing bud­get presents an op­por­tu­ni­ty to fi­nal­ly tack­le this is­sue sys­tem­at­i­cal­ly. The leg­is­la­tion pro­posed in last year’s bud­get, must be brought to Par­lia­ment im­me­di­ate­ly. This leg­is­la­tion will man­date arm’s length pric­ing for re­lat­ed-par­ty trans­ac­tions across all sec­tors and re­quire com­pa­nies to main­tain trans­fer pric­ing doc­u­men­ta­tion.

More im­por­tant­ly, the gov­ern­ment must com­mit re­sources to en­force these pro­vi­sions. The Board of In­land Rev­enue needs a ded­i­cat­ed trans­fer pric­ing unit with the tech­ni­cal ex­per­tise to an­a­lyze com­plex en­er­gy-sec­tor trans­ac­tions.

The op­por­tu­ni­ty cost of con­tin­ued de­lay is enor­mous. Every quar­ter that pass­es with­out prop­er trans­fer pric­ing en­force­ment rep­re­sents mil­lions of dol­lars in po­ten­tial for­eign ex­change earn­ings that nev­er reach our of­fi­cial re­serves. While we de­bate cur­ren­cy de­val­u­a­tion and eco­nom­ic di­ver­si­fi­ca­tion, multi­na­tion­al com­pa­nies po­ten­tial­ly struc­ture their op­er­a­tions to min­i­mize their tax oblig­a­tions to T&T.

This is not about be­ing an­ti-busi­ness or an­ti-in­vest­ment. It is about en­sur­ing that com­pa­nies op­er­at­ing in our ju­ris­dic­tion pay their fair share based on the true val­ue of the re­sources they ex­tract and ex­port. Coun­tries around the world have im­ple­ment­ed ro­bust trans­fer pric­ing regimes that bal­ance le­git­i­mate busi­ness needs with rev­enue pro­tec­tion.

The irony should now be ob­vi­ous: we com­plain about for­eign ex­change short­ages while al­low­ing prac­tices that sys­tem­at­i­cal­ly re­duce the for­eign ex­change that should be flow­ing in­to gov­ern­ment cof­fers. We then com­pound this by main­tain­ing ex­change rate poli­cies that dis­cour­age the for­mal repa­tri­a­tion of what­ev­er for­eign ex­change pri­vate sec­tor en­ti­ties do earn.

Trans­fer pric­ing en­force­ment rep­re­sents the clear­est path to mean­ing­ful im­prove­ment in our for­eign ex­change po­si­tion. It re­quires on­ly the po­lit­i­cal will to en­force ex­ist­ing laws and the tech­ni­cal ca­pac­i­ty to do so ef­fec­tive­ly.

In the end we can con­tin­ue with sim­ply re­ar­rang­ing the deck chairs on the Ti­tan­ic, or use the tools avail­able to sta­bi­lize the ship.

Ian Nar­ine is a fi­nan­cial con­sul­tant who hopes that this dis­cus­sion gets trans­ferred in­to the na­tion­al bud­get. Please send your com­ments to ian@ian­nar­ine.com