Wen­dell Mot­t­ley

Eu­ric Bobb

In re­cent months, ac­cess to for­eign ex­change (forex) has be­come a ma­jor is­sue of pub­lic con­cern: Par­ents wor­ry about pay­ing fees for chil­dren study­ing over­seas; busi­ness­men are dis­tressed at the prospect of not be­ing able to pay for­eign sup­pli­ers in a time­ly man­ner; house­hold­ers want to buy goods on­line for which they have enough lo­cal cur­ren­cy (TTD).

Both of us have been there be­fore in our pro­fes­sion­al lives, no­tably in 1977, 1983 and 1991, when there was sim­i­lar loud clam­our for the gov­ern­ment “to do some­thing”. There­fore, we con­sid­er it use­ful to il­lu­mi­nate the on­go­ing dis­cus­sion by lay­ing out, in sim­ple fash­ion, some of the ba­sic facts about the sup­ply of and de­mand for forex.

On the sup­ply side, forex is earned by sell­ing goods and ser­vices to non-res­i­dents who pay in a cur­ren­cy oth­er than TTD, prin­ci­pal­ly US dol­lars but al­so eu­ro, Cana­di­an and ster­ling.

Hote­liers, tour op­er­a­tors, en­er­gy ser­vice com­pa­nies, ser­vice providers to cruise ships and yachts, ex­porters of agri­cul­tur­al and man­u­fac­tured goods are among res­i­dents who are paid di­rect­ly in for­eign cur­ren­cy.

The most im­por­tant earn­ers of forex in our econ­o­my, about three-quar­ters of the to­tal, are en­er­gy com­pa­nies which sell vir­tu­al­ly all their out­put in the world mar­kets. In the nor­mal course of busi­ness these com­pa­nies have bills to be set­tled in TTD, there­fore they sell for­eign ex­change to the banks (au­tho­rised deal­ers) to get lo­cal cur­ren­cy to pay salaries, pur­chase elec­tric­i­ty, wa­ter, con­trac­tor ser­vices, etc.

An­oth­er chan­nel through which some en­er­gy com­pa­nies bring for­eign ex­change in­to the econ­o­my is for the pay­ment of tax­es, in the first in­stance by sale of forex to the Cen­tral Bank, which cred­its the Gov­ern­ment’s ac­counts with the equiv­a­lent TTD.

Mar­ket-based sys­tem

As a small, open econ­o­my T&T must im­port goods and ser­vices to meet a sig­nif­i­cant share, at least 50 per cent, of its ex­pen­di­ture for con­sump­tion and in­vest­ment. The buoy­an­cy of this de­mand is de­ter­mined by the over­all state of the econ­o­my while its com­po­si­tion shifts de­pend­ing on the mix be­tween in­vest­ment and con­sump­tion and the chang­ing pref­er­ences of con­sumers. Un­der to­day’s eco­nom­ic cir­cum­stances, de­mand for forex ex­ceeds the sup­ply.

There is no rea­son why sup­ply and de­mand should au­tonomous­ly bal­ance over any giv­en pe­ri­od. Hence, mech­a­nisms are need­ed to al­lo­cate the sup­ply of for­eign ex­change among com­pet­ing de­mands.

In April 1993, the bu­reau­crat­ic sys­tem that was in force since 1942 was re­placed by a mar­ket-based sys­tem.

The ma­jor el­e­ments of the re­form were: the ex­change rate would be de­ter­mined un­der a man­aged float in­flu­enced by over­all eco­nom­ic cir­cum­stances; con­trols on both cur­rent and cap­i­tal trans­ac­tions were abol­ished; for­eign ex­change earn­ers were al­lowed to open USD ac­counts in lo­cal banks or keep their funds over­seas; lo­cal banks were de­clared au­tho­rised deal­ers to in­ter­act di­rect­ly with cus­tomers wish­ing to buy and sell for­eign ex­change.

Why was the sys­tem of oblig­a­tory sur­ren­der and tight ex­change con­trol abol­ished? From about 1983, with the weak­en­ing and even­tu­al col­lapse of oil prices cou­pled with a sec­u­lar de­cline in oil pro­duc­tion that peaked at 230,000 bar­rels per day in 1978, the sup­ply of for­eign ex­change fell chron­i­cal­ly short of de­mand. The ini­tial re­sponse of the Gov­ern­ment was to in­struct the Cen­tral Bank to tight­en its ad­min­is­tra­tive con­trols.

Many will re­call the in­fa­mous Form EC-0 that each res­i­dent wish­ing to pur­chase for­eign ex­change had to sub­mit to the Cen­tral Bank for pri­or ap­proval be­fore join­ing the queue at his/her com­mer­cial bank.

Se­nior staff of the bank, from the gov­er­nor and deputy gov­er­nor down the line, spent in­nu­mer­able over­time hours re­view­ing ap­pli­ca­tions and mak­ing judge­ments about grant­i­ng ap­proval and for how much whether to im­port es­sen­tials, pay for ed­u­ca­tion or med­ical ser­vices abroad, trav­el, repa­tri­a­tion of div­i­dends, etc. It was a ver­i­ta­ble night­mare!

The mar­ket-based sys­tem in­tro­duced in 1993 worked rea­son­ably well for over two decades, a pe­ri­od dur­ing which a re­mark­able in­dus­tri­al pol­i­cy saw T&T be­come a gas-based econ­o­my with a world-class pres­ence in the mar­kets for LNG, am­mo­nia, methanol, UAN and melamine.

The in­creased pro­duc­tion and mon­eti­sa­tion of nat­ur­al gas stim­u­lat­ed a strong in­flow of forex. How­ev­er, the pro­duc­tion of nat­ur­al gas reached a peak of about four bil­lion stan­dard cu­bic feet per day (MM­SCF/D) in 2014 and is now ap­prox­i­mate­ly 2.491MM­SCF/D. The price of prod­ucts such as LNG, am­mo­nia, methanol and UAN is no­to­ri­ous­ly cycli­cal and is to­day well be­low the lat­est peak in 2022.

As a thought ex­per­i­ment, let us imag­ine that an ad­di­tion­al one bil­lion stan­dard cu­bic feet per day of gas were avail­able to­day for LNG and petro­chem­i­cals at to­day’s prices: on an an­nu­alised ba­sis, and not in­clud­ing cor­po­ra­tion tax or lo­cal ex­pen­di­ture by up­stream com­pa­nies, a con­ser­v­a­tive es­ti­mate sug­gests that about US$400 mil­lion would flow in­to the cof­fers of au­tho­rised deal­ers. This un­der­lines the mag­ni­tude of the struc­tur­al prob­lem that we have been fac­ing re­cent­ly with the sup­ply of forex.

While the sup­ply of forex has de­clined, de­mand has re­mained high. The pub­lic be­came ac­cus­tomed over a gen­er­a­tion to mar­ket con­di­tions that no longer ex­ist and have not adapt­ed to the changed cir­cum­stances.

From 2012-15 when gas pro­duc­tion was in the 4 bil­lion stan­dard cu­bic feet per day range the sale of forex to the pub­lic av­er­aged about US$7 bil­lion per year while since 2019 (ex­clud­ing 2020-21 for the ef­fect of COVID-19) the cor­re­spond­ing fig­ure is about US$6 bil­lion. The lat­ter fig­ure is not strict­ly com­pa­ra­ble with 2012-15, be­cause there is an un­quan­ti­fied sup­pressed de­mand, hence the es­ca­lat­ing pleas for the gov­ern­ment “to do some­thing”.

Anec­do­tal­ly, some com­men­ta­tors ref­er­ence an un­of­fi­cial mar­ket but there is no ev­i­dence to sug­gest that it car­ries any weight com­pared to the US$6 bil­lion of trans­ac­tions in the for­mal mar­ket.

Forex im­bal­ance

The sus­tained high de­mand for for­eign ex­change over re­cent years has in part been fu­elled by per­sis­tent fis­cal deficits which feed liq­uid­i­ty in the bank­ing sys­tem. At the same time, with an eye to cush­ion­ing the do­mes­tic econ­o­my, the Cen­tral Bank did not fol­low the US Fed­er­al Re­serve pol­i­cy of rais­ing in­ter­est rates start­ing in March 2022. This af­fect­ed the forex mar­ket through two chan­nels.

First, rel­a­tive­ly low in­ter­est rates in a con­text of ex­cess liq­uid­i­ty stim­u­lat­ed the de­mand for loans -cred­it to the pri­vate sec­tor grew by 8.2 per cent in 2023- and cred­it card lim­its were set gen­er­ous­ly.

Grow­ing ex­pen­di­ture meant in­creas­ing de­mand for forex: for ex­am­ple, in­ter­net shop­ping and its sup­port­ing in­fra­struc­ture be­came a “growth” fea­ture of the econ­o­my, tai­lors and seam­stress­es ex­pe­ri­enced healthy de­mand for al­ter­ations of cloth­ing bought on­line and fran­chis­es of all kinds flour­ished.

Sec­ond­ly, some res­i­dents who earn forex rather than sell to the banks (in­crease the pool of forex for sale to the pub­lic) ra­tio­nal­ly and with­in the law in­vest­ed in US Trea­suries to the tune of US$1.3 bil­lion be­tween mid-2022 and end-2023, ac­cord­ing to es­ti­mates by the In­ter­na­tion­al Mon­e­tary Fund.

Over the last sev­er­al years as the flow of for­eign ex­change fell short of de­mand, T&T drew on its stock of of­fi­cial for­eign ex­change re­serves which fell from US$7 bil­lion at the end of 2020 to US$5.6 bil­lion in Au­gust 2024. This im­bal­ance be­tween cur­rent de­mand and cur­rent sup­ply can­not con­tin­ue at the ex­pense of fur­ther re­duc­tion of the stock of re­serves now at on­ly 7.8 months of im­port cov­er.

While ex­port-led di­ver­si­fi­ca­tion is nec­es­sary as we look to the fu­ture, the en­er­gy sec­tor will re­main the main source of for­eign ex­change for a long time es­pe­cial­ly with good prospect of in­creased gas sup­ply and, there­fore, forex earn­ings in the next few years. Even so, our eco­nom­ic his­to­ry teach­es us that we should not risk be­ing ful­ly re­liant on a resur­gent sup­ply of forex from the en­er­gy sec­tor. We face a struc­tur­al prob­lem that can be fixed on­ly by bring­ing de­mand in­to align­ment with sup­ply.

Un­like the bib­li­cal mir­a­cle of the few loaves and fish­es that fed a mul­ti­tude, man­ag­ing an econ­o­my is about trade-offs among com­pet­ing de­mands. There is no mirac­u­lous so­lu­tion to the re­cur­ring short­age of forex. What­ev­er may be done to re­duce de­mand in the near term, there will re­main a clear need for a sys­tem of al­lo­cat­ing forex.

As stake­hold­ers con­tin­ue to de­mand that “the gov­ern­ment do some­thing” 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.

Wen­dell Mot­t­ley served as T&T’s Min­is­ter of Fi­nance be­tween 1991 and 1995. He re­ceived the Or­der of the Re­pub­lic of Trinidad and To­ba­go (ORTT), this coun­try’s high­est ho­n­our, on No­vem­ber 1,2018.

Dr Eu­ric Bobb is a Cam­bridge-trained econ­o­mist, who served as Gov­er­nor of the Cen­tral Bank of T&T from 1984 to 1988. He re­ceived the Cha­co­nia Medal (gold), T&T’s sec­ond high­est ho­n­our, in 1994.