As T&T con­tin­ues to grap­ple with a chron­ic short­age of for­eign ex­change, Re­pub­lic Bank econ­o­mist Garvin Joe­field is call­ing on the Gov­ern­ment to weigh the net ben­e­fits of a de­val­u­a­tion against the con­tin­ued cost of de­fend­ing the TT dol­lar for one year.

Speak­ing to the Sun­day Busi­ness Guardian on the forex sit­u­a­tion, Joe­field ex­plained, “The de­fence of the TT dol­lar is not a pol­i­cy we can or should ad­here to over the long-term. While it could pro­vide some ben­e­fits, I think it’s im­por­tant to weigh the net ben­e­fit of de­val­u­a­tion ver­sus the net ben­e­fit of con­tin­u­ing to de­fend the TT dol­lar over the next year or so.

“The course of ac­tion that is es­ti­mat­ed to pro­vide the greater net ben­e­fit is the one that should be adopt­ed. Gov­ern­ment has opt­ed to main­tain the sta­tus quo in hope of a boost in 2027. How­ev­er, should the im­pact of the cross-bor­der en­er­gy re­sources fall short of Gov­ern­ment’s ex­pec­ta­tions or the down­ward trend for­eign cur­ren­cy re­serves ac­cel­er­ates over the next two years, the au­thor­i­ties will even­tu­al­ly be forced to de­val­ue the do­mes­tic cur­ren­cy.”

The Sun­day Busi­ness Guardian al­so reached out to the Cen­tral Bank to ex­plain how the US-dol­lar tax­es from the en­er­gy sec­tor are dis­trib­uted to au­tho­rised deal­ers.

The Cen­tral Bank stat­ed there is no spe­cif­ic link be­tween en­er­gy sec­tor tax rev­enue and forex dis­tri­b­u­tion to deal­ers, not­ing that the dis­tri­b­u­tion to deal­ers comes from to­tal forex re­serves, which come from sev­er­al sources.

Cen­tral Bank da­ta be­tween 2008 and 2023 in­di­cat­ed that for each of those years the de­mand for for­eign ex­change out­stripped the sup­ply.

The Bank was al­so asked what is the for­mu­la by which forex is dis­trib­uted to au­tho­rised deal­ers in T&T.

It said, “The Cen­tral Bank’s dis­tri­b­u­tion to au­tho­rised deal­ers pri­mar­i­ly takes in­to ac­count the deal­ers’ rel­a­tive shares in the for­eign ex­change mar­ket. The al­lo­ca­tions have evolved over time with changes in mar­ket share.”

The Sun­day Busi­ness Guardian al­so con­tact­ed com­mer­cial banks in­clud­ing Roy­al Bank of Cana­da (RBC), Re­pub­lic Bank Ltd and Sco­tia­bank T&T on whether they were sat­is­fied with the forex dis­tri­b­u­tion arrange­ments in place at this time

On­ly RBC re­spond­ed.

“Like many do­mes­tic fi­nan­cial in­sti­tu­tions, RBC faces chal­lenges in bal­anc­ing the de­mands of our clients with the cur­rent sup­ply of for­eign ex­change,” that bank said.

De­val­u­a­tion pros and cons

Delv­ing in­to the ad­van­tages and dis­ad­van­tages of a de­val­u­a­tion, Joe­field said calls for the TT dol­lar to be de­val­ued in the in­ter­im, are cen­tred on elim­i­nat­ing, or at least con­sid­er­ably re­duc­ing, ex­cess de­mand for forex.

This, he ex­plained, would al­low the for­eign ex­change mar­ket to op­er­ate more ef­fi­cient­ly, like­ly erad­i­cat­ing cus­tomer forex queues at au­tho­rised deal­ers, the need for re­stric­tions and would al­so lim­it ac­tiv­i­ty on the par­al­lel mar­ket (black mar­ket).

“De­val­u­a­tion could al­so force changes in con­sumer pref­er­ences and choic­es that would ben­e­fit lo­cal pro­duc­ers. An­oth­er im­por­tant ben­e­fit would be the sub­stan­tial re­duc­tion in un­cer­tain­ty re­gard­ing the ac­qui­si­tion of forex by house­holds and busi­ness­es. It will al­so like­ly slow the de­ple­tion of the coun­try’s for­eign cur­ren­cy re­serves sub­stan­tial­ly,” Joe­field added.

He al­so shared some in­sights on the dis­ad­van­tages of de­val­u­a­tion.

“Even so, de­val­u­a­tion would im­pose chal­lenges, which the Gov­ern­ment clear­ly wish­es to avoid at this time. First­ly, it would re­sult in wide­spread price in­creas­es, in­clud­ing for es­sen­tial goods and ser­vices, which could im­pose fur­ther hard­ships on vul­ner­a­ble sec­tions of so­ci­ety,” Joe­field said.

In ad­di­tion to this, he said, out­stand­ing for­eign debt held by Gov­ern­ment and cor­po­ra­tions will im­me­di­ate­ly be­come more ex­pen­sive, adding that this will cause gov­ern­ment’s debt to GDP ra­tio to in­crease.

“It is im­por­tant to note that a de­val­u­a­tion is not ex­pect­ed to re­sult in a sig­nif­i­cant in­crease in the coun­try’s ex­port earn­ings, even though it would make its ex­ports cheap­er,” Joe­field ad­vised.

In T&T, he said the en­er­gy sec­tor is the sin­gle largest gen­er­a­tor of for­eign ex­change, con­sis­tent­ly ac­count­ing for more than 80 per cent of the to­tal.

With at least 80 per cent of the goods con­sumed do­mes­ti­cal­ly be­ing im­port­ed, for­eign cur­ren­cy plays a crit­i­cal role in the na­tion’s ac­qui­si­tion of im­port­ed med­i­cines, food, and in­puts for oth­er sec­tors, among oth­er things.

Against this back­drop, the de­clin­ing nat­ur­al gas and oil pro­duc­tion lev­els that have char­ac­terised the do­mes­tic en­er­gy sec­tor for more than a decade, have im­posed im­mense chal­lenges on the do­mes­tic econ­o­my, es­pe­cial­ly when the volatil­i­ty of in­ter­na­tion­al en­er­gy prices is con­sid­ered.

One such chal­lenge, Joe­field out­lined, is the grad­ual de­crease in the coun­try’s for­eign cur­ren­cy re­serves, which fell from US$11.49 bil­lion (12.9 months of im­port cov­er) in 2014 to US$6.25 bil­lion (7.8 months of im­port cov­er) in 2023. The fig­ure stood at US$5.53 bil­lion (7.8 months of im­port cov­er) in Au­gust 2024.

This de­vel­op­ment, Joe­field said to­geth­er with the au­thor­i­ties’ de­ci­sion to de­fend the do­mes­tic cur­ren­cy and the con­tin­ued strong de­mand for for­eign ex­change (forex), re­quires the Cen­tral Bank to metic­u­lous­ly man­age the coun­try’s stock of for­eign cur­ren­cy.

He said in this set­ting, the mar­ket for forex is very tight. “With­out get­ting in­to too much de­tail, de­fend­ing the lo­cal cur­ren­cy means that the Cen­tral Bank takes ac­tion to al­low the TT dol­lar to trade at a lev­el that is above its true mar­ket val­ue,’ he said not­ing that for in­stance, when a cus­tomer pur­chas­es US dol­lars at an au­tho­rised deal­er at the pre­vail­ing US$1-TT$6.80 rate, they are giv­ing up few­er TT dol­lars than mar­ket con­di­tions de­ter­mine they should.

In oth­er words, the US dol­lar is un­der­val­ued rel­a­tive to the do­mes­tic cur­ren­cy, Joe­field said adding this is why the de­mand for forex re­mains very strong, to the point where it sub­stan­tial­ly ex­ceeds the sup­ply.

At the true mar­ket val­ue, the de­mand-sup­ply dy­nam­ic is more like­ly to be in bal­ance.

Can there be a so­lu­tion to forex woes?

With for­eign cur­ren­cy in short sup­ply on the do­mes­tic mar­ket, busi­ness­es and house­holds have been cry­ing out for years for a last­ing so­lu­tion to be brought to the sit­u­a­tion. There have al­so been calls for the Gvern­ment to de­val­ue or float the lo­cal cur­ren­cy.

For its part, Joe­field said the cur­rent ad­min­is­tra­tion has con­sis­tent­ly re­sist­ed the pres­sure to al­low the do­mes­tic cur­ren­cy to trade at, or near, its mar­ket val­ue, cit­ing the dif­fi­cul­ties such a move will im­pose on vul­ner­a­ble peo­ple and the wider econ­o­my.

The Gov­ern­ment has not­ed that it ex­pects the sit­u­a­tion to ease sig­nif­i­cant­ly start­ing in 2027 when the coun­try is sched­uled to start ben­e­fit­ing from the pro­duc­tion of nat­ur­al gas from cross-bor­der or near-bor­der re­serves on the mar­itime bor­der shared with Venezuela. How­ev­er, Joe­field said even if these projects come on­line as en­vis­aged, the boost they pro­vide to the en­er­gy sec­tor, the wider econ­o­my and for­eign re­serves will wane over time.

He said the on­ly last­ing so­lu­tion to the coun­try’s forex chal­lenges is to aug­ment T&T’s for­eign re­serve earn­ing and for­eign re­serve sav­ing ca­pac­i­ty through the di­ver­si­fi­ca­tion process.

“This in­volves boost­ing out­put in man­u­fac­tur­ing, tourism, agri­cul­ture, and oth­er sec­tors to re­lieve the strain. A greater fo­cus on the agri­cul­ture sec­tor would be vi­tal to any im­port sub­sti­tu­tion plan (to con­serve for­eign ex­change) giv­en the coun­try’s large food im­port bill, es­ti­mat­ed at $7.2 bil­lion in 2023.

“This of course will have to be paired with ini­tia­tives de­signed to switch con­sumer pref­er­ences from im­port­ed food to lo­cal­ly grown and man­u­fac­tured prod­ucts. To its cred­it, the gov­ern­ment has recog­nised the ne­ces­si­ty for a last­ing so­lu­tion and has rolled out sev­er­al ini­tia­tives, in­clud­ing spe­cial eco­nom­ic zones to help trans­form the do­mes­tic econ­o­my,” he ex­plained.

Joe­field added that there is need, how­ev­er, for greater em­pha­sis to be placed on the pace of im­ple­men­ta­tion, not­ing that di­ver­si­fi­ca­tion is of course a long-term process, but some sec­tors such as tourism and agri­cul­ture may be able to pro­vide some rel­a­tive­ly quick wins.