Not for the first time, International Monetary Fund (IMF) staff has encouraged the Ministry of Finance and the Central Bank to adopt a more flexible exchange rate regime.
The IMF recommended that exchange rate flexibility would promote greater private sector investment in the non-energy sector and increase the chances of T&T achieving the diversification of the domestic economy everyone agrees is crucial.
In its concluding report, following its Article IV consultation with local authorities earlier this month, the IMF staff mission could not have been clearer when it opined, “A more efficient foreign exchange infrastructure would help eliminate foreign exchange shortfalls....
“Over the medium term, greater exchange rate flexibility would reduce the need for fiscal policy adjustments to restore external balance and create room for more counter-cyclical monetary policy.”
The IMF staff’s argument is that exchange rate flexibility would result in a “more conducive business environment for the private sector to invest and diversify the economy.”
In other words, if the T&T economy is to create a booming non-energy sector, whose foreign exchange revenues can rival and, over time, surpass the energy sector, one necessary element would be exchange rate flexibility.
In response to the IMF’s “encouragement,” Finance Minister Colm Imbert took to Twitter to claim that exchange rate flexibility and higher interest rates, another of the institution’s proposals for the local economy, “could only lead to hyperinflation and recession.”
In the past, Mr Imbert has pointed to the impact of exchange rate flexibility on Jamaica and Suriname’s economies. Mr Imbert, however, has been quite reluctant to discuss the experience of one economy in the Caribbean that adopted the kind of exchange rate flexibility the IMF advocates. That economy is, of course, the T&T economy.
Mr Imbert was a member of the Cabinet, led by then Prime Minister Patrick Manning, that decided to remove foreign exchange controls and float the TT dollar in April 1993.
The TT dollar had then been pegged to the US dollar at the rate of US$1 to TT$4.25 since 1988. After flotation, the TT dollar adjusted to an initial rate of US$1 to TT$5.76, crossing the TT$6 mark in September 1996.
As Minister of Works and Transport and Local Government in the 1991-1995 administration, Mr Imbert is ideally placed to inform the country whether T&T experienced hyperinflation and recession following the April 1993 flotation.
The evidence suggests T&T did experience higher inflation following the flotation of the exchange rate, but there were few belligerent demands for wage increases by the main trade unions to compensate for the higher prices. And, in fact, the economy grew and the country’s foreign exchange reserves increased.
This is by no means an argument in favour of a return to a de facto flotation at this time.
At the end of 2022, the country’s rate of inflation was measured at 8.7 per cent, mostly as a result of imported energy and food prices. Reverting to a market-determined exchange rate at this time would simply drive inflation higher, at a time when working people are under considerable strain.
T&T, however, deserves a more balanced and informed assessment of the pros and cons of “greater exchange rate flexibility” from its Minister of Finance, not a position driven by evidence from everywhere else but T&T.