RESPONDING TO the presentation of the 2020 budget by Minister of Finance, Colm Imbert, Parliament’s Hansard recorded Opposition Leader, Kamla Persad-Bissessar as telling the nation on October 11:
“The UNC recognises that the conduct of monetary and exchange policy falls exclusively under the purview of the Central Bank.
A new UNC Government will commit to the following to help protect our external position: Work with the Central Bank to ensure a competitive exchange rate. The Minister of Finance will work with the Central Bank to make sure that our exchange rate is competitive, eliminating the current dirty-managed float and allowing market forces to operate within a crawling band.
This transition to a more balanced foreign exchange market will be supported by an opening up of the foreign market allocation system to allow (desk thumping) for a far more equitable distribution of foreign exchange, especially to small- and medium-sized businesses. I do not know if you all have any idea—when last you ‘went down and watch in a bank and see man lining up’ to get, what? A hundred US or US $200 and, therefore (interruption)....
“I am saying as we transition into a more balanced foreign exchange market that will be supported by the opening up of the foreign market allocation for a more equitable distribution.
“That is where I was, and I came to talk about people standing in the lines, standing in the lines to get that foreign exchange in the bank.
That is an important matter for this country, Madam. So it is the inequitable distribution. They have handled the monetary policy so badly.
“In addition to the fact that you have scarcity of the forex, what is happening? There is a black market for US dollars in this country. (desk thumping) That is what they have created. That is where we have gone back to, those bad old days....”
This is what the United National Congress (UNC) intends to do if it is returned to office on August 10. As someone who has lobbied for the correction of the grossly overvalued exchange rate since 2013, it is welcome change to have a political leader who is at least open to the idea of a competitive exchange rate.
Well done Kamla. That is, apart from the mistake in the first sentence of the extract: Exchange (rate) policy does NOT fall exclusively under the purview of the Central Bank.
That’s because the Central Bank Act at clause 3 (2) states: “Subject to subsection (1), the Central Bank shall be charged with the general administration of this Act and in the exercise of its powers and the performance of its duties, the Bank shall conform with any general or special directions given to it by the Minister.” The ability of a minister of finance to provide general or special directions to the Central Bank “in the exercise of its powers and the performance of its duties,” means that the minister can direct the Central Bank Governor to maintain the current dirty-managed float.
The previous point is emphasised by what is outlined in clause 3 (1) of the Central Bank Act, which states: “The Minister may by Order designate the Central Bank established under the Central Bank Act, or an officer in his Ministry to be in charge of Exchange Control.”
Theoretically, and quite legally, therefore, Minister of Finance, Colm Imbert, can wake up tomorrow morning and decide that he wants his Permanent Secretary, Vishnu Dhanpaul, to be in charge of the allocation of foreign exchange in T&T.
But I digress.
T&T’s foreign reserves
When Mrs Persad-Bissessar refers to eliminating the current dirty-managed float, what she means is that, if elected, the UNC’s minister of finance would request of the Central Bank, by way of a special direction, to stop propping up T&T dollar by selling US dollars and other foreign currencies to authorised dealers every two weeks. Those fortnightly sales by the Central Bank, in effect, subsidise the provision of US dollars to the T&T population because the Bank is selling US$1 at US$6.7993, which is way off the intrinsic value of the TT dollar.
One of the consequences of that subsidy is the depletion of T&T’s foreign reserves at the rate of US$1.5 billion a year. What is worse is that the subsidy of the US dollar perpetuates the population’s taste for foreign goods, which properly should be out of the financial reach of all but T&T’s wealthiest households.
The ability of middle-income households to log on and purchase the trinket they saw on cable television the night before and then have the item shipped to their door is sucking the lifeblood out of the country.
It is also crystal clear that the only way that any government is going to encourage this country’s private sector to invest in the non-energy (and energy) sector is if the exchange rate is at a competitive level. And from what I can discern in the UNC’s national transformation plan, that party is all about facilitating the local private sector to jumpstart the economy.
And I repeat, it cannot only be about pushing the non-energy sector: One of the pertinent questions that must be asked is would seven petrochemical plants on the Point Lisas Industrial Estate have closed their doors if the TT/US exchange rate were more appropriately priced?
In other words, if the Government pegs the country’s revenues on natural gas sold at US$1.80 ($12.20) per unit, wouldn’t NGC earn $18 per unit if the exchange rate were $10 to US$1? There is no doubt that correcting the grossly overvalue exchange rate will have an impact on the standard of living of the population—by which many people mean their ability to buy a KFC snackbox four times a week. That is the downside of correcting the grossly overvalued exchange rate.
But what about all of the economic and financial upsides?
In its last report on T&T, dated September 18, 2018, the IMF said: “Notwithstanding the reduced tightness in the market, owing to increased FX inflows from energy companies, continued FX shortages affect market confidence, raise the cost of doing business, hampers non-energy sector activity, and could result in responses that further feed shortages. The authorities could take advantage of the current relatively stable period with low inflation and progress in fiscal consolidation to address the shortages, while minimising distortions. Going forward, the exchange rate could play a more active role in an economy exposed to frequent terms-of-trade shocks and help manage the transition to a more balanced foreign exchange market.
“Allowing gradually some market forces in determining the exchange rate (e.g., within a widening band) could facilitate adjustment to external shocks, help restore competitiveness, and safeguard foreign reserves. Permitting two-way exchange-rate variation could help reduce incentives for FX-hoarding and one-way currency bets, while allowing the exchange rate to anchor inflation expectations with some scope for flexible monetary policy.” But, given the impact on people’s standard of living, is this a policy to which Mrs Persad-Bissessar remains wedded?
And in order to test the theories about the impact of a depreciation on people’s standard of living, should we not be looking backward at our history of floating the TT dollar in April 1993, rather than outward to countries like Jamaica and Suriname?