FCIB: Should TT$ be devalued?

The Research and Analytics (FCRA) division of First Citizens Investment Services is asking if the country can afford to support what may very well be an overvalued TT dollar.

Under the sub-heading, Something’s Got to Give, in its ten-page report, Trinidad and Tobago’s Test of Economic Fortitude, the FCRA asked, “Can we afford to support a currency that many consider to be overvalued at the current level?

“A gradual pace of currency depreciation is necessary because the over valuation is inhibiting export diversification, competitiveness and growth, while simultaneously facilitating forex leakages through artificially cheaper imports.”

The FCRA said oil prices are not expected to get back anywhere close to pre-crisis levels and while TT is largely import-driven, the benefits of a depreciation may outweigh the costs. It said it would have an inflationary impact but there are very little underlying inflationary pressures in the economy.

The division pointed out that the United States Energy Information Administration expects West Texas Intermediate (WTI) crude oil to close 2018 at US$50.57 per barrel, compared to $49.69 per barrel for 2017. TT’s foreign exchange (forex) is largely reliant on taxes from energy companies, but with prices at a low, this has put a strain on the availability of forex.

The FCRA said the International Monetary Fund (IMF) has said TT’s currency remains substantially overvalued and varies from 23-50 per cent, based on two models. “Using the exchange rate at the time of this analysis (July 2016), would mean the currency should be around TT$8.21 to $10.10 against the US dollar.”

The FCRA added that in its August 2017 Article IV concluding statement, the IMF stressed the importance of reducing and eliminating the forex market imbalance and outlined that “a range of measures will likely be necessary to do so. “These include fiscal adjustment, structural reforms to enhance the country’s foreign exchange earnings capacity and operating the foreign exchange market with a greater degree of flexibility,” the IMF said.

Arguing that what got TT to where it was now won’t necessarily get the country where it needs to be in the future, the FCRA pointed out that Government collected more than $280 billion from the energy sector over the past 15 years or so. Half of that was spent on recurrent expenditure such as transfers and subsidies, debt servicing, wages and salaries. This prompted the FCRA to ask, “Was this spending productive?

While the 2018 budget earned points for starting fiscal consolidation, the FCRA was critical of its silence on the forex policy and TT’s “ability to continue the managed peg, as well as measures to improve the efficiency of the public service and institutions.”