Central Bank failed to manage exchange rate

Carla Bridglal

The Central Bank failed in its role to regulate the exchange rate over the last 15 years, leading to the crisis that has now developed, where a sharp and sudden adjustment is now required to stabilise the current account, Economic Development Advisory Board chairman Dr Terrence Farrell has said.

“In my own view… by the time the crisis came around in 2014/2015, (the rate) should have already been over TT$7 to US$1. If you had followed a simple rule to move the exchange rate by the difference between the inflation rate of my trading partners (the US) and core inflation in Trinidad, the rate would have just appreciated very quietly and there would have been no outcry. People would have been making that adjustment over 15 years. Now we are at the point, unfortunately where it is significantly overvalued,” Farrell said.

He was speaking on a panel discussion on fiscal policy in the Caribbean at the annual Conference on the Economy, hosted by the University of the West Indies, St Augustine on Thursday.

The TT-US dollar exchange rate has to be managed, he said, because a free floating dollar (regulated by market forces) in this economy makes no sense.

“If (the dollar) floats freely it will sink. It has to be managed. And we happen to have an institutional structure where the Central Bank gets a lot of foreign exchange (and can manage it) with an eye to a number of things, including diversification and increasing exports,” he said.

From 1993, when the managed float system was introduced, to about 2002, he continued, the bank had been doing a successful job adjusting the rate very gradually, and people didn’t really notice. Nobody complained, he said, except for the occasional queue at banks because of the nature of the supply.

Prices have to go up, he said, with any adjustment leading to the income effect (where changes in consumers’ discretionary income will influence demand for a good or service).

“I, personally speaking, am not interested about telling people what brand of cornflakes they should eat or what brand of ice cream they should buy. We are not a socialist society, not a communist society where we tell people what clothes to wear and what to eat. If they want to buy Haagen Dazs or drive a Mercedes Benz, let them. But they have to pay for it,” he said.

What the government can do, then, because the price of basic food items is going to go up is target and subsidise those particular products in order to mitigate the effects of an adjustment to the exchange rate on the poor and vulnerable in society, Farrell noted.