In the six years since the 2015 oil crash, scores of business and academic leaders, as well as multilateral organisations, have called for our overvalued currency to be allowed to float and devalue.
But why should we? After all, even in the event of devaluation, dozens of countries would still have cheaper currencies than ours, relative to the dollar.
Instead of talking so much about prices, why don’t we double down on quality and raise our prices? Surely, we are too expensive to compete on price anyway, especially against Asian products?
Devaluing the currency, if done too dramatically, could have resulted in a spike in prices, especially damaging to the poorest, and those on fixed incomes. It might have sparked social unrest. It would have made the government’s foreign-denominated debt payments more expensive.
Sure, floating our overvalued currency might reduce the demand for foreign exchange and result in more exports, but without an improvement in local businesses' profitability and the availability of more local investment options, would it really shift the case for keeping more cash in local assets?
Six years on, a chronic shortage of foreign exchange has not obviously depleted store shelves. We’re not rationing. As of July 2020, the Central Bank held a relatively healthy eight months of foreign exchange in reserve to cover imports.
It was clear from the start that propping up the currency was always going to be expensive. Since 2015, the Central Bank has spent more than US$2.5 billion from our reserves, largely to pay for imports.
Of course, during that time, the delay in devaluation changed people’s behaviour as they responded to the new incentives. Businesses, knowing the currency is overvalued, have already used the past few years to increase prices to factor a future devaluation.
No one is converting anything to TTD if they can avoid it, and it is in the majority’s interest to hoard foreign currency with expectation of an eventual devaluation. The non-exporting multinational companies have totally frozen incoming investments until their large TTD cash piles are repatriated. What is the point of investing if you cannot get a dividend?
Meanwhile, foreign exchange shortages have continued, exacerbated by the covid19 downturn.
It was clear from the beginning that this couldn’t be kept up for very long. But that said, it was only ever a temporary measure until gas production and prices recovered to 2015 levels and restored the currency to its natural rate.
That last point has often seemed like a defensible assumption.
Then came 2020, and covid19. The pandemic has not so much upended the fundamentals of oil and gas as stripped away the illusions accompanying them.
There will likely be a recovery in global energy demand. But the gas majors have made their decision already.
What is TT’s largest investor and foreign exchange generator telling its investors? On BP’s Capital Markets Day in September 2020, its new CEO Bernard Looney promised: “A 40 per cent reduction in oil and gas production” in the next ten years. He said: “We have been an international oil company for 111 years. And over that time, our main focus has been on producing resources. We are now refocusing on delivering solutions for customers as we transform into an integrated energy company.”
Announcing that renewables will rise from 11 to 25 per cent of Shell’s investment programme, Shell’s CEO Ben van Beurden said, “We have to show that our investment programme is shifting away from just investing in resources to much more differentiated things like hydrogen, biofuels, renewable power and nature.”
Higher living costs have already been largely priced in and will be outweighed by the costs of maintaining the exchange rate. There are by far better uses for our billions remaining in reserves than paying for imports.
We will also eventually run out of reserves. Kids, rationing isn’t fun or nostalgic.
It is clear: we must ditch the assumption that production and prices will recover to 2015 levels; and start gradually allowing the currency to float – giving people time to adjust, while supporting the most vulnerable. This will allow exporters to be profitable enough to invest in quality and be truly competitive. It will improve local returns and bring capital back to the country.
Government leaders are already recognising that both the economic and political calculus is changing. Even before covid19, nominal GDP shrank by 9.5 per cent between 2015 and 2019.
By my back-of-the-envelope calculation, our entrepreneurial people would have to produce an extra 250 million bottles of sauces or biscuits a year just to get back to 2015 levels – forget allowing their children to live a better life than our own. We must act to restore hope.
Kiran Mathur Mohammed is a social entrepreneur, economist and businessman. He is a former banker, and a graduate of the University of Edinburgh.