The forex dilemma: What should be done

They also suggest that the primary way to deal with it is by rationing the scarce resource rather than allowing the exchange rate to depreciate much further.

If I am correct then I suggest that there is an alternative way that can be more effective in achieving a number of goals all at the same time.

The fact that the demand for foreign exchange is outstripping the supply and that this is likely to continue for several years indicates that the current exchange rate regime is inappropriate.

Central Bank policy then must seek to adjust the rate in order to bring about certain changes in behaviour by individuals and companies which will curb import demand and promote exports.

This can be done through a change in relative prices, ie, by making the price of imports more expensive through a depreciation of the exchange rate.

An appropriately depreciated exchange rate would (i) discourage imports, (ii) help to stimulate domestic substitutes (think local farmers and manufacturers etc) and (iii) encourage exports.

In the process the consumer will choose to buy less of the now higher-priced imports and new and existing exporters would be incentivised to promote exports.

While this is a simplified explanation of what I am contending, it addresses the main arguments.

The path of rationing foreign exchange as the main instrument of control which both gentlemen seem to prefer is one that is fraught with major challenges including bureaucratic headaches and even corruption.

It was tried in the eighties only to be eventually surrendered in 1993 in favour of a largely successful managed float.

Further, rationing might necessitate additional tariffs on imported goods and services so as to curb imports while exporters may also wish additional tax and other incentives.

The bureaucracy to monitor these is costly, complicated and hardly ever work to accomplish the desired goals.

One well understands that prices can rise in the short run but that needs to happen if both gentlemen want to encourage less expenditure on imports and to give farmers, manufacturers, traders, and service providers a better chance against imported goods and services and to begin exporting more.

To be sure, either route, rationing or depreciating the TT dollar, would necessitate other appropriate policy positions along with a marked reduction in the cost of doing business.

Diversification into additional sources of foreign exchange, which must be the ultimate goal, would stand a better chance if consumers, producers and government are all reoriented through the price effect to shift behaviours in a way that curbs imports, promotes substitutes to imports or replacements and incentivises producers of exports in new and traditional sectors.

The vulnerable certainly needs some cushion from rising prices. This can and should be done through targeted social measures, some of which already exist.

Ronald Ramkissoon economist