A well thought out policy

A position has been voiced which appears to suggest that the Finance Minister’s proposed prioritisation of currency allocations has angered local business groups, many of which are struggling to secure currency for needed goods, or so they say.

Additionally, it has also been stated that we have a liberalised market and that we should be allowing the market to determine the exchange rate.

Indeed, one must wonder about these comments, especially from those that include persons responsible for establishing the present system of a managed float. According to the IMF, the TT dollar’s effective exchange rate was 19.6% above its 10-year average in February.

The proponents (both internal and external) of massive depreciation suggest that the potential benefits of a devaluation on its external accounts would encourage a more balanced import adjustment, provide tailwinds to non-commodity exports, and support the country’s competitiveness as an investment destination. On its fiscal accounts, devaluation would help narrow the country’s wide deficit by increasing the local currency value of revenues derived from energy exports.

The Minister of Finance seems resistant to any move to allow a massive depreciation of the local currency. Is he abandoning the “liberalised” environment as some have claimed? Or is this really consistent with a managed float based on the unique characteristics of our environment? Has the Minister of Finance made a major mistake? Is he ignoring his adviser? Perhaps we can start by pointing out that historically the Central Bank over the last decade has only provided the market with 20 to 35 percent of injections over a year.

The banks historically have provided the bulk of foreign exchange of the market with the Central Bank providing injections randomly.

This leaves the issue of allowing the currency to freely float and let the market determine the price.

Certainly no one who understands the nature of this market could make the statement that the market should determine the price of the currency.

We have lumpy foreign currency flows since the bulk of the foreign currency comes in at the end of every quarter. The Central Bank attempts to smooth the inflows into the market.

This managed float prevents sharp movements in the value of our dollar.

If the currency was allowed to freely move as currency came in or became scarce, imagine what wide swings there would be in the currency. This would make the pricing of imported items a nightmare for retailers. It would make the cost of items balloon and out of the reach for pensioners and fixed low-income earners.

It appears that the Minister has taken the decision that he would manage the float of the currency very tightly allowing for some depreciation of the currency but treating this as a long-run game and not a short term one. This means he knows that the Juniper fields are going to come on stream. Policy measures to increase oil production has borne fruit. If he gets further increases in oil and gas production and the 100 percent tax deduction from investment in the first year for energy companies is not renewed, then not only will there be increased energy output but also increased forex inflows. This will ease the shortages presently experienced.

The use of prioritisation of currency allocations seem to be just a short term measure that forms part of the managed float. The approach appears a well thought out one by the Finance Minister