Businessman Emile Elias has appealed to Prime Minister Kamla Persad-Bissessar to raise the exchange rate for the US dollar from TT$6.80 to TT$9.
The suggestion from the executive chairman of NH International (Caribbean) Ltd has drawn heated debate given the country’s current forex crisis, and especially as the UNC Government prepares to deliver its first national budget since winning the April 28 general election.
REDUCE UNNECESSARY IMPORTS: Dr Vaalmikki Arjoon
Here are responses from two economists to the suggestion:
Indera Sagewan:
A devaluation may appear at first glance as a fix for the current forex shortage the country is experiencing, but once you drill down it comes crashing in. Yes, a devaluation will make the cost of US dollars more expensive and therefore reduce the demand, but it will hit those who can’t afford….individual households and MSMEs really hard….they will be the main casualties.
Parents needing forex for kids studying abroad, persons needing medical care aboard, and, of course, the lower middle-income vacationers will have to downsize or forego that planned trip. Micro and small business will face increasing costs, become less competitive and face closure.
We are a high import-consuming people, that’s a fact. Moreover our manufacturing sector has a high import content, a devaluation renders our exports less competitive and added to the US 15% tariff, a recipe for troubled waters, in fact, it could result in less forex earning by non-energy exporters.
Devaluation will seriously exacerbate inflation, pushing up the cost of living to everyone. But, the most vulnerable will feel it the most, as most basic food items comprising their food basket is imported; rice, flour, onion, garlic, potato, all beans. Most people are still recovering from the Covid onslaught on living standards and the post-Covid additional inflationary onslaught.
There is no quick fix to this problem, it’s systemic and that’s where the focus needs to be placed, non-energy export diversification. This must be prioritised.
In the short term, I share the position articulated by the governor of the Central Bank – increase interest rates, apply import controls, and I add, use moral suasion with the commercial banks. We should not have scarce forex allocated to imported avocados, watermelon, Halloween pumpkin, sweet peppers. Let’s use policy to cut that food import bill drastically, it will immediately incentivise local production. We produce cereals yet our shelves are loaded with foreign options. Let’s forego this for a while and give the economy a minute to recalibrate.
This could be a good time to have our private sector make a real effort to shift from distribution to value adding manufacturing and export. It’s easy to secure a foreign distributorship or franchise, takes much more effort to be innovative and start something new, but there are so many low-hanging fruits; tourism, value adding to Cocoa, superfoods etc.
We need a deep dive with a cutting blade into our current imports to distinguish needs from wants, use the blade but simultaneously and more aggressively incentivise and encourage new forex earning sources.
Dr Vaalmikki
Arjoon:
Calls for devaluation intensify whenever FX shortages bite harder. But in our case, a devaluation is unlikely to solve the problem, and if too steep, could make matters worse. Reducing unnecessary imports, such as food we can produce locally or luxury items, is important. Yet many essentials – pharmaceuticals, clothing, electronics, and technology cannot be substituted locally, as we lack the capacity or know-how to produce them. Importers will still have to buy these goods, passing the higher costs from a devaluation on to consumers. The outcome is predictable: rising prices, inflationary pressures, demands for higher wages, and a more expensive environment for doing business – eroding competitiveness instead of strengthening it.
Any rate adjustment, if at all pursued, should remain within the framework of the managed float and be gradual, paired with measures to contain inflation from higher import costs. More importantly, it must be coupled with reforms that expand investment, raise production, and remove the many barriers to doing business, so that exports can grow and the root FX problem can be addressed – reduced FX supply.
At its core, our FX challenge stems from a sharp reduction in supply. We earn most of our FX from exports, with energy commodities accounting for about 80% of total earnings. In the past decade, oil and gas production has declined steeply, cutting inflows. With less energy revenue flowing in, the supply of FX has tightened, leaving banks and businesses competing for a shrinking pool of USD. Also, our key energy exports – oil, LNG, and petrochemicals are priced and paid for in USD on international markets, using global benchmarks, and not in TTD by local producers. A weaker TTD therefore does not make these commodities cheaper for foreign buyers. The only way to increase FX inflows from energy is through higher global prices and/or greater local production, requiring a more competitive exploration and upstream sector. Devaluation therefore cannot raise FX earnings from the energy sector.
Non-energy manufacturers have increased exports in recent years. However, this sector remains small at 7.5% of the economy compared to energy’s 30–40%. Expanding this sector is critical to offset more of the losses in FX earnings from the energy sector and strengthen the resilience of the wider economy, but devaluation would not necessarily give it the expected boost.
There is a perception that a weaker TTD dollar is supposed to boost exports by making local goods more affordable abroad. But this logic mainly applies to economies that can source their own production inputs like raw materials, without heavy reliance on imports. In our case, a large share of local manufacturers depend on imported raw materials, machinery, and other inputs that simply are not produced in T&T. On top of that, they must cover shipping, logistics, packaging, marketing and overseas distribution expenses when they export – all of which are denominated in USD. A sharp devaluation would therefore backfire on these firms, as every container, piece of equipment imported, or marketing campaign abroad would require more TTD to meet the same USD cost obligations. Instead of boosting competitiveness, it would inflate their costs and squeeze margins, undermining the very export push the country needs. Plus, many non-energy manufacturers already price their goods directly in USD, not in TTD, so higher costs from devaluation would simply pressure their bottom line without creating any incentive to cut USD prices abroad.
A steep devaluation will therefore punish the very firms we want to expand – the micro and small businesses, as it will discourage investment and cause them to downsize their operations or even close when they cannot cope with this increased cost. This leaves the market dominated by large firms that can absorb the higher costs prompted by a devaluation, passing them on to customers through higher prices, undermining real competitiveness.
What has exacerbated the issue is that FX is no longer simply treated as a currency but also as a valuable asset used to create more wealth for those with access to it. In this vein, authorised dealers also deploy it in ways that maximise their own profits, such as investing in overseas portfolios or providing high-interest USD loans, instead of simply selling it to local customers and businesses to support broad-based economic activities.
