debut: 2/16/17
40,924 runs
T&T's Price of a Rigged Dollar: PNM a Decade of Fantasy Economics
For almost a decade, Trinidad and Tobago tied itself to an exchange rate policy that is now widely discredited. Under former Minister of Finance Colm Imbert, endorsed and protected by then Prime Minister Dr. Keith Rowley, the country abandoned its proven “managed float” and instead locked the dollar into a de facto fixed rate of TT$6.79 to US$1. That choice , defended for years as “stability” , was in fact an expensive illusion. It forced the Central Bank (CBTT) to sell foreign exchange at an artificial price, draining reserves, distorting the economy, fueling parallel markets, and undermining competitiveness.
In 2014, gross official reserves stood at US$11.45 billion. Today, once one nets out our ballooning foreign debt, true reserves are effectively near zero. In short: we have burned through a decade of accumulated foreign savings while running up new debt, much of it used not for growth but to paper over shortfalls and maintain a false sense of balance. The consequences are now plain. Businesses and households alike face persistent shortages of foreign exchange. Critical projects are stalled because importers cannot access US dollars for machinery and inputs. The government is cornered: either fix the rate through reform, or wait for an IMF program to impose a solution on far harsher terms.
What Went Wrong
The “managed float” ,used successfully for years , allowed gradual depreciation, cushioning inflation, preserving reserves, and protecting external competitiveness. Abandoning this system locked us into an overvalued dollar. Too many imports were artificially cheap; exporters and manufacturers were penalized; genuine market supply and demand were ignored. Once energy revenues slowed, the mismatch between foreign exchange demand and supply widened. Instead of adjusting the currency, the government intervened, selling scarce forex under a fixed rate and borrowing abroad to disguise the drain. Unsurprisingly, reserves eroded, investor confidence fell, and a thriving black market emerged.
The Adjustment Now Facing T&T
Correcting this problem is unavoidable. The real question is whether policymakers move now, voluntarily, or leave it to a crisis.
Broadly, three scenarios are plausible:
Scenario A: Gradual Adjustment to TT$9 ≈ US$1
A modest depreciation would raise prices moderately , perhaps 4–6% extra inflation in year one. But it would quickly reduce forex excess demand, close the gap with the black market, and stabilize reserves within two years. Exporters would see 25–30% competitiveness gains, while foreign investors would regain moderate confidence now that repatriation of profits is clearer. Politically, this is the least disruptive course.
Scenario B: Strong Adjustment to TT$11–12 ≈ US$1
A sharper move restores external balance faster. Inflation would initially jump 8–12%, but reserves would recover within 12–18 months, the black market would vanish immediately, and manufacturing, agriculture, and tourism would become significantly more competitive. The economic case is strong, but the political and social cost is heavier, requiring careful safety nets to cushion the poor and prevent a wage-price spiral.
Scenario C: IMF-Imposed Devaluation to TT$15 ≈ US$1
If the government waits, this is almost inevitable. The IMF would lend support, but only with painful conditionality: subsidy cuts, public sector retrenchment, higher utility tariffs, and forced fiscal contraction. Inflation could spike 15–20% in the first year. Yes, reserves would stabilize, but under strict IMF ceilings rather than sovereign policy. Investor confidence would turn ambivalent—clarity on forex, but deep uncertainty about the state’s autonomy. This is the costliest path.
The Way Forward
The responsible choice lies between A and B , controlled, credible adjustments under a restored managed float, led by the CBTT. The Finance Minister should focus on fiscal discipline while the Central Bank manages monetary and exchange rate policy.
Importantly, reserves should no longer be squandered at artificial rates but instead rebuilt strategically. Fiscal policy must avoid feeding forex demand through distortive subsidies and must instead support competitiveness in non-energy exports, services, and local production.
If handled correctly, reform could reset investor confidence, eliminate the black market, and rebuild Trinidad and Tobago’s credibility as a financial center. Businesses would finally regain reliable forex access, while households would endure some inflation but within controlled bounds ; far gentler than the alternative of an IMF program.
History will record that Trinidad and Tobago’s lost decade of exchange rate mismanagement under Imbert and Rowley inflicted profound damage: squandered reserves, rising debt, and suppressed competitiveness. The nation now faces the bill for that policy experiment.
But history can also record something else: that when confronted with a looming crisis, a new leader acted boldly, empowering the CBTT, rebalancing the exchange rate, and restoring economic sanity.
The best time to correct course was ten years ago. The second-best time is right now.
Economics 101
Sarge
For almost a decade, Trinidad and Tobago tied itself to an exchange rate policy that is now widely discredited. Under former Minister of Finance Colm Imbert, endorsed and protected by then Prime Minister Dr. Keith Rowley, the country abandoned its proven “managed float” and instead locked the dollar into a de facto fixed rate of TT$6.79 to US$1. That choice , defended for years as “stability” , was in fact an expensive illusion. It forced the Central Bank (CBTT) to sell foreign exchange at an artificial price, draining reserves, distorting the economy, fueling parallel markets, and undermining competitiveness.
In 2014, gross official reserves stood at US$11.45 billion. Today, once one nets out our ballooning foreign debt, true reserves are effectively near zero. In short: we have burned through a decade of accumulated foreign savings while running up new debt, much of it used not for growth but to paper over shortfalls and maintain a false sense of balance. The consequences are now plain. Businesses and households alike face persistent shortages of foreign exchange. Critical projects are stalled because importers cannot access US dollars for machinery and inputs. The government is cornered: either fix the rate through reform, or wait for an IMF program to impose a solution on far harsher terms.
What Went Wrong
The “managed float” ,used successfully for years , allowed gradual depreciation, cushioning inflation, preserving reserves, and protecting external competitiveness. Abandoning this system locked us into an overvalued dollar. Too many imports were artificially cheap; exporters and manufacturers were penalized; genuine market supply and demand were ignored. Once energy revenues slowed, the mismatch between foreign exchange demand and supply widened. Instead of adjusting the currency, the government intervened, selling scarce forex under a fixed rate and borrowing abroad to disguise the drain. Unsurprisingly, reserves eroded, investor confidence fell, and a thriving black market emerged.
The Adjustment Now Facing T&T
Correcting this problem is unavoidable. The real question is whether policymakers move now, voluntarily, or leave it to a crisis.
Broadly, three scenarios are plausible:
Scenario A: Gradual Adjustment to TT$9 ≈ US$1
A modest depreciation would raise prices moderately , perhaps 4–6% extra inflation in year one. But it would quickly reduce forex excess demand, close the gap with the black market, and stabilize reserves within two years. Exporters would see 25–30% competitiveness gains, while foreign investors would regain moderate confidence now that repatriation of profits is clearer. Politically, this is the least disruptive course.
Scenario B: Strong Adjustment to TT$11–12 ≈ US$1
A sharper move restores external balance faster. Inflation would initially jump 8–12%, but reserves would recover within 12–18 months, the black market would vanish immediately, and manufacturing, agriculture, and tourism would become significantly more competitive. The economic case is strong, but the political and social cost is heavier, requiring careful safety nets to cushion the poor and prevent a wage-price spiral.
Scenario C: IMF-Imposed Devaluation to TT$15 ≈ US$1
If the government waits, this is almost inevitable. The IMF would lend support, but only with painful conditionality: subsidy cuts, public sector retrenchment, higher utility tariffs, and forced fiscal contraction. Inflation could spike 15–20% in the first year. Yes, reserves would stabilize, but under strict IMF ceilings rather than sovereign policy. Investor confidence would turn ambivalent—clarity on forex, but deep uncertainty about the state’s autonomy. This is the costliest path.
The Way Forward
The responsible choice lies between A and B , controlled, credible adjustments under a restored managed float, led by the CBTT. The Finance Minister should focus on fiscal discipline while the Central Bank manages monetary and exchange rate policy.
Importantly, reserves should no longer be squandered at artificial rates but instead rebuilt strategically. Fiscal policy must avoid feeding forex demand through distortive subsidies and must instead support competitiveness in non-energy exports, services, and local production.
If handled correctly, reform could reset investor confidence, eliminate the black market, and rebuild Trinidad and Tobago’s credibility as a financial center. Businesses would finally regain reliable forex access, while households would endure some inflation but within controlled bounds ; far gentler than the alternative of an IMF program.
History will record that Trinidad and Tobago’s lost decade of exchange rate mismanagement under Imbert and Rowley inflicted profound damage: squandered reserves, rising debt, and suppressed competitiveness. The nation now faces the bill for that policy experiment.
But history can also record something else: that when confronted with a looming crisis, a new leader acted boldly, empowering the CBTT, rebalancing the exchange rate, and restoring economic sanity.
The best time to correct course was ten years ago. The second-best time is right now.
Economics 101
Sarge
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