Central Bank Governor Dr Alvin Hilaire says the country has had a microeconomic imbalance for the last few years and what is needed is an overall economic solution.
He was responding to whether or not the T&T currency should be devalued.
“It’s no secret there has been an imbalance in the foreign exchange market. It has been due in part to a collapse in energy prices, we had some production difficulties, the COVID didn’t help and this is where we are,” Hilaire explained.
During the recently held Spotlight on The Economy Finance Minister Colm Imbert said there were no plans at this time to devalue the T&T currency.
Hilaire, who was speaking during the bank’s current financial stability issues held virtually yesterday, said there must be “an appropriate combination” of fiscal, monetary and structural policy.
“Particularly structural, meaning getting the way of doing business more agile, getting flexibility in different markets to be able to take advantage of different scenarios,” Hilaire said.
He cited a preCOVID study done by the IMF a couple of years ago examined the experiences of countries in Latin America and the Caribbean regarding depreciation or sudden devaluation.
“For countries that didn’t have flexibility in their operations it came because of import compression so there was a huge compression of imports as opposed to exports,” Hilaire said.
Contrast this to the case of Asia, he added, noting where there was a small depreciation and people began to produce more because their operations were quite flexible to take into account what maybe a price change.
Hilaire said it is in this context that T&T can look at the different aspects in which a depreciation may work.
“Having said that it is not so important the exchange rate regime but the complementary policies.”
He said if he were to look at two extremes, one a fixed exchange rate and “so fixed as in the case of a currency union like the Euro or the Eastern Caribbean” and two, where there is complete flexibility.
“Both situations and the hybrids in between could work but it all depends on a number of things-flexibility to deal with situations as well as the credibility and what it means as well as the complementary policies.
“If you don’t have that then any change including a depreciation would have a temporary and perhaps adverse scenario.”
He also noted that while the country’s financial system remains sound, well-capitalised and healthy there are, however, some vulnerabilities including rising household debt, sovereign exposure, and an uncertain macroeconomic outlook.
Hilaire said financial stability indicators show that in general banks were well capitalised, profitable, have good liquidity and the strong credit ratings.
The performance of the insurance sector was also commended.
At the same time, Hilarie noted, credit growth was sluggish and had not yet responded to the recent significant monetary policy actions in March this year.
He noted, the weak credit response is likely due to both demand (individuals and businesses reluctant to borrow more) and supply (banks’ concern regarding maintaining credit quality) factors.