With the T&T budget expected to be presented in a matter of weeks, three economists have argued that devaluing the TT dollar would not be in the best interest of the country.
This is while economists, like Dr Roger Hosein, Marla Dukharan and some of the business chambers have long touted that a devaluation of the domestic currency in T&T would be a catalyst to transforming the country’s foreign exchange position.
They have argued that a devaluing of the TT dollar would decrease import reliance thereby reducing the amount of forex demanded and increase exports as it becomes cheaper for T&T’s external trading partners to purchase.
However, economist Dr Vaalmikki Arjoon, has argued that a devaluation of the TT dollar will not yield the expected results of a more competitive economy or a reduced demand for forex and could possibly exacerbate the current situation in the country.
In an article, Arjoon contended, “A sudden and large devaluation could also backfire causing the fiscal deficit to worsen.”
Arjoon posited that the country’s fiscal deficit could further worsen as the state could collect less taxes if the devaluation worsens the profitability of firms. He added that the low capacity of some firms and the poor institutional quality established in the country limits some companies from benefiting from a currency devaluation.
According to Arjoon, a devaluation means that manufacturers would have to pay more to import their raw materials and their machinery, which further drives up the cost of production. He added that because of delays in customs, many would have to pay overtime charges, which increases their cost of production and ultimately, these costs are passed on to the consumer.
Additionally, he claimed that unions are likely to demand higher salaries, which inflates the state’s wage bills. Arjoon projected that the amount the government would have to spend on capital expenditure would increase—when it wants to improve infrastructure.
For example, the economist noted that in building a new highway, the contractors will have to import some of these construction materials.
He said, “The devaluation makes this more expensive, so the capital projects become more expensive.” In addition, Arjoon emphasised that T&T’s debt to GDP ratio would increase, as its external debt would be more costly to repay, as well as interest payments.
Providing the Business Guardian with updated figures to his article, Arjoon highlighted that “the TT dollar value of our external debt is $27.8 billion in May 2019, or US$4.10 billion. Let’s assume that we let the dollar slide and it ends up at $9 to US$1, then the value of our external debt will increase by $9.10 billion to $36.90 billion. If it goes to $10 to US$1 then the debt burden will increase by $13.2 billion.”
He added that the bulk of T&T’s foreign exchange earnings typically comes from the tax revenues earned from energy companies, also noting that the country’s reserves have fallen from a high of US$11.5 billion in December 2014 to US $7.22 billion in July 2020—a 37.2 per cent decline.
Agreeing with the sentiments of Arjoon, was UWI lecturer Dr Darren Conrad who said, “All of that to say that devaluation is not really going to be beneficial, as a matter of fact, it’s going to be detrimental to us.”
Referring to one of his most cited academic papers, Conrad argued that devaluation requires a certain climate in which it should be done.
He contended that the first requirement is that the demand for the imports has to be relatively elastic. In other words, as the price of imported goods increase, there should be some a shift from imported to of locally produced goods.
However, he revealed that the demand for foreign goods in T&T is inelastic. He said, “People will buy the foreign goods irrespective of the price, they will make cuts in other areas, in order to continue the consumption of the foreign goods.”
Additionally, Conrad explained that there must be a high demand for exports. He noted, however, that T&T’s manufacturing sector is ailing. Thus, he concurred that if imports are made more expensive relative to the exports, there would be nothing to gain because the country is not a large exporter.
He added, “And there is not a high demand for the goods that we export.”
Essentially, Conrad highlighted that devaluation would have a harmful impact on the working class.
Conrad went on to say that, especially at this time, there should not be a significant increase in the price of goods, which is what would happen should a devaluation occur.
According to Conrad, “We have already endured a significant job loss as a result of the pandemic coming out here. So I don’t think that we should even be using the term very loosely.”
Echoing the sentiments of Arjoon and Conrad was economist Dr Vanus James, who said that the depreciation of the value of the TT dollar would increase the cost of imports, but it would also encourage an outflow of foreign currency to safe havens.
He remarked, “If sufficiently large, the increased cost of imports would lower real spending power of consumers and producers and reduce discretionary imports, like new vehicles and foreign travel or productive inputs.”
However, James asserted that it will not reduce necessary imports like food and medicine, or even clothing. Furthermore, he posited that domestic producers would not benefit from a decision to devalue the currency because most of the imported commodities cannot be produced in T&T.
Moreover, he claimed that if the price of necessary imported inputs rise, this would make domestic output less competitive in foreign markets. Like Conrad, James said that the evidence suggests that total imports are relatively inelastic to a currency depreciation because of dependence on imports for both production and consumption.
He emphatically noted, “One thing a currency depreciation will not do is increase exports.” James took this position noting that the historical evidence is that exports of oil and gas cause the exchange rate rather than respond to it.
James continued, “COVID-19 has created a cash flow and foreign exchange crisis in Caricom’s tourism economies, which are the main markets for our manufacturing exports (food and beverages). Therefore, though theoretically promising, not much will come from cutting the price of those exports.”
He also argued that the Tobago tourism sector is tiny, so a currency depreciation, though encouraging, would not have a significant effect on the number of foreign visitors and on gross exports.
While James argued that the government would have to turn to demand suppression measures mainly cutting spending, raising interest rates, and allowing more unemployment, Conrad argued that focus should be on bolstering the manufacturing sector.
Meanwhile, Arjoon suggested increasing the taxes or duties on the importation of luxury goods, lowering corporation taxes for small businesses (20 per cent) and start ups (10 per cent in the first two years) and improving the business environment to attract more foreign direct investment (FDI).
Arjoon argued, “We will continue to be largely ignored by foreign investors unless we improve in the ease of doing business rankings.”