Senator: T&T must devalue now

IN THE SENATE

■ Ria Taitt

ria.taitt@trinidadexpress.com

EMBRACE devaluation in small steps now before it is too late when we would be forced to do a massive devaluation.

This seemed to be the advice being given by Independent Senator Amrita Deonarine to Finance Minister Colm Imbert as she contributed to the budget debate in the Senate on Friday.

Deosarine urged the Government to take the difficult decisions sooner rather than later, to avoid severe currency devaluation, as happened in Suriname this year.

She said the Government had ruled out relying on a devaluation to solve the difficulties problems in the foreign exchange market and she understood the Government's reasoning which was that it had the potential for inflation and could have negative effects on the non-energy sector.

She noted that the Government had adopted other means to ease the forex outflows such as the increased duties on vehicles, the increased VAT on luxury foods but the question was whether these measures were sufficient.

She also pointed out that tax incentives in the multiple sectorsmanufacturing, construction, digital and creative sectors- aimed at diversification and stimulation of the economy, would lead in the short-term to the further depletion of foreign exchange.

'In the short-term, unless there is some significant turnaround in the energy sector, maintaining the exchange rate becomes more and more difficult...In the interim the external disequilibrium in the foreign exchange market is building up and the longer the economic situation remains the same, unless there is significant turnaround in energy revenues, it creates more and more pressure to maintain the exchange rate,' Deonarine stated.

Chronic shortage

She spoke of the case of Suriname which this year had to undergo a 90 per cent devaluation because of the length of time that country took to deal with the foreign exchange reserve situation and they ended up with a chronic shortage of US dollars in their economy. She said immediately inflation skyrocketed.

Deonarine said once the exchange rate is misaligned there a parallel (black) market emerges. She said in T&T the parallel market which has emerged suggests that the exchange rate is overvalued by at least 20 per cent. She said she was sure that some businesses were accessing foreign exchange from the parallel market and that they were passing on these increased costs to the consumers.

'To deal with this situation we have two policy options. One is that we can keep kicking the can down the road, hoping for a strong rebound in the energy sector, while trying in the interim, alternative measures to reduce the rate at which the foreign exchange reserves are depleting. Economists refer to this as an internal devaluation,' she said.

'But should the energy sector not rebound and economic stagnation or economic decline continue for an extended period, then unfortunately we will be at risk of doing a massive official devaluation which would have severe socio- economic effects,' Deonarine said.

'The second policy option is that we take a pragmatic approach and adopt micro-devaluations within whatever international buffers that we have and in the short term adopt gradual micro adjustments. And we are one of the few countries in the region which is fortunate to have the luxury to do such an adjustment within the comfort zone of a high foreign exchange account.,' she said.

She added that this would give time for the population consumption and production patterns to adjust accordingly. She said this was a proactive policy. She said she did not know if the Minister of Finance was setting the stage for this, but she stressed that she did not want the country to go the Suriname route.

Impact on cost of living

Deonarine said the Government had contended that devaluation has an impact on cost of living. However, she noted some of the measures in the budget would have serious knock-on effects on the standard of living for the lower and middle classes. She cited the property tax, potential increases in public utility rates, liberalised fuel prices, increased taxes on cars and increase in VAT on luxury food.

Deonarine noted that the minister referred to apples and grapes in his budget speech and said she did not think they were luxury items, given the consumption patterns of the country. Noting that the Government was trying to encourage healthy eating due to the high rate of NCDs, she said the Minister of Finance should collaborate with the Minister of Health in determining the luxury lists so as not to have conflicting priorities.

However Deonarine said the country had lost a lot of money in its external accounts in revenues through the decline in exports and the build-up of debt, especially foreign debt coupled with the loss in revenue, meant that the external debt sustainability was threatened.

She said while the minister was comforted by the foreign reserves and she agreed with this to some extent, the US$7.5 billion in foreign reserves, approximately US$2 billion came from disbursements in external lending agencies which were placed in the fund to finance the deficit.

'What I am trying to get at is that we are in a situation where the external debt increased by four percentage points, our current account balance would become in deficit, our overall balance of payment account has consistently been in deficit for some time and we are operating in an extremely tight foreign exchange environment that is expected to further tighten,' Deonarine said.

She said all of the factors were contributing to a 'disequilibrium in the foreign exchange market, such that it requires intervention by the Central Bank currently to supply approximately one-third of the market for hard currency'.