No to devaluation

By Raffique Shah
April 15, 2019

Raffique ShahThe continuous cacophony over the state of the national economy is confusing me, as I imagine it confounding the vast majority of the population, including many of those who promote themselves, or who are presented by the media as experts to pontificate on the topic.

If I confused readers with my opening paragraph, rest assured that was not deliberate. It’s just that every Monday morning some Government minister announces that the ailing economy, having been rescued from the intensive care unit from near-death inflicted by his predecessors, suffering foreign-currency-asphyxia, is now stable-to-robust enough to have gone on a training run in preparation for the Miracle Economies Olympiad.

And no sooner has the Miracle Minister exited the studio, the television or radio host summons a phalanx of experts who will refute every indicator of recovery advanced, explain how and why the economy is in fact worsening, and declare that we are on the brink of collapse. They will outline their prescriptions for resuscitation, the most important bitter medicine being a strong dose of devaluation of the T&T dollar from anywhere between eight-to-one US dollar to ten-to-one, which in Sparrow-speak, is unholy murder.

The cacophony turns into a din as politicians weigh in on what they perceive to be the issues, and before you can say “IMF”, another unholy “cuss-out” erupts in the conventional and social media.

The never-ending noise turns off persons who may otherwise be inclined to engage in informed discussion or debate based on facts and reliable data, to inject some sobriety into what can only be described as a bar-room brawl.

In my simplistic way, for example, I would ask advocates of devaluation of the T&T dollar how such measure would improve the country’s foreign exchange earnings or strengthen the economy.

Over the past five years, during which production and prices of energy products declined, the country exported goods valued between a high of US$16.3 billion in 2012 and $8.2 billion in 2016. Energy exports accounted for $13.1 and $6.4 billion respectively, while non-energy exports amounted to $3.1 and $1.7 billion.

Non-energy imports for those years stood at US$6.2B and $5.3 billion. I deliberately excluded energy imports—mostly crude oil that was processed at Petrotrin refinery, which is no longer in operation.

Had the T&T dollar been devalued at eight-to one during that period, basic arithmetic tells me that in 2016, our export earnings will have been T&T $65.6 billion instead of $55.76 based on the official exchange rate of approximately $6.8. But by similar token, the cost of imports, which for us mean almost everything—food, clothing, furniture, appliances, pharmaceutical drugs etc—will have rocketed from T&T $36 billion to $42.4 billion.

Those who favour devaluation tell us that because of the serious shortage of forex, business operators have, for some time, been paying T&T $8 for one US dollar on what seems to be a thriving currency black market. I do not doubt them. The corollary to that, though, must be that consumers have been buying goods based on an eight-to-one rate, plus a mark-up. If we accept this (we have no choice, do we?), then it follows that should the Government devalue to eight-to-one there should be no further price increases.

Does anybody believe that would happen? Sure—and the cow jumped over the moon!

Devaluation (eight-to-one) will effectively mean an across-the-board reduction in purchasing power by approximately 17 per cent. Who will be hardest hit? The usual victims—lower middle-income to no-regular-income earners. These are the most vulnerable in the society, the people you see at groceries (if you still shop in such joints, which are distinct from supermarkets) examining prices of goods closely before deciding to buy, or subtracting some items from their purchases when they reach the cashiers.

The well-off, those who take home more than, say, $20,000-$50,000 per month, have no such problems. They simply pile their trolleys with goodies and pay with plastic in what can be likened to inanimate transactions.

Devaluation will not only punish the poor: it will not stimulate the local manufacturing sector the way its advocates suggest. Bear in mind that but for a few local entrepreneurs, the majority of our manufacturers import more than 50 per cent of their raw materials, hence they will need more forex.

And I don’t see how they will become more competitive when labour will demand increases in wages and salaries.

There are mechanisms and behaviours other than IMF-style austerity impositions that can see us turn around our economy. Before I offer my two-cents suggestions, do the experts and their echoes who promote radical surgery tell their publics that as recently as in 2017, the World Bank listed T&T at 41st among the high-income countries based on per capita gross national income (nominal), based on an average annual income of US$15,340?

Switzerland ($80,560) tops the list of 183 countries that reported their GNI for 2017: another 30-odd did not report. And I should point out that in the Caribbean, The Bahamas (27th) and St Kitts-Nevis (40th) are ahead of us, and Barbados one spot behind.

By themselves, rankings based on GNI, GDP and similar indicators mean little—which underscores a point that needs to be made: those in favour of devaluation justify their calls by quoting from reports and recommendations of the said World Bank and rating agencies such as Fitch and Standard and Poors.

That one such World Bank report places T&T among the wealthiest countries in the world based on a standard indicator, should tell those who clamour for devaluation of the TT dollar that these agencies blow hot and cold at the same time. Barbados has just emerged from an IMF programme, during which it ignored a stipulation that it should devalue its dollar.

Why should we therefore devalue our dollar and hurt our most vulnerable people?

I shall return to address this and associated issues in another column.