Prospects for the Trinidad and Tobago dollar

Since the introduction of the managed float in April, 1993, the currency has remained relatively stable and most economic indicators have moved in the desired direction

The exchange rate of the Trinidad and Tobago dollar depends very much on the economic and socio-political environments, and also on the expectations people have about the changes in this environment. Some of the factors which influence the rate include inflation, capital inflows, the overall balance of payments, interest rates and the degree of political stability.
It is fair to say that since the introduction of the managed float in April, 1993, the currency has remained relatively stable and most economic indicators have moved in the desired direction.

In 1995, real output of the economy grew for the second consecutive year, the rate of price increases decelerated further to 5.3 percent, the unemployment rate fell for yet another year to average at 17.2 percent and interest rates also declined. However, certain developments towards the end of the 1995 and early in 1996 have contributed to some anxiety, as far as the exchange rate is concerned. On the political front, this anxiety stemmed from the election of a UNC/NAR coalition Government with a slim two-seat majority. As far as the economy is concerned, high liquidity levels fueled rapid growth in imports in 1995. This contributed to a smaller balance of payments surplus and lower foreign exchange reserves than in 1994. Not surprisingly, these events combined to bring a great deal of apprehension to the foreign exchange market, which, in turn, put sustained demand pressure on the rate.

This situation led the Central Bank of Trinidad and Tobago to tighten liquidity and, in the process, raise commercial bank interest rates. If there is one lesson to be learnt from the recent experience, it is that the liberalized economic system is more sensitive to political events than previously thought. The pressure on the exchange rate changes seasonally and this has influenced its price. Since the currency was floated three years ago, it has fluctuated from its familiar rate of TT$5.99/US$1 to between TT$6.09/US$ and TT$5.97/ US$1.00, While some credit for this must go to the Central Bank and the commercial banks for their responsible approach to the issue, it is really the fundamental soundness of the economy which facilitated the stability of the rate. One must not forget that, contrary to what some critics argue, under the new regime, it is the non-banking business community and the general public who will determine how much foreign currency to purchase, how much to sell and therefore, what the long term, sustainable rate would be.

Timely intervention of the Central Bank, without the support of the commercial banks can only be of a temporary nature.
While conditions in the domestic economy are important in influencing the exchange rate, the perfromance of the domestic economy in relation to our major trading partners is the key.

What this suggests is that any analysis of the prospects for the dollar must take the expected performance of our trading partners into consideration.
What is the prognosis for the exchange rate to the end of 1996?
Continued stability
The reason for this prognosis rests on the expected performance of the key economic indicators. In 1996, the economy is expected to grow a third consecutive year, while the rate of inflation is not expected to be much higher than the 5.3 percent achieved in 1995. The unemployment rate should fall further to around 16 percent and interest rates are not expected to climb any higher.

As far as the foreign accounts are concerned, the external debt service in 1996 is projected to be some US$70.0 million less than last year and the foreign exchange reserves should still compare favorably with the US$478.0 million attained last year. Based on recent pronouncements, some US$3.3 billion in foreign direct investments is expected over the next five years. While only a fraction of this will enter the domestic economy directly, there is little doubt that such inflows will play a sizeable role in ensuring, not only the level of capital inflows in coming years, but the level of confidence in the domestic economy as well.

On the political front, some useful lessons have presumably been learnt in the recent past and should serve all concerned in good stead in the period ahead.

Stability in the exchange rate is quite consistent with small depreciations in the nominal exchange rate. Indeed this is expected and necessary for ensuring that our economy, and exports in particular, remain competitive. Both existing and planned activity in the petroleum and petrochemical sectors will also be important in exchange rate stability. This is so, not only for the hard currency inflows, which will be derived via direct investments and taxes, but also from the confidence which such activity will provide. The prospects for these sectors look very good at this time and, consequently, so does the exchange rate.

However, this must not fool us into underestimating the requirements of the task at hand on the political and socio-economic fronts. Neither must it allow us to become complacent. Circumstances are forever changing and it is necessary to have a great deal of effort, courage and sensitivity to turn plans into reality. Are all of us up to the task?

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