Central Bank Warns of Further Slippage

PORT OF SPAIN (CMC) | The Central Bank of Trinidad and Tobago (CBTT) Thursday warned of a “further slippage” of the foreign exchange situation here noting that the country will need to maintain its monetary policy dynamism to deal with the current as well as future domestic and external financial challenges.

There have been calls from the private sector, economists and financial experts here for Trinidad and Tobago to devalue the local currency in light of the tight foreign exchange situation as well as the drastic decline in revenue from the energy sector, resulting in tight economic problems for the oil-rich twin island republic. But CBTT Governor Dr Alvin Hilaire told a news conference that the country had enough foreign exchange to cover at least nine months of imports.

“In terms of whether it would improve, on the present trajectory it might actually weaken for a while if we have our intervention, “he said, noting with the current state of the oil markets “we could have a further decline in reserves towards the end of this year and especially if we have to increase intervention because of the Christmas Season.

“So I would say in the next few months we would have a further slipping in reserves,” Hilaire said, adding that the “arguments for changing rates and so forth don’t have merit. “Basically any regime could work if you have the rest of the conditions supportive of that.”. Hilaire said the financial institution is joining other central banks across the globe “in pursuing a monetary policy appropriate to country-specific circumstances, while advocating for closer coordination with other macroeconomic policies . . . and avoiding excessive money creation”. He told reporters that determining the pace of adjustment to a large terms of trade shock as Trinidad and Tobago is facing “is not a simple choice between shock therapy and gradualism.

“Key considerations include assessments of whether the shock is temporary or permanent, what is the menu of appropriate policies, how financial markets and the public would react and what is the room available for manoeuvre.” Hilaire said that unlike some earlier periods of energy price declines, Trinidad and Tobago entered this latest episode a few years ago with substantial buffers, including high international reserves by any standard, substantial deposit is in a sovereign wealth fund and meaningful fiscal space due to a relative low level of debt. “These cushions have allowed the adjustment to proceed at a somewhat measured pace. Of course, it also means that the degree of freedom would become progressively smaller over time and this would likely affect the perspective of financial markets.

“Taking everything into account, compared to many other energy exporters, Trinidad and Tobago is still in a relatively strong position, but attention must be taken to engender the necessary reforms in a context of fiscal, structural and monetary policy coordination as early as possible.”

Hilaire told reporters that monetary action in Trinidad and Tobago has had to respond to the economy’s energy-exporting nature and associated growth and inflation cycles. He said apart from direct local spending by energy companies, the main channel through which the energy sector affects the local economy is through government taxes. “This has interesting implications for monetary policy since even in the absence of an overall deficit, government spending in excess of what it receives from domestic taxes could add to inflationary pressures. “The Central Bank therefore has to pay close attention to the financial activities of the government to avoid the possibility of overheating the economy. This is further complicated by the fact that international energy prices are unpredictable and the economy has been subject to the boom-bust cycles over the last half century associated with external price movements”. The Central Bank Governor said that for the most part, spikes in the energy prices from 1973 to 1982 and 1995 to 2013, “have been accompanied by episodes of relatively high growth in Trinidad and Tobago and moderate to high inflation.

“On the flip side, depressed prices led to economic contraction and slower inflation. Another important consideration is the exchange rate regime. The country switched from a fixed exchange rate with controls to a flexible regime with no controls on current or capital account transactions in 1993.” Hilaire said the absence of capital controls meant that monetary policy now had to more directly take into account its impact on capital movements.

“In simple language attempts by the Central Bank to conduct monetary policy could be offset by people moving their money in or out of the country, especially if the exchanged rate is managed,” he told reporters.