Friday 27 November, 2020

Central Bank: Devaluation alone won’t fix economic challenges

An appropriate combination of fiscal, monetary and structural policy is what’s required to maintain stability when it comes to Trinidad and Tobago’s macroeconomic challenges.

That was the response from Central Bank Governor Dr Alvin Hilaire when asked about the feasibility of the devaluation of the TT dollar on Thursday.

Finance Minister Colm Imbert said on Monday that devaluing the country’s dollar at a time when less foreign exchange is coming in would serve no useful purpose.

The Central Bank Governor during a virtual event on Thursday to discuss T&T’s current financial stability issues said a devaluation of our dollar shouldn’t be seen as the only solution.

Solutions to the country’s macroeconomic imbalance, he said, should make doing business more flexible and allow them to manage on foreign markets.

Hilaire said: “It is no secret that there is an imbalance in the foreign exchange market. It has been due in part to the collapse in energy prices; we had some production difficulties – COVID-19 didn’t help.

We believe that what is really important for stability in each area and balance is an overall macroeconomic solution.”

“An appropriate combination of fiscal monetary and structural policy, in particular, structural meaning getting the way of doing business more agile, getting flexibility in different markets to be able to take advantage of different scenarios.”

Pointing to a study by the International Monetary Fund (IMF) looking at the pre-COVID experience of Latin America and Caribbean countries, the Central Bank Governor said if the depreciation was step enough a balance of payments would be achieved.

He said this may sound good but the study also found that countries that didn’t have flexibility in their operations could only achieve the intended balance through import compression.

He stressed that there must be complementary policies to allow flexibility within the economy for devaluation to work as without it, there could be temporary change and an “adverse scenario”.

“So, I think we have to look at different aspects of how a depreciation may work. In the Central Bank’s view, it’s not so important the exchange rate regime, but the complementary policies.”

Hilaire underscored that the Central Bank is ultimately prepared to operate within different regimes but the more important factor is ensuring complementary policies to ensure “durable” solutions.

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