Jun 2016 Financial News

T&T's currency substantially overvalued - IMF

Jun 23, 2016

The International Monetary Fund (IMF) says the T&T currency is “substantially overvalued,” even as shortages of foreign exchange continue to plague the local market.

In a news report earlier this week following the completion of its Article IV consultation with the T&T authorities last month, the IMF said:

“Although the currency has been allowed to depreciate modestly against the US dollar, external balance models suggest the currency remains substantially overvalued (although the degree of overvaluation is subject to uncertainty due to historical shortcomings in domestic data).”

An overvalued exchange rate means that a country’s exports will be relatively expensive and imports cheaper, as such a situation tends to discourage domestic production and exports, while promoting spending on imports.

Article IV reports are prepared by IMF staffers and are discussed by the executive board of the institution which makes recommendations on policy actions.

On the issue of T&T’s overvalued currency, the IMF’s executive directors noted that while the immediate policy priority was to focus on maintaining external balance, “addressing foreign exchange shortages on current transactions would be important.”

Importers and other users of foreign exchange have complained for months about being unable to get the US dollars they need or want.

The Central Bank’s policy of restricting the drawdown of the country’s reserves has led to the rationing of foreign exchange by the authorised dealers and long queues.

The IMF’s directors told the T&T authorities that a “well-communicated move to greater exchange rate stability, as part of a comprehensive demand-management package, would help strengthen the foreign exchange market and support the needed macroeconomic environment.”

The statement from the IMF also noted that some directors highlighted the importance of mitigating volatility in the foreign exchange market and recommended a careful adjustment strategy.

The IMF also predicted that T&T’s fiscal deficit in the current fiscal year would be nearly 11 per cent of GDP, which would be the biggest deficit in at least the last 20 years.

The institution blamed lower energy prices and weaker growth for the widening of the fiscal deficit and predicts that the T&T economic output will decline by 2.7 per cent in the 2016 fiscal year which ends in September. This follows the 2.1 per cent decline in the 2015 fiscal year.

Source:
Trinidad Guardian, A5
Thursday June 23, 2016