Dr Marlene Attzs. -
ECONOMIST Dr Marlene Attzs said a managed floating exchange is not without risks and she preferred to first give the EximBank window a chance to operate as a short-term measure, while awaiting a structural approach to the foreign exchange (forex) crunch over the long-term.
Attzs spoke to Newsday on November 14 on whether Trinidad and Tobago's successful use of a managed flotation of the TT dollar in 1993 has any lessons now for the country's current forex shortage/predicament.
Recently former Central Bank governor Euric Bobb and former finance minister Wendell Mottley publicly called for the managed flotation of the TT dollar, which they had overseen in 1993.
Attzs explained the concept of a managed float, as compared to the current situation of the TT dollar being pegged/fixed to the US dollar.
"The managed float means you are going to allow the forces of demand and supply to operate and let the exchange rate float according to demand and supply, but you are not going to leave it as a freely floating exchange rate. It is going to be managed within a particular band.
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"So the Central Bank is going to take greater responsibility, to ensure that the rate does not depreciate beyond that band."
She said the Central Bank will have to become more actively involved in exchange rate policy and in determining what is an appropriate band within which the exchange rate would appreciate and depreciate.
"The Central Bank is going to be putting money into the system and managing the exchange rate within a pre-determined band.
"Where we are now with the excess demand, if we were to float the currency – a free floating currency – we could find our exchange rate going to like ten to one, because the demand is so significant. Under the managed float that will not happen. The Central Bank will take greater administrative responsibility to control the rates within a particular band."
Attzs said such a move would test the Central Bank's administrative capacity, in having to monitor the system on almost a daily basis and also draw down on TT's foreign reserves to put into the system as required to maintain the rate within the band for a managed float.
She said a managed float would not be risk-free.
"There is still going to be some impact on prices. You will see price fluctuations. If I buy currency today, I may pay a different amount tomorrow and the day after that, as the case may be.
"So there might still be some fluctuation, but it is intended to be so gradual a change that I can adjust and adapt."
She likened it to the experience in some countries of daily fluctuations in gasoline prices paid at the pump.
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"The challenge is that it is not a zero inflationary risk. You will still have some inflationary pressures, depending on the rate at which you buy forex within that managed float.
"Prices will go up, but it is not going to be as drastic a change or depreciation as if you had just allowed the rate to free float."
Asked if TT's economists have a consensus in favour of a managed float now, she related the support expressed by Bobb and Mottley, but added her own views.
"My only caution to add to that is that the dynamics have changed now. We have a significantly greater propensity to consume imported goods and services, so I think we have a greater demand for forex.
"I don't know the extent to which a managed float will allow us to achieve the kind of outcome to have the kind of impact to satisfy the demand that we have for forex. Our challenge still remains that we have a declining (forex) supply, from the energy sector. It remains to be seen.
"But I would prefer, certainly from my perspective, the revised Exim arrangement, that window, that the Minister of Finance (Colm Imbert) announced recently.
"I think we need to give that a chance to operate and see what success, and then we revisit the conversation around forex."
Imbert recently reopened the window, to the tune of a reduced sum of US$25 million per month in forex available to businesses (compared to US$30 million previously.)
Attzs said from Christmas until Carnival TT will experience "an extraordinarily high demand" for forex for things like parties, goodies and costumes.
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She signalled another concern, namely potential forex profiteering.
"I don't want us to fuel a speculative demand for foreign exchange where people just start to buy up forex and hold it and hold it and that just kind of fuels the problem.
"You also have a situation where even under the managed float when the rate depreciates, who is going to be able to buy it? The big businesses. So the SMEs might not even be in a position to benefit from that, because they don't have the kind of money floating around that big businesses have.
"So you may find inadvertently that our SMEs, who need the support, might find themselves crowded out of the situation or formal arrangement with the managed float and might simply have to continue going to the black market to buy their foreign exchange." She said the managed float could be a panacea in the short term.
"But I think we need to be very cautious in how we approach this, because what you don't want is for speculation to drive the exchange rate up and then average citizens find themselves facing higher and higher prices in the supermarket. So to me it is a very sensitive conversation."
Attzs said whatever decision is taken on this, a managed float remains just a short-term panacea, but otherwise the country must address its longer-term structural challenges towards achieving a more sustainable approach to managing TT's forex situation.
She concluded, "I don't think we can rush into any kind of solution. I think it has to be very carefully calibrated.
"You don't want to crowd out the SME sector, because they are the ones who are going to suffer the most, and you don't want to crowd out people who are on fixed incomes who simply can't afford to face higher prices."
