DEVALUATIONS AND ELECTIONS

In the past few days there has been an increased commentary by persons on both sides of the political divide about whether or not Trinidad & Tobago will devalue it's currency. Right now the official exchange rate is hovering around US$1 equals TT$6.75. However, there is a dearth of availability of US dollars for any reason ... whether legitimate or otherwise ... and the black market rate is now hovering around TT$9 equals US$1.


The authorities from time to time issue stern warnings about black market foreign currency deals, which warnings are cheerfully ignored by the populace as a whole. Indeed, unless you have a contact getting any amount of foreign currency is difficult if not impossible. One mother that I know was the other day desperately trying to get US$2,000 to send to her son who is in university in the States. On the one hand, its not a lot of money, but on the other hand the money is desperately needed by the young man to pay his rent and buy food! She couldn't get the foreign currency in time from the bank so she bought the money on the black market. When the bank finally came through (after about two weeks) she took the money from the bank and promptly resold it on the black market to recoup her loss when she was forced to buy.


Of course, the problem is exacerbated by the local banks who buy the foreign currency at comparatively low rates and resell it at a huge profit! But, at least they are legal! In any case, the (mis)behaviour of the banks is another story. It is suffice to note at this time that they are not at all innocent in this mess and have actually helped to exacerbate the problem with their greedy and predatory way of doing business.


In the meantime the country is bleeding heavily. Our foreign currency reserves are falling at an alarming rate and we now have less than a year of import cover. So? What should we do?


The Government spokesmen (and women) talk about "diversification". Sounds good, eh? But in reality how serious are they? Let me give you an example: Trinidad & Tobago imports tomatoes. Now, I am ashamed to admit that I haven't a clue how much a pound of tomatoes costs ... my wife does all of our groceries! But let's pretend for the sake of example that a pound of tomatoes costs an importer US$1 per pound. Now, if T&T were to devalue (and let's be drastic for the sake again of example) to say US$1 now equals TT$20 it won't take a genius to realize that the importation of tomatoes would no longer be a good business. People just wouldn't be able to afford to buy the imported product. The end result would be that local farmers would finally be able to compete with the international product. In other words, and using this rather over-simplified example, the devaluation would have allowed a certain diversification in a part of the agricultural sector.


It doesn't take a genius to work out that a devaluation would also cause a tidal wave throughout the local economy. For example, motor cars and trucks would all of a sudden become prohibitively expensive.  I'm sure you get my point. A devaluation is a fairly classic device that governments can use to prevent foreign exchange from leaking out.


Which brings me to my next point: devaluations always cause hardships in the society ... especially amongst the poorer classes. Everybody's life becomes more expensive and it becomes harder to make ends meet. It is no wonder, therefore, that most governments try desperately to avoid this step.  But a general election is due by September next year. The Government can borrow enough over the next few months that will allow the standard of living to be held or maintained ... more or less ... for another year, but it's room for maneuver is going to become more and more restricted as time goes by. Put another way, there is nothing on our economic horizon, either in terms of some miraculous bailout (like  a massive oil discovery) or in terms of new economic proposals that remotely look like an end to the economic hurricane that is battering us right now.


An early election would avoid the Government having to devalue the currency ... they could always do it after. But the truth is that a devaluation is beginning to look more and more like the only way out for us. I would love to be wrong on this, but I have a very real fear that if we don't bite this particular bullet soon our delaying "taking in front" will be even worse for us when our reserves finally run out and we are forced to go ignominiously cap in hand (as we did in the late eighties) to the IMF.