Does the IMF want Trinidad and Tobago to devalue its dollar?

Now, the International Monetary Fund didn’t come right out and say “devalue”… but they kind of did.

According to the IMF’s latest review, Trinidad and Tobago needs to loosen its tight control of the exchange rate because keeping the currency steady is putting pressure on foreign reserves.

We’ve been talking about Trinidad’s forex crisis for the better part of two years now. The country operates what is technically a managed exchange rate system, but in reality, it functions very much like a fixed rate.

Jamaica has a floating system, where supply and demand determine the price. Trinidad’s rate, on the other hand, has been around TT$6.80 to one US, for about twenty years.

The problem? There’s a shortage of US dollars in Trinidad. So what ends up happening is that the Central Bank has to sell US dollars from its reserves to meet demand and keep the rate from sliding.

The IMF’s concern is that defending the rate like this steadily drains reserves and will continue to do so if the underlying issues don’t improve.

The Fund said that if Trinidad wants to hold the line, it would need tighter Government spending and possibly higher interest rates to reduce pressure on the currency and stabilise reserves.

According to the IMF, the country’s reserves could fall to about US$4.6 billion in 2026 if the current trend continues. That’s roughly five months of imports.

Caribbean economist Marla Dukharan has also pointed out that some of the funds counted in Trinidad’s reserves are linked to its sovereign wealth fund.

So the IMF is saying something has to change. Either let the dollar truly float or tighten spending.  But the forex reserves can’t handle much more of the same old same old.

They made a similar recommendation to Jamaica last year, when they said the BOJ should not intervene in the market as much, and instead let the market determine the exchange rate. At that time, we were in the 160/161 to one USD range. Now, we’re back down to the 156/157 range.

And it’s not the first time someone has recommended allowing the TT dollar to devalue. Late last year, we talked about some businesspeople in Trinidad calling for the forex rate to be increased to TT$9. The idea is to restrict demand until the supply can increase.

It’s doubtful that Trinidad’s Government will take this advice. Officials have pushed back on IMF recommendations, saying they don’t want recommendations that they believe would undermine the development agenda. 

And Trinidad’s tide may be about to turn with recent geopolitical events regarding oil.  Oil prices are shooting up because of the war with Iran.  And Trinidad has a new natural gas deal with the US-controlled Venezuela.

So higher oil revenue for Trinidad is coming just in time. 

And that’s the bottom line.