A RECENT IMF report suggested the TT dollar is overvalued by 20 per cent, but Minister in the Ministry of Finance Brian Manning on Tuesday told Newsday the Government would not expose citizens to the "deleterious effects" of any devaluation.

Former trade minister Mariano Browne supported the report and suggested any current overvaluation would now have items being imported more cheaply than the country could afford and provide potential undeserved windfalls for currency speculators.

The report this month, after an Article IV consultation, was generally optimistic about TT's economy. It said covid19, low energy production and price shocks had hit TT's economy in 2020, which had shrunk by 7.4 per cent that year and probably a further one per cent in 2021.

Lower energy earnings plus outlays against covid19 had pushed the fiscal deficit to 11.6 per cent in 2020 and 10.1 per cent in 2021. Government debt-to-GDP worsened from 45.4 per cent in 2019 to 65.9 per cent in 2021.

"A strong recovery is projected for 2022," said the report, amid risks. Growth is projected at 5.5 per cent, supported by a recovery in oil and gas production.

The report predicted an improved fiscal deficit of 7.5 per cent, amid a Government debt-to-GDP peaking at 68.8 per cent, but then declining.

However, the report several times commented on the TT dollar exchange rate.

"Directors stressed the importance of modernising foreign-exchange and money-market infrastructure to reduce inefficiencies and imbalances and to support the exchange rate arrangement."

The IMF suggested the TT dollar was overvalued on the basis of imports exceeding its exports.

"The current account balance further deteriorated in 2020 to 0.1 per cent of GDP, reflecting a sharp contraction in energy exports, which exceeded a decline in imports.

"The current account gap is estimated at minus 3.4 per cent, suggesting a currency overvaluation of 11.6 per cent...."

The IMF hinted at floating the TT dollar, saying, "Looking to the future, exchange rate flexibility, if properly utilised, would reduce the need for fiscal tightening to achieve external balance and create room for countercyclical monetary policy."

It also urged the Exim Bank to replace its hybrid exchange-rate system and special-purpose windows by "modernising FX and money market infrastructures."

The IMF expected new energy projects to improve the foreign-exchange supply in the medium term.

The report raised the exchange-rate issue by listing its key recommendations in its 2018 Article IV consultation.

This included, "Recommendations: Allow exchange rate to fluctuate with market forces" and "Status: No progress. The authorities prefer to maintain the status quo on the exchange rate regime."

[caption id="attachment_945145" align="alignnone" width="1024"] US$20 bills. The IMF reports the TT Central Bank's "one-sided" interventions have kept the US dollar stable. - PHOTO BY JEFF K MAYERS[/caption]

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