Remove forex restrictions | Local News

The International Monetary Fund (IMF) yesterday called on the Government to remove restrictions on foreign exchange availability for current international transactions, even as the Washington DC-based institution predicted a strong recovery for the domestic economy in 2022.

The IMF comments came in the concluding statement of its 2021 Article IV consultation with Trinidad and Tobago, the first such assessment since August 2018. The Article IV consultation is usually an annual, comprehensive discussion between IMF staffers and representatives of member countries.

Under the rubric Modernising Monetary and Exchange Rate policy, the IMF staffers said: “The mission underscored the need for an appropriate policy mix to support the exchange rate regime and called for the removal of restrictions on current international transactions.

“The authorities are encouraged to modernise foreign exchange and money market infrastructure to reduce inefficiencies and imbalances to support the sustainability of the existing arrangements.

“Looking to the future, greater exchange rate flexibility would reduce the need for fiscal policy adjustments to restore external balance and create room for more counter-cyclical monetary policy.”

Counter-cyclical monetary policy includes reducing interest rates and increasing money supply as the Central Bank did on March 17, 2020 when it cut its key policy interest rate, the repo rate, by 1.50 per cent, while reducing its reserve requirement to 14 per cent from 17 per cent.

The IMF staff went on to say that the mission “encouraged the authorities to remove all restrictions on current international transactions while providing sufficient foreign exchange to meet demand for all current international transactions.”

On the definition of current international transactions, the IMF document titled Annual Report on Exchange Arrangements and Exchange Restrictions 2020 makes clear that these transactions go beyond availability of foreign exchange for trade-related purposes.

“The CBTT also limits sales of its foreign exchange intervention funds to meeting only “trade-related” demand, which do not include non-trade transactions that are, however, current international transactions as defined under Article XXX(d) of the IMF’s Articles of Agreement, and encourages authorised dealers to similarly prioritise sales of foreign exchange obtained from other sources.”

The Central Bank and the Ministry of Finance have maintained restrictions on the availability of foreign exchange for non-trade-related purposes since 2014. The Central Bank sets the rates at which foreign exchange is bought and sold “while not providing enough foreign exchange (ie, through the CBTT ’s foreign exchange interventions) to meet all demand for current transactions at that rate”, according to the 2018 Article IV Consultation staff report.

Covid response

The IMF team said T&T faced unprecedented challenges in 2020/2021, as the combined effects of Covid-19, energy production cuts, and price shocks pushed the economy further into recession, with real GDP contracting by 7.4 per cent in 2020 and estimated to further contract by one per cent in 2021.

“The authorities’ decisive policy response helped contain Covid-19’s spread, protect lives and livelihoods, and pave the way for a strong recovery,” according to the IMF staff.

But the mission warned: “Once the recovery is firmly in place, policy attention should focus on reducing public debt levels and rebuilding fiscal buffers, supported by a credible fiscal framework. The Central Bank should remain vigilant to any build-up of financial vulnerabilities. Structural reforms remain vital to support sustainable and inclusive growth.”

Strong growth next year

The IMF is projecting a strong recovery for the T&T economy in 2022.

“Real GDP growth in 2022 is expected at 5.7 per cent, reinforced by the continued policy support and the anticipated recovery in oil and gas production. Still, output would remain below pre-Covid-19 levels well into the medium term,” the IMF mission to T&T said.

The staffers also predicted that “with demand pressures contained, headline inflation in 2022 is projected at about 2.4 per cent.”

The IMF also expects fiscal deficit (the difference between expenditure and revenue) to narrow in the current financial year to 7.5 per cent, but predicted that public debt will remain high.

“The fiscal deficit is projected to narrow to 7.5 per cent of GDP in FY2022, reflecting a combination of higher revenue mobilisation and modest spending cuts. Over the medium term, the fiscal deficit is projected to gradually narrow and reach balance by FY2027.”

The IMF staffers expect central Government debt to peak at about 69 per cent of GDP in the 2023 fiscal year and gradually decline.