The Dollar dilemma: understanding T&T’s Forex challenge

By Dr Marlene Attzs, Economist.

Email: marlene.attzs@gmail.com

As a small and open economy, Trinidad and Tobago conducts much of its trade using the universally accepted United States Dollar (USD). Foreign exchange (Forex), particularly in USD, plays a vital role in our country’s economy, facilitating everything from importing goods like food, clothing, and cars to paying for services like online purchases and coffee from global franchises—you may spend TT dollars for each of these goods but ultimately the supplier of the goods or owner of the franchise needs to be paid in US dollars.

Our Forex earnings have traditionally been tied to the energy sector, which has served as the backbone of the economy. However, over the last decade, declining local energy production and unpredictable global energy markets have significantly reduced the amount of Forex, especially US Dollars, available. At the same time, the demand for Forex has steadily increased, driven by the country’s heavy reliance on imports to meet consumption needs.

A look back: T&T’s exchange rate history

When Trinidad and Tobago gained independence in 1962, the T&T Dollar (TTD) was pegged, or “tied,” to the British pound and later to the USD. During the oil boom of the 1970s, the country earned significant Forex from energy exports, which supported a fixed exchange rate system and allowed us to build healthy Forex reserves.

By the 1980s, a different reality emerged—oil price volatility exposed T&T’s vulnerability to external shocks—what happened in the global oil market affected us and we “suffered through” declining oil revenues.

So sharp and significant was the decline in Forex revenues that the country went into a Forex ‘crisis’, forcing T&T to seek assistance from the International Monetary Fund (IMF) in 1988.

Part of the IMF’s prescription was significant structural adjustments that saw more liberalised trade and a shift towards the country adopting a free market approach to international trade—less protectionism of local industries and greater integration into the global economy.

In 1993, exchange controls were abolished, and the TTD was allowed to float—meaning its value was determined by the supply of and demand for USD in the market. This shift caused the currency to depreciate significantly.

By 1997, the exchange rate had stabilised at approximately TT$6.3 to US$1, and it has hovered around this rate for many years based on the Central Bank of Trinidad and Tobago’s active role in the foreign exchange market.

The Central Bank regularly intervenes to supply foreign exchange to the market, drawing from the country’s reserves. However, relying on reserves to meet continued demand for Forex to meet the consumption of imported goods and services while supply of Forex diminishes is unsustainable. This widening gap between demand and supply highlights the need for long-term solutions.

Why the Forex challenge matters

Our dependence on imported goods and services means that Forex is essential to keep the economy functioning. Practically, everything we consume—from groceries to cars to education from foreign universities to online purchases—requires foreign currency.

Without enough Forex, businesses struggle to pay for imports, and the overall economy suffers. At the same time, T&T’s continued heavy reliance on energy exports makes us highly vulnerable to global market fluctuations.

When energy prices fall, so do our Forex earnings, leaving the country with a shortfall. This mismatch between supply and demand is a persistent issue that we can no longer ignore.

The country is going into a high consumption period—from Christmas to Carnival, we will be consuming a lot of imported goods (and services). Even though some of the Christmas party foods and drinks may be purchased or made locally, many of the inputs will be imported.

The Carnival costumes are all imported, either ready-made or the components imported and stitched together in the mas camps. Think about it, practically EVERYTHING is imported and requires US dollars!

Moving forward: Addressing the challenge

Solving Trinidad and Tobago’s Forex challenge requires bold, holistic and comprehensive action which calls for national effort and adjustment—solving the Forex challenge is everyone’s business.

First, we need to increase efforts at economic diversification, so we reduce reliance on the energy sector. A more diversified economy would provide alternative sources of foreign exchange.

Second, we must attract more foreign investment. We also need to enhance policies that encourage foreign direct investment in non-energy sectors, such as renewable energy, technology, and creative industries—focusing on the ease of doing business can support this.

The mechanisms to allocate Forex must be reviewed to prioritise ESSENTIAL imports and productive exporting industries. I’ve often heard that significant sums of Forex are used to import French fries. Is this the best use of what is an increasingly scarce resource?

Finally, we as consumers need to be aware of how our spending habits contribute to the growing demand for Forex. Consumers should be encouraged to support local goods and services, reducing the reliance on imports and easing the pressure on Forex demand.

The current Forex challenges we face are deeply rooted in our economic structure and history. However, with strategic action, we can build a more resilient system that reduces vulnerability to global shocks and creates a stable environment for growth.

Addressing these issues requires a collective effort from the government, businesses, and consumers. There are no quick fixes and no easy solutions, but a well-executed plan can ensure a stronger, more sustainable economy for future generations.

That’s just my point of view!