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IMF: T&T dollar overvalued by 20.4%

THE real effective exchange rate (REER) of the T&T dollar implies that it is overvalued by 20.4 per cent, according to one of two models used by the International Monetary Fund (IMF) to assess the competitiveness of the domestic currency.

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The real effective exchange rate is a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs.

Writing in the Article IV Consultation staff report, which was released last week, the IMF team that studied the T&T economy said the country’s real effective exchange rate depreciated by 7.2 per cent between March 2020 and June 2021 due to a 3.7 per cent depreciation in the nominal effective exchange rate and a 3.5 per cent decrease in the relative price index.

“Despite this depreciation, the real effective exchange rate remains overvalued with respect to the levels implied by medium-term fundamentals and desirable policies.

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“This is consistent with the observed tightness in the domestic foreign exchange market and the one-sided interventions by the Central Bank of Trinidad and Tobago, which have kept the nominal exchange rate vis-à-vis the US dollar stable.”

In its assessment, the IMF team said one model that used changes in T&T’s current account—which is the difference between the value of exports of goods and services and the value of imports of goods and services—implied a real effective exchange rate overvaluation of 11.6 per cent.

This is consistent with the direction of overvaluation produced by another model using the real effective exchange rate to imply the overvaluation of 20.4 per cent, according to the Article IV report.

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Since the March 2020 to June 2021 period used by the IMF, the prices of T&T’s main exports of natural gas, crude oil, ammonia and methanol have rebounded, which could have a positive impact on the current account.

IMF: T&T dollar overvalued by 20.4%  Trinidad & Tobago Express Newspapers

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