The exchange rate is the price of domestic currency in terms of foreign currency and is therefore closely linked to monetary policy, which influences financial asset prices and interest rates. For countries like Trinidad and Tobago, with open economies heavily dependent on international trade, it is arguably the most important policy measure, as it underpins every area of economic activity.
Many variables can influence a country's exchange rate. These include the balance of trade (the net trade in visible goods), productivity changes, inflation, interest rates, capital flows and foreign investment, Central Bank policies, and political and economic stability, all of which affect confidence. Exchange rate policy provides a framework for balancing stability and competitiveness, depending on a country's priorities -- whether growth, inflation, employment, external debt, or financial stability. It is also an important signal of investor confidence. If the economic outlook or social conditions are unstable, investors tend to move their savings to safer destinations, weakening the exchange rate.
These objectives (growth, inflation, employment, etc) rarely coincide. It is difficult, if not impossible, to have a fixed exchange rate, free movement of capital, and an independent monetary/interest rate policy simultaneously. A fixed exchange rate may help contain inflation, but it also encourages imports, which deplete reserves and risk financial instability.
Maintaining low interest rates may incentivise savers to move their money abroad in search of higher returns. Therefore, the choice of an exchange rate mechanism should be explained in terms of why one pricing approach -- fixed, floating, or managed float -- fits better with a country's objectives.
At a recent press conference, the Central Bank emphasised that official foreign exchange reserves are declining because demand exceeds supply. For the last decade or more, the CBTT has been covering the shortfall from official reserves. The governor suggested that raising interest rates could improve foreign currency availability by encouraging the repatriation of USD deposits held overseas. He also raised the possibility of selective credit controls.
Both suggestions carry pros and cons. While they could reduce demand, they may also slow economic growth or trigger recessionary conditions. In response, a businessman argued that the TT dollar should be devalued, claiming this would eliminate the black market overnight, boost exports, increase investment inflows, and normalise demand once citizens and businesses could reliably access US dollars through the banking system at the "correct" price (9 TT to 1 USD). But if devaluation occurs, the question remains: fixed rate, floating rate, or managed float?
Economists countered that devaluation would raise the cost of living for lower- and middle-income households and undermine business confidence. Yet this argument overlooks the effect of the foreign exchange black market. Many businesses already price their inventories at the higher black-market rate, which means consumer prices already reflect a weaker exchange rate -- yet inflation has not surged.
The claim that imports are rising because of credit card use also fails to hold up. Imports are not increasing; rather, credit card usage is, suggesting that businesses are using cards -- sometimes others' -- to bypass the banking sector's foreign exchange window.
What commentators also ignore is that the USD itself has been weakening relative to other currencies. Between January and July 2025, the USD depreciated by 10 per cent -- the largest decline in 50 years -- amid doubts over the resilience of the US economy, its trade policies, and fiscal strength. Because the TT dollar is pegged to the USD, it too has declined by 10 per cent relative to other currencies, pushing up the price of goods from non-USD markets. Yet again, this has not had a material impact on inflation.
Although local demand for USD has been contracting for the past decade, supply has fallen even more sharply because the value and volume of exports have declined. This highlights the need to reconsider the foreign exchange pricing mechanism -- specifically, whether a floating rate would better reflect the country's reality than a fixed one. T&T remains heavily dependent on natural gas and its derivatives, with no significant increase in non-energy exports. The ongoing debate about foreign exchange availability is, in fact, a proxy for the failure of the non-energy sector to expand its export capacity.
The real question is: what must be done to change the business model we have relied on for the last 63 years? Waiting for a rebound in natural gas volumes or prices, or for projects such as Dragon, Manatee, or Exxon, or for a regional energy discovery, is simply delaying the reckoning until the next energy shock. Genuine wealth is not found in the Heritage and Stabilisation Fund but in the resilience and ingenuity of our citizens.
The reality is that T&T's real income has declined. The country must balance its budget, live within its foreign exchange earnings, and find new ways to generate revenue. Transformation will take time and requires deliberate policy choices to push the private sector in that direction. Exchange rate policy may be the most important tool in the economic toolbox -- but like any tool, it comes with costs.
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business.