Pyramid Scheme, TT dollars bills. TTD devaluation: How it could change life for Trinidadians.

The impact of TTD devaluation with a 10:1 exchange rate

A significant devaluation of the Trinidad and Tobago dollar (TTD) to a 10:1 exchange rate against the United States dollar (USD) would be a transformative economic event, altering life for virtually every citizen. Such policy decision for TTD devaluation, often suggested by some economists as a means of addressing deep-rooted economic challenges, has profound implications.

While proponents emphasise long-term benefits such as increased export competitiveness and foreign exchange stability, critics warn of immediate and widespread hardships for the majority of the population. This article explores both perspectives and provides a detailed thought experiment to illustrate how such a move would impact approximately 80% of Trinidad and Tobago’s citizens.

Economic rationale for TTD devaluation

Economists advocating for devaluation argue that it could resolve several persistent issues in Trinidad and Tobago’s economy:

1. Enhancing export competitiveness

Devaluation would make goods and services priced in TTD cheaper on the global market. For a country heavily reliant on energy exports, this could attract international buyers, increase revenue, and improve the trade balance. Non-energy exports, such as agriculture and manufacturing, might also benefit from improved cost competitiveness.

2. Boosting tourism

A weaker TTD would make Trinidad and Tobago more affordable for foreign tourists, potentially revitalising the tourism industry. Increased visitor numbers could stimulate economic activity in related sectors such as hospitality, transportation, and entertainment.

3. Encouraging local production

The higher cost of imported goods resulting from devaluation might incentivise local businesses to produce alternatives. Over time, this could foster economic self-sufficiency, reduce reliance on imports, and create jobs.

4. Reducing trade deficits

By discouraging imports through higher prices and boosting exports, devaluation could narrow the country’s trade deficit. This would strengthen the balance of payments and improve the nation’s fiscal health.

5. Addressing foreign exchange shortages

Trinidad and Tobago has experienced periodic foreign exchange shortages due to high demand for USD. Devaluation could reduce this demand by making USD more expensive, potentially aligning the official exchange rate with market realities.

While these arguments suggest potential long-term gains, it is critical to examine the immediate and widespread consequences for the majority of the population.

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Implications for the average citizen: A thought experiment

To understand how devaluation would affect the average Trinidadian, consider the following scenario: The TTD is devalued from its current exchange rate (approximately 6.8:1) to 10:1 against the USD. This represents a nearly 50% drop in value. For about 80% of the population—comprising middle and lower-income groups—the effects would be dramatic and far-reaching.

Economic impacts

1. Inflation and cost of living

Imported goods: Trinidad and Tobago imports a significant portion of its food, electronics, and medical supplies. With devaluation, the cost of these items would skyrocket. For example, groceries like flour, rice, and canned goods would become unaffordable for many households.

Fuel prices: Despite being an oil-producing nation, the cost of fuel could rise due to imported components and services. Transportation expenses, including public transportation fares, would increase, impacting daily commuters and businesses reliant on logistics.

2. Erosion of wages

Salaries denominated in TTD would lose purchasing power, especially for workers in sectors that do not directly benefit from increased export competitiveness. Wage stagnation could leave most workers unable to keep up with inflation.

3. Debt and savings

Individuals and businesses with loans in USD or other foreign currencies would face significantly higher repayment costs. Meanwhile, TTD-denominated savings would lose value, eroding financial security for retirees and aspiring homeowners.

4. Business strain

Local businesses reliant on imported inputs—such as retailers and construction firms—would struggle with higher costs, potentially leading to layoffs, reduced operations, or closures. This would exacerbate unemployment and income inequality.

5. Positive effects on exports and tourism

While energy exports might benefit, the gains would likely be unevenly distributed, with the wealthiest sectors reaping most rewards. Similarly, tourism might grow, but its benefits would be concentrated in specific geographic areas and industries, leaving the majority of citizens unaffected.

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Social impacts

1. Income inequality

Devaluation would widen the gap between the wealthy—who often have assets in foreign currencies or diversified portfolios—and the economically vulnerable majority. The middle and lower classes, whose earnings are entirely in TTD, would bear the brunt of rising costs.

2. Social unrest

Frustration over declining living standards could lead to protests, strikes, and political instability. Public pressure on the government to increase wages, expand social programs, or subsidise essential goods might strain already limited public finances.

3. Education and health

Families sending children abroad for higher education would struggle with the rising cost of tuition and living expenses. Similarly, the cost of imported medicines and medical equipment would increase, compromising access to healthcare for low-income families.

4. Cultural and behavioural shifts

As imported goods become less accessible, there might be a renewed emphasis on buying local. While this could strengthen national pride, it might also limit the variety and quality of available products.

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Personal impacts

1. Daily life

Households would face difficult choices, such as cutting back on non-essential spending, eating less expensive (but potentially less nutritious) food, or postponing major purchases like appliances or vehicles.

2. Savings and investments

People might rush to convert their TTD savings into USD or other stable currencies, exacerbating the foreign exchange shortage. Those unable to do so would watch their savings diminish in value.

3. Psychological stress

Anxiety over financial insecurity and rising costs could lead to a mental health crisis for many citizens. The inability to achieve long-term goals, such as home ownership or starting a business, would weigh heavily on individuals.

4. Black market growth

With a significant gap between the official and black market exchange rates, underground currency trading would likely flourish. This could increase crime and further undermine trust in the formal economy.

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Balancing economic theory and practical reality

While the thought experiment demonstrates the severe short-term effects of devaluation on the majority of Trinidadians, proponents of the policy emphasise its potential long-term benefits. These benefits, however, depend on effective implementation and complementary policies:

1. Government intervention

Policymakers must establish robust social safety nets to cushion the impact of rising costs on the most vulnerable. Subsidies on essential goods, targeted cash transfers, and wage adjustments could help mitigate the immediate shock.

2. Investment in local industries

For devaluation to achieve its intended goals, the government must support local businesses through incentives, infrastructure development, and access to affordable financing. Strengthening domestic agriculture and manufacturing would reduce reliance on imports and create jobs.

3. Foreign direct investment (FDI)

Attracting FDI into export-oriented sectors could accelerate economic diversification and growth. This would require transparent governance, investor-friendly policies, and stable political conditions.

4. Public communication

The government must communicate the rationale and expected outcomes of devaluation clearly to the public. Without widespread understanding and buy-in, the policy risks being met with resistance and unrest.

Conclusion

Devaluing the Trinidad and Tobago dollar to a 10:1 exchange rate with the USD could address macroeconomic imbalances, enhance export competitiveness, and attract foreign investment. However, the benefits of such a policy would take years to materialise and would depend heavily on strong governance, strategic planning, and effective mitigation measures.

In the meantime, the immediate consequences for the average citizen—particularly the 80% comprising middle and lower-income households—would be severe, characterised by rising inflation, declining purchasing power, and heightened financial stress.

Given these potential challenges, individuals should consider proactive measures to safeguard their financial stability. One practical approach is to explore remote work opportunities that pay in USD. Platforms like ZipRecruiter provide access to a global job market, enabling Trinidadians to earn foreign currency while working from home. This strategy not only acts as a hedge against possible devaluation but also provides additional income streams that can help families navigate economic uncertainties.

By combining personal resilience strategies, like seeking USD-denominated earnings, with sound national policies, Trinidad and Tobago can better prepare for the economic transformations that devaluation might bring. This balanced approach could ensure that both individuals and the nation are well-positioned for a more sustainable and equitable future.

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