Decoding T&T's Forex Conundrum: What Consumers Need to Know

Trinidad and Tobago is grappling with a foreign exchange (forex) crisis that's hitting both consumers and businesses. With forex reserves running low, banks are slashing credit card limits for international spending, leaving small businesses struggling and shoppers feeling the squeeze. This crisis is also pushing up the cost of living, which is reflected in the Consumer Price Index (CPI) – a key measure of inflation that tracks changes in prices for everyday goods and services. Experts are calling for more economic diversification, but for now, understanding how the forex crisis affects both the CPI and your wallet is crucial to navigating these tough times.

Forex line graph

The Exchange Rate Pass-Through Effect

Trinidad and Tobago’s economy is heavily reliant on imports—everything from food to fuel to raw materials. This dependence makes the country particularly vulnerable to what’s known as the "pass-through effect," where changes in the forex dynamics have an effect on local prices. Research indicates that inflation in Trinidad and Tobago is particularly sensitive to these fluctuations, with pass-through effects ranging between 60-80% [1,2]. This range may vary by sector such as food, energy and durable goods and may also shift over time. Despite operating under a managed float system with quasi-fixed characteristics, where the currency value remains relatively stable against the US dollar, foreign exchange shortages sometimes disrupt this balance. The limited flexibility of the system leads businesses struggling to source foreign currency through official channels and they often turn to alternative markets, where higher costs can translate into increased prices for imported goods. These added expenses are typically passed on to consumers, contributing to rises in the CPI. Studies suggest that exchange rate changes also influence domestic prices indirectly by raising the cost of imported intermediate goods used in production.

Take this scenario

Normal Conditions:

• A retailer in Trinidad and Tobago imports jeans from the United States at a cost of $50 USD per pair.

• With a stable exchange rate of 1 USD = 6.80 TTD, the cost to the retailer is 340 TTD per pair, excluding shipping, tariffs, and taxes.

• The jeans are sold locally at 500 TTD after adding markups.

CPI and Inflationary Impacts:

Currency Depreciation and Exchange Rate Pass-Through

• Suppose TTD depreciates to 7.20 TTD per USD for the business since it has to buy on the black market, due to forex pressures, increasing the cost of the jeans in local currency to 360 TTD per pair.

• This increased cost impacts the retailer’s pricing. To maintain profitability, the retailer raises the price to 550 TTD.

• The higher price of imported goods directly contributes to an increase in the CPI, particularly in the clothing and apparel category.
  

These scenarios aren’t just hypothetical. During the forex crisis of 2015-2017, when the TTD lost significant value, businesses saw their costs for essential imports like food and fuel shoot up by 10-15%. And guess what? Those higher costs didn’t just stay on the books—they were passed directly to consumers in the form of price hikes on basic goods and services [2,3]. The risk now is that if the forex shortage continues, along with high pass-through effects, inflation could spiral even higher. This could push prices up across the board, making everyday items more expensive and putting serious pressure on the economy. 

In short, the exchange rate’s effect on prices isn’t just a theoretical concept—it’s something that impacts your daily life. Without changes to how the economy manages currency fluctuations, that pressure at the checkout is unlikely to ease anytime soon. When CPI rises, it’s a reflection of this reality. An increase signals that prices across various categories are climbing—a clear indicator of inflation. For Trinidad and Tobago, where imports are a cornerstone of daily life, changes in the CPI often tell the story of an economy struggling with the ripple effects of currency instability.

A Note On Credit Cards

In the past few years, commercial banks in Trinidad and Tobago have found themselves in a tough spot, thanks to a deepening forex shortage. To cope, they’ve been slashing forex limits on credit cards, leaving both consumers and import-heavy small businesses scrambling, with significant ripple effects on the local economy, including the Consumer Price Index (CPI). Starting December 1, 2024, things are about to get even tighter. Credit card holders are facing sharp reductions in their forex limits—some by as much as 66%! [4-6] For those who rely on foreign currency for international purchases, the impact has been huge—especially with the country’s forex reserves under pressure due to fluctuating oil and gas revenues. With fewer dollars to go around, banks are walking a fine line in managing liquidity, which directly affects your purchasing power and access to goods and services dependent on imports.

For instance, forex shortages have fuelled the steady increase of Trinidad and Tobago's CPI, with the latest figures being around 123.9 points. So, what does this mean for you? Well, if you’re planning to travel abroad, shop online, or do business with international suppliers, you could run into problems. The general upward trend reflected in Figure 1.0 seen below, means increases in import costs for retailers, leading to higher prices passed on to consumers [7]. Small businesses are already feeling the pinch, with delays and higher costs for importing goods, pushing them to either reduce inventory or absorb increased costs, both of which can drive up the CPI​. As economist Dr. Vaalmikki Arjoon warns, if the forex demand continues to outpace supply, even tighter restrictions could be coming down the line [5].

Figure 1.0 showing Trinidad and Tobago’s CPI during the period Jan - Nov 2024 and the forecasted CPI for the period Dec 2024 - Sept 2025. [7]

In response to the squeeze, many consumers are getting creative—turning to prepaid cards or even the black market, where forex is available at a much higher price [5]. But that’s not a sustainable fix, and it’s a sign of just how serious this issue is becoming for everyday shoppers and business owners alike. Changes in the Consumer Price Index (CPI) directly influences the cost of living, causing fluctuations in everyday expenses such as groceries, transportation, and utilities.

How Forex Shortages Are Affecting Your Wallet

Trinidad and Tobago's Consumer Price Index (CPI) offers a clear window into the financial situation of its citizens, with transportation costs, food prices, and the overall inflation rate driving the story.

1. Transportation CPI: Your transportation costs are influenced by shifts in global oil prices and local operational challenges, with rising fuel prices affecting everything from taxis to goods delivery. While these changes can have a significant ripple effect, there's no immediate cause for concern about higher commuting costs. According to data from Trading Economics, the transportation CPI remained stable at 126 points between July and September 2024 [8].

2. Food Inflation: The 1.3% year-over-year increase in the food CPI as of September 2024 indicates a moderate rise in food prices [9]. This trend aligns with global patterns of food price inflation observed in recent years. In developing regions, food inflation tends to be higher, often ranging between 5% and 15%, due to greater reliance on imports, currency fluctuations, and supply chain disruptions. A 1.3% increase in Trinidad and Tobago’s food CPI is moderate and compares favorably with global averages, especially in the context of food price inflation in developing economies. It suggests relative stability in food prices, which is beneficial for consumers, especially those in low-income groups. To fully assess its significance, it is crucial to consider household income trends, food supply dynamics, and broader inflation rates. If overall inflation is higher than food CPI, this suggests that food prices are rising more slowly than other costs, which could be advantageous for consumers.

3. Overall Inflation Rate: The overall inflation rate is the sum of these challenges and more, balancing rising transportation and food costs with forex constraints and supply chain hiccups. While inflation remains moderate compared to global spikes, the pressure is mounting. Efforts to stabilize prices, such as boosting local food production and managing foreign exchange, are in play but haven’t fully eased the burden yet [10].

   
   

Transportation, food, and inflation aren’t just statistics—they’re part of everyday life, shaping how people spend, save, and plan for the future. For many people, especially those in the low- and middle-income brackets, this growing gap between income and expenses is unsustainable. If wages aren’t rising fast enough to keep up with inflation, it means your standard of living takes a hit. The more you have to spend just to cover basic needs, the less room you have for anything else.

What’s Next for Trinidad and Tobago’s Forex Market?

The ongoing foreign exchange shortage in Trinidad and Tobago has economists buzzing, each offering their own take on what's causing the squeeze, the impact it’s having, and what needs to be done to fix it. At the heart of the problem is the country’s heavy reliance on the oil and gas sector, which has underperformed, falling short of the government’s projections. A familiar story: when global oil prices drop, so does the country’s forex reserves. But it's not just about oil. Here’s a categorized summary of the economists’ implications for addressing Trinidad and Tobago’s forex shortage:

Key Challenges:

• Delayed energy sector recovery (gas production stabilization by 2027).  

• Difficulty in implementing diversification strategies in the short term.  

• Inflation and consumer/business pressure are likely to persist in the interim.

Economists Proposed Solutions:

1. Structural Economic Reforms

   1. Economic Diversification: 

      1. Dr. Roger Hosein and Dr. Marlene Attzs advocate investment in sectors such as renewable energy, agriculture, and digital services to reduce reliance on oil and gas [11].

      2. Encouraging local production and developing export-driven industries is essential for long-term stability.

      3. The Trinidad and Tobago Manufacturers’ Association (TTMA) supports boosting export-driven sectors to improve forex availability for small businesses [12].  

   2. Special Economic Zones:

      1. Economist Ronald Hinds suggests leveraging Special Economic Zones to attract investment and ease the pressure on forex demand.

         
         

2. Policy and Monetary Adjustments:

   1. Exchange Rate Reforms:

      1. Mariano Browne, former Minister, argues for transitioning to a market-driven exchange rate to better reflect supply and demand dynamics. A floating exchange rate, according to Browne, could reduce artificial demand and the growth of the parallel market [13].  

   2. Forex Market Regulation:

      1. Managing the growing black market and improving Central Bank allocation strategies to reduce supply-demand imbalances (Dr. Dhanraj Sharma) [14].

         
         

Short- Medium term actions for impact mitigation:

1. Promoting Local E-commerce:

   1. Expand local online stores offering TTD payment options. 

   2. Improve logistics and delivery systems to support domestic e-commerce growth.

2. Innovative Financing Options:

   1. Encourage partnerships with banks or fintech companies to develop USD-saving plans or alternative payment systems.

3.  Support for Local Entrepreneurs:

   1. Provide training and support for businesses to navigate forex challenges.

4. Consumer Awareness:

   1. Educate consumers on budgeting, shopping locally, and exploring alternative payment methods.

USD constraints on credit cards limit consumer spending power for online purchases but open the door for local businesses to capture a larger share of the market. At the same time, these restrictions challenge entrepreneurial ventures that depend on international commerce and add to inflationary pressures, calling for action from both the private sector and policymakers. Tackling Trinidad and Tobago's forex crisis will demand resilience, adaptability, and a focus on sustainable, long-term solutions. 

Moving toward a market-driven exchange rate could be part of the answer, but such a shift would need to be managed with care. Gradual implementation, well-designed safety nets, and thoughtful planning are essential to minimize economic shocks and ensure a smooth transition. With the right approach, the challenges of today could lay the groundwork for a more stable and dynamic economy tomorrow.

References

1. Bobb, Ashley, and Lauren Sonnylal. “Assessing the Exchange Rate Pass - Through to Inflation: The Case of Trinidad and Tobago | Central Bank of Trinidad and Tobago.” Accessed November 28, 2024. https://www.central-bank.org.tt/news-centre/latest-news/assessing-exchange-rate-pass-through-inflation-case-trinidad-and-tobago.

2. “Trinidad and Tobago’s Forex Crisis: A Closer Look - Trinidad and Tobago Newsday.” Accessed November 28, 2024. https://newsday.co.tt/2024/01/31/trinidad-and-tobagos-forex-crisis-a-closer-look/.

3. “TRINIDAD AND TOBAGO 2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR TRINIDAD AND TOBAGO.” IMF Country Report No. 16/204. International Monetary Fund, June 2016.

4. Tack, Clint Chan. “Finance Minister Rejects Claims of IMF Forex Caution - Trinidad and Tobago Newsday.” Accessed November 28, 2024. https://newsday.co.tt/2024/11/11/finance-minister-rejects-claims-of-imf-forex-caution/.

5. Grey, Soyini. “More Forex Blues for Citizens, Businesses as RBC Cuts Limit on Credit Cards - CNC3,” November 9, 2024. https://www.cnc3.co.tt/more-forex-blues-for-citizens-businesses-as-rbc-cuts-limit-on-credit-cards/#google_vignette.

6. Tack, Clint Chan. “Now RBC Reduces Forex Limits on Credit Cards.” Trinidad and Tobago Newsday, November 8, 2024. https://newsday.co.tt/2024/11/08/now-rbc-reduces-forex-limits-on-credit-cards/.

7. “Trinidad And Tobago Consumer Price Index Cpi.” Accessed November 28, 2024. https://tradingeconomics.com/trinidad-and-tobago/consumer-price-index-cpi.

8. “Trinidad And Tobago CPI Transportation.” Accessed November 28, 2024. https://tradingeconomics.com/trinidad-and-tobago/cpi-transportation.

9. “Trinidad And Tobago Food Inflation.” Accessed November 28, 2024. https://tradingeconomics.com/trinidad-and-tobago/food-inflation.

10. “Trinidad and Tobago Inflation Rate.” Accessed November 28, 2024. https://tradingeconomics.com/trinidad-and-tobago/inflation-cpi.

11. Perez-Sobers, Andrea. “Forex Shortage Holding Back Economy.” Accessed November 28, 2024. http://www.guardian.co.tt/business/forex-shortage-holding-back-economy-6.2.1882180.9968f8ea4a.

12. Gioannetti, Andrew. “TT Chamber Analyst Wary about Forex Shortage Solutions.” Trinidad and Tobago Newsday, October 3, 2024. https://newsday.co.tt/2024/10/03/tt-chamber-analyst-wary-about-forex-shortage-solutions/.

13. Souza, Janelle De. “Ex-Minister Mariano Browne: Treat Forex like Any Other Commodity.” Trinidad and Tobago Newsday, November 3, 2024. https://newsday.co.tt/2024/11/03/ex-minister-mariano-browne-treat-forex-like-any-other-commodity/.

14. Dhanraj Sharma, The Financial Express (2022).