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Economist urges: Fix forex system or face higher prices

Published: 
Friday, June 6, 2014
Economist Dr Ronald Ramkissoon

Economist Dr Ronald Ramkissoon says the Central Bank’s new foreign exchange allocation system is creating problems because it is probably “inadequate in design, in implementation, or in timing, or in a combination of all of the factors”. “A system which combines an auction with a cap will always be difficult to implement and has the potential to create distortions in the market. When this is combined with other simultaneous changes difficulties will arise,” he told the T&T Guardian yesterday. Ramkissoon said while the previous system of allocating foreign exchange was not perfect, its reform may have brought about improvements. 

 

The economist recalled that at the time of the flotation of the TT dollar in 1993 he attended a seminar about the foreign exchange market hosted by the Central Bank and the then Institute of Banking and presented a paper on Exchange Rate Stability in T&T. “The managed float which was introduced in April 1993, has worked reasonably well for this country. There has not been major changes over the years,” he said. “The new system seems to be aimed at introducing greater competition to an imperfect market. This is not easily achieved and demands much skill and consensus building. Further, timing is also critical because of the sensitivity of exchange rate changes in small open economies. This means that even if changes are desired and well intended, the socio-political context cannot be ignored.

What is clear is there is no shortage of foreign currency since T&T has a sizeable foreign reserve position. “The current gaps in distribution translate into additional costs in acquiring foreign currency which, in turn, means that the effective rates of exchange are higher than the announced rates. This can sooner or later be manifested in higher retail prices. “On the external front, foreign suppliers of domestic businesses are becoming increasingly wary of excuses and explanations of our traders. This situation does no good to our business reputation and helps to weaken business confidence. The monetary authorities must move swiftly to remedy the situation.” For weeks members of the business community have been complaining about the problems with supply of foreign exchange. An injection of US$200 million went into the market last week. The situation with foreign exchange is the focus of a breakfast meeting today hosted by the T&T Chamber of Industry and Commerce. Central Bank Governor Jwala Rambarran and Larry Nath, president of the Bankers Association of T&T, will discuss the Central Bank’s policy and its role in supplying foreign exchange to commercial banks, as well as the ways in which the flow of foreign exchange from banks to business can be improved.