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Solve forex shortage now

Sunday, January 1, 2017

As T&T marks the first day of 2017, one of the most intractable problems facing the current administration is the increasing uncertainty surrounding the availability of foreign exchange.

The unavailability of foreign exchange threatens to deepen the already severe contraction in T&T’s domestic economy, potentially leading to significant retrenchment of the employees of retailers and distributors and a shortfall in the Government’s revenue expectations.

The problem of foreign exchange availability is now so critical that commercial banks are routinely limiting over-the-counter sales of US dollars to US$500 or less, importers are being made to wait for weeks to pay foreign invoices, and one of the country’s largest foreign exchange users has signalled a cutback in imports.

In short, the overarching problem is that demand for foreign exchange far exceeds the supply of it, with T&T’s earnings of US dollars having plummeted in 2016 as a result of the collapse in both the prices and the production of its energy-sector exports. That means the total supply of foreign exchange has been reduced.

On the demand side, the country’s thirst for foreign exchange remains unquenched despite the Government’s attempts to rein in demand by increasing taxes and reducing expenditure.

Under the current foreign exchange allocation system, energy-sector companies that earn foreign exchange sell the US dollars to T&T’s 12 authorized dealers in prescribed percentages. The Central Bank also sets the selling and buying prices of US dollars and provides foreign exchange to dealers, at the margins.

One year ago, the Central Bank decided to limit its supply of foreign exchange to the authorized dealers to about US$150 million a month, totalling US$$1.8 billion for 2016, or 30 per cent less than in 2015.

Up to December 23, 2016, the banking system, which excludes the few non-bank authorized dealers, purchased US$5.9 billion from the Central Bank and the wider public (mostly the energy companies) compared with US$7.5 billion in 2015—21 per cent less than in 2015.

The Central Bank seems to have adopted the position that with less foreign exchange being earned by the country, it will ration the amount it sells to authorized dealers, as it tries to slow down the depletion of T&T’s foreign reserves.

But such a policy posture has consequences.

In previous years, queues for foreign exchange were episodic and seasonal. In 2016, those queues have been transformed into a persistent, seemingly permanent unavailability of foreign exchange, which is damaging the credit ratings of businesses, large and small, because of delays or inability to pay foreign suppliers.

And the system may be imposing hidden costs on consumers as more and more distributors and retailers are forced to seek foreign exchange on the black market at substantially higher prices than the Central Bank rates.

This black market in foreign exchange—which is illegal, but seemingly unpoliced and certainly unprosecuted—may itself be propagating criminality, as those who receive US dollars through drug trafficking, corruption or money laundering are able to sell their ill-gotten gains at huge profits.

The TT-dollar proceeds of this totally dysfunctional system are then being used to purchase large swathes of property and in the construction of fantastic mansions by people who declare poverty-level incomes to the Board of Inland Revenue.

In effect, then, the Central Bank’s current foreign exchange system may, unwittingly it is hoped, be facilitating an extremely lucrative trade among T&T’s underworld elements.

There is also clear evidence that the rationing of foreign exchange by the Central Bank may in fact be contributing to a worsening of the situation.

According to analysis by the International Monetary Fund published in its June 2014 Article IV staff report on T&T, the current system is exacerbating the shortages in the system because “repeated shortages have resulted in incentives to hoard foreign exchange.”

In most other markets, if a commodity is in short supply, the market dictates a higher price such that the reduced supply is brought into equilibrium with reduced demand.

This approach was rejected by Minister of Finance Colm Imbert in the 2017 budget presentation, when he said: “…a free-floating exchange rate carries enormous risks for small, developing countries. These include serious inflationary pressures, the possibility of a wage-price spiral and, as a consequence, adverse income and distribution effects.”

If the minister of Finance has no faith in the market, believing that the consequences of a free-floating exchange rate are too dire, he must come up with a non-market solution that fixes the now chronic problem of the unavailability of foreign exchange.

But dire consequences of inaction require a solution now—not after months of study, consultation, more analysis and more consultation—and that is even before it is taken before Cabinet, which has adopted the speed of molasses being poured uphill.

On balance, it is clear that the current foreign exchange system is dysfunctional and incapable of working.

The longer the current system is maintained, the greater are the risks to the economy through higher levels of unemployment, deeper economic contraction, less investment in productive enterprises, and generating astronomical profits for criminals.