The business sector is complaining of a shortage of foreign exchange (FE) in the market while the Central Bank Governor says that the Central Bank is selling its normal 25 per cent of demand to the banking sector.
However, the Governor recognises that the market demand for FE has been increasing and though the flow from the energy sector into the market may not be smooth, FE should be available (assuming no market anomaly) and businessmen should shop around. Together with this the Central Bank can modulate its input within limits to help smooth the supply.
The problem is a bit more complex. Normally in the production of a good, as the demand for it increases the economic system also moves to increase supply–hence the typical supply-demand-price curves for goods. However, no such set of curves exists for the supply and demand of FE–these are virtually delinked in our system.
What exists is a mechanism that can match the demand to the existing supply. The basic instrument is the exchange rate, ie when the demand outstrips the supply the TT$ can be devalued making the US$ more expensive in the local market, so tempering the demand for FE.
The new auction system for the sale of FE by the Central Bank can also influence the exchange rate. Since the Central Bank is not keen on any major devaluation of the TT$, it could try instead to encourage the adjustment of the local bank interest rates via the Repo–increasing the cost of the TT$ credit–in order to lower this demand. Unfortunately the Repo is only effective if the liquidity in the local market is tight, which is definitely not the case now.
One option being called for by the business sector is that with our foreign reserves equal to one year's imports the Central Bank can input on a steady basis more FE into the market. This is not a good idea since these reserves have been stagnant over the past few years as to the number of months of imports they can cover; meaning that the Central Bank is at its limit as to the steady state input into the market.
Another option that exists is for the Central Bank to accept that a devaluation is necessary and use its reserves to manage this devaluation so that it does not occur abruptly. Reduction in liquidity via OMOs etc, and an increase in the Repo is another option.
It is interesting to note that the businessmen who are complaining about FE shortages seem to think that such FE should exist by right–without considering that it is the responsibility of some of them to earn FE as part of their business endeavours particularly in the present circumstances of depleting energy resources.
On-shore economic diversification into global exports is long overdue; even the World Bank in one of its recent reports underscores this need in the light of the current circumstances in the petroleum driven plantation.
Mary K King