If manufacturers cannot easily access foreign currency to do their business, then this will only fuel speculation and hoarding, says Ramesh Ramdeen, the chief executive officer of the T&T Manufacturers' Association (TTMA).
"If that predictable environment is not there, and the Governor of the Central Bank puts an extra $2 billion in the system, manufacturers are going to hoard. So when the money is there, even if they do not need it, they will soak it up because they want their operations to continue. They cannot run a factory with 300 people and do not have the money," he said at a workshop at Hotel Normandie last Friday.
Ramdeen referred to past remarks by the Central Bank Governor Jwala Rambarran who suggested, in a speech in December last year that some people were using foreign exchange to conduct business with companies with terrorist links. (See box)
Ramdeen said he disagrees with that as it is simply a case of lack of confidence in the market.
"Even if a manufacturer has access to $4 million and does not need it he will take it if he has the opportunity. All this leads to hoarding and speculation."
He said these problems affect manufacturers as they want to operate in an environment that is predictable, that is transparent and when they go to their suppliers they have the money to pay them.
He also said the instruments are not there in T&T to give people incentive to save in TT dollars.
"You put your money in a TT-dollar account and you get zero per cent. So, if there are instruments in the international arena where you convert the US dollars and you get four per cent or five per cent you will convert to US dollars."
He also spoke about the exchange rate system.
"Some people may ask why the government does not print more TT dollars?
"People do not understand how the managed float or floating system operates in T&T. All things being equal, if you have two TT dollars and one US dollar in the system, the exchange rate will be two to one.
"What the Government does is it keeps it within this managed framework of six point something dollars to one US dollar. So if there is too much foreign exchange in the system, they take it out and put it in the Heritage and Stabilisation Fund (HSF) or in the reserves to keep the balance. So if the Government prints willy nilly without earning foreign exchange, it depreciates the dollar," he said.
Ramdeen spoke last Friday at a business performance optimisation workshop hosted by the ICT company Ixanos at the Normandie Hotel, St Ann's.
Hard currency and regional trade
Ramdeen said T&T needs to earn foreign exchange both at the macro level, which is the country level, and also at the micro level, which relates to companies.
"We need to earn foreign exchange to buy goods and services. There is no way to purchase goods and services on the international markets if you do not have foreign exchange. T&T's currency is not recognised as a hard currency internationally. In fact, throughout the region only Guyana might accept some T&T currency, when we negotiate with them to trade in goods, they want part payment in hard currency and part payment in T&T currency," he said.
He said it is time that the countries of the region begin to trade in the local currencies of the region.
"That will facilitate a great amount of goods. An example is Jamaica which consumes our goods and services but they do not want T&T's currency. If they did, it would allow T&T to save on its foreign currency. In Jamaica there is a very important reason why they need foreign exchange and that is to pay their external debt. They cannot pay their external debt in a regional currency and they have to pay that in hard currency. All the International Monetary Fund (IMF) loans they took in the past, Jamaica must now pay for these. The only way for this to be done is in hard currency," he said.
Ramdeen said the Caribbean region has the most "uncommon common market."
"If we had a common market that is supposed to be working the way it is supposed to be working, we are supposed to have a single currency. If we include Haiti in the common market, it means we have 15 countries. We have 15 countries with nine different currencies which include Haiti, the OECS countries, the Bahamas," he said.
He said at the company level, manufacturers need foreign exchange to buy raw materials.
"Manufacturers also need hard currency to pay their debts and you must pay them in order to manufacture. Sometimes 50 per cent or 60 per cent of the input into manufacturing comes from outside this island," he said.
He said the food import bill is about TT$4 billion and not all is consumed locally as part of this food import bill is re-used for other completed food products which are then exported.
"So this foodstuff is used for processing and is then exported. A lot of people do not understand that as they think all of the food imported is consumed here. Over 50 per cent of that comes into the country to be processed and re-exported. Manufacturers need canned products, citrus and other agro-processing goods. Of course, we need foreign exchange for these things."
Ramdeen maintains there is no foreign currency shortage in the banking system.
"If you go to the bank for US dollars they say there is none, but if you buy euros and then you go to change it to US dollars then they change it. So where are they getting the US dollars from? But the consumer is paying a double cost. This is what is happening. There are no shortages in T&T but the problem is in accessing it. The system needs to be revamped."
He said the TTMA wants the Government to create a facility–maybe using the Exim Bank–that will allow manufacturers to pay their suppliers.
"They can bring their invoices and present them to the Exim Bank and the Exim Bank will release the funds accordingly. Outside of the oil and gas sector in T&T the manufacturing sector contributes to the earning capacity of foreign exchange in T&T," he said.
Innovation and industrialisation
Dr Rikhi Permanand, executive director, Council for Competitiveness and Innovation at the Ministry of Planning, who also spoke at the workshop, said for companies seeking external markets they need to look at the benefits and drawbacks of globalisation.
He said during the early 1990s there were signs that globalisation and market-based economies were successful as Singapore and the Asian economies were all growing, and in Latin America Brazil and Mexico had become industrialised.
However, by the late 1990s problems arose as Japan's economy went into deflation, by the early 2000s, Argentina's economy had exploded and the US after the 2001 terrorist attacks went into decline.
In 2015, he said economic problems continue with Russia's invasion of Ukraine, slowing growth in China and Brazil's collapse.
He said innovation now is important in developing a competitive economy.
"Firms' competitiveness is the ability to provide goods and services more effectively and efficiently than the competitors and, at the same time, to generate returns on investments. Measurements of competitiveness at the firm level include profitability, cost, quality, productivity, export sales and market share. National competitiveness is the ability of the nation's firms to sell goods and services to meet the quality standards of local and world markets at prices that are competitive and provide returns on the resources employed to produce them."
He said the trend among Western nations is to return to manufacturing as a pillar of the economy rather that rely on the services sector.
"It creates skilled jobs and generates revenue for national treasuries."
He said for T&T manufacturers the "critical issues" include labour and materials and these must be addressed to allow the sector to grow.
"But we have to innovate our way around this. The manufacturing sector of T&T is an important one and contributes 10 percent to GDP, but it must become an even larger perhaps even doubling its contribution to GDP in the next five to ten years," he said.
On December 1, 2014, Central Bank Governor Jwala Rambarran made a comprehensive presentation on the foreign exchange situation at the third Monetary Policy Forum, which was hosted by the Chaguanas Chamber of Commerce, an excerpt of which is carried here.
I would now like to turn to another murky matter that has grabbed headlines for most of the year�foreign exchange, but not just foreign exchange, everyone's needs for precious US currency being unfulfilled, from the vacationer wanting US$500, to you, the business community being unable to pay for goods, and seeing your credit standing being affected. Foreign exchange has been turned into a murky matter by some with agendas and others who pretend to be ignorant about how our system works.
I'm sure when the business reporters write the 2014 year in review, they will probably say the so called, "foreign exchange shortage" is the business story of the year and perhaps it is; but there are always three sides to a story...yours, mine and the truth... and may be after a year and more, some of you will see the truth today.
Let's start at the beginning. As banker to the Government, we receive the country's revenue from the energy sector through the taxes energy companies are required to pay every quarter in US dollars. That money forms most of the country's "Official Reserves." Central Bank invests the reserves and we use the interest income we make from those investments to fund the operations of the bank itself. Central Bank is not funded by the taxpayer, and we do not receive funding from the Government. In fact, it is the other way around. At the end of the fiscal year, we send our surplus to the Government.
We also use the reserves to service government's external debt payments and to sell foreign exchange to the banking system to meet shortfalls in supply. Through our sales of US to the financial system, we foster orderly conditions in the foreign exchange market, thereby maintaining exchange rate stability.
As you are well aware, demand for foreign exchange from the business community and the public is perennially high, but supplies come to the market at discrete intervals, usually when energy sector companies convert foreign exchange with the banking system to pay local bills.
So foreign exchange supplies to the country come in two ways:
�2 Directly to the Central Bank when energy companies pay their quarterly taxes in US dollars and;
�2 When energy companies convert US dollars through the banking system year-round to meet local commitments.
However, demand is always higher than supply and these gaps result in shortfalls in the system. It is at these points when Central Bank steps into meet the shortfalls by selling foreign exchange from our stock of official reserves.
Therefore, Central Bank only enters the system to meet shortfalls in foreign exchange supply, not to provide the entire supply to the financial system. Right now, we account for just over 25 per cent of the total foreign exchange supply while the money that comes directly from the energy companies account for the rest.
What then, based on this structure, has created all the noise in the past year?
There was a time when shortfalls would occur seasonally, close to Christmas and the hectic August travel period. Over the last two decades, demand for foreign exchange not only expanded but its composition has also changed to reflect new patterns of consumer spending, for example, use of credit cards for making online payments. Today it's now known as "Cyber-Monday" in the United States and many locals will flood US retailers' Web sites from the comfort and warmth of their homes in T&T thanks to the Internet, credit cards and US delivery addresses.
Foreign credit card purchases devoured US$570 million for the year so far. That excludes today's Cyber-Monday sales and upcoming Christmas purchases. Last year, foreign credit card payments consumed US$530 million. That is more than US$1 billion spent foreign credit card purchases in just two years. Commercial banks must meet these credit card payments before they meet any other foreign exchange demand. That's one source of demand, then there's that double-digit growth in sales of new cars, many of which are higher-end luxury vehicles. For the year so far, we've spent US$205 million on purchases of new cars; last year that figure was US$340 million. That is nearly US$750 million on purchases of new cars in two years.
Foreign currency deposits are another source of foreign exchange demand. Currently, we have US$3.3 billion in foreign currency deposits in the banking system.
Here's where it gets interesting, and the foreign exchange story gets a bit murkier. There are many business leaders who often give their opinions freely on foreign exchange, many go the media and have been extremely vocal on the matter.
Many businesses have legitimate requests for foreign exchange and we acknowledge your requests are not always met on time, and it is for this reason Central Bank has taken US$1.7 billion from our reserves for the year so far to help meet your unsatisfied demand.
However, we've noticed a trend, where businesses make noise for foreign exchange to pay bills for trade-related purposes and actively lobby the authorized dealers and Central Bank for US dollars. When the money is provided, the funds are promptly deposited in their foreign currency account and left unused and the noise about not being able to get money for business continues. I do have one tip for businesses trying to get foreign exchange; it helps if you don't conduct business with companies with terrorist links as we have strict laws on anti-money laundering and combatting the financing of terrorism.
As I indicated before, Central Bank steps into the market to meet the shortfall in foreign exchange supply and that presently accounts for just over 25 per cent of total supply. So why can't we supply 50 per cent or 80 per cent, or even all? Why must we ensure that we have enough official reserves put aside?
Well, let me ask you this: what if the global financial crisis goes on for another five years? What if the Fed raises interest rates faster and more than expected next year and causes tremendous volatility in global currency, stock and bond markets? What if the Ebola virus spreads to the Caribbean region?
When we factor in the chance of these external events happening, we have to ensure we have enough official reserves as insurance just in case something does happen.
The plan is to ensure we don't deplete these reserves, as we once did in the late 1980s, because it took us 30 years to finally reach to today's US$11 billion.
And yes, this US$11 billion includes US$1.175 billion from proceeds from the sale of MHTL.
In benchmarking, we have just over one year's worth of official reserves. This means if I took all the official reserves and gave it to the business community, you would actually be able to buy everything you need for a year. Is that enough?