For­mer fi­nance min­is­ter sug­gests “dol­lar swap” with the US

Econ­o­mist says coun­try at risk of cri­sis by 2022

For­eign ex­change woes symp­tom of weak en­er­gy sec­tor

T&T should do a “dol­lar swap” with the Unit­ed States to ad­dress our on­go­ing for­eign ex­change woes, for­mer fi­nance min­is­ter Prof Win­ston Dook­er­an has sug­gest­ed.

Dook­er­an said the coun­try needs to “take a diplo­mat­ic ini­tia­tive to ap­ply for a cur­ren­cy swap un­der the For­eign and In­ter­na­tion­al Mon­e­tary Au­thor­i­ties (FI­MA re­po fa­cil­i­ty) arrange­ment with the Fed­er­al Re­serve Bank” if we are to in­crease the ca­pac­i­ty for net in­flow of for­eign ex­change and cap­i­tal.

“Be­cause bank fund­ing mar­kets are glob­al and have at times bro­ken down, dis­rupt­ing the pro­vi­sion of cred­it to house­holds and busi­ness­es in the Unit­ed States and oth­er coun­tries, the Fed­er­al Re­serve has en­tered in­to agree­ments to es­tab­lish cen­tral bank liq­uid­i­ty swap lines with a num­ber of for­eign cen­tral banks,” the Fed­er­al Re­serve stat­ed.

The Fed­er­al Re­serve said swap lines were de­signed to im­prove “liq­uid­i­ty con­di­tions in dol­lar fund­ing mar­kets in the US and abroad by pro­vid­ing for­eign cen­tral banks with the ca­pac­i­ty to de­liv­er US dol­lar fund­ing to in­sti­tu­tions in their ju­ris­dic­tions dur­ing times of mar­ket stress.”

These arrange­ments have helped to ease strains in fi­nan­cial mar­kets and mit­i­gate their ef­fects on eco­nom­ic con­di­tions, the Fed­er­al re­serve stat­ed.

“The swap lines sup­port fi­nan­cial sta­bil­i­ty and serve as a pru­dent liq­uid­i­ty back­stop,” the Fed­er­al Re­serve added.

But how does it work?

The Fed­er­al Re­serve pro­vides US dol­lars to a for­eign Cen­tral Bank.

At the same time, the for­eign cen­tral bank pro­vides the equiv­a­lent amount of funds in its cur­ren­cy to the Fed­er­al Re­serve, based on the mar­ket ex­change rate at the time of the trans­ac­tion.

The par­ties agree to swap back these quan­ti­ties of their two cur­ren­cies at a spec­i­fied date in the fu­ture us­ing the same ex­change rate as in the first trans­ac­tion.

Be­cause the terms of this sec­ond trans­ac­tion are set in ad­vance, fluc­tu­a­tions in ex­change rates dur­ing the in­ter­im do not al­ter the even­tu­al pay­ments.

Ac­cord­ing­ly, these swap op­er­a­tions car­ry no ex­change rate or oth­er mar­ket risks.

The Fed­er­al Re­serve stat­ed that help­ing to sta­bilise for­eign dol­lar mar­kets, these swap lines al­so play a role in sup­port­ing for­eign eco­nom­ic con­di­tions, which al­so pos­i­tive­ly ben­e­fit the US econ­o­my through many chan­nels, in­clud­ing con­fi­dence and trade.

The Fed­er­al Re­serve op­er­ates these swap lines un­der the au­thor­i­ty of Sec­tion 14 of the Fed­er­al Re­serve Act and in com­pli­ance with au­tho­ri­sa­tions, poli­cies, and pro­ce­dures es­tab­lished by the Fed­er­al Open Mar­ket Com­mit­tee (FOMC).

Since 1994, the Fed­er­al Re­serve has had bi­lat­er­al cur­ren­cy swap agree­ments with Cana­da, Mex­i­co, es­tab­lished un­der the North Amer­i­can Frame­work Agree­ment (NAFA).

In De­cem­ber 2007 this was ex­pand­ed and dol­lar liq­uid­i­ty swap lines were es­tab­lished to pro­vide liq­uid­i­ty in US dol­lars to over­seas mar­kets.

Last March the Fed­er­al Re­serve an­nounced the es­tab­lish­ment of tem­po­rary US dol­lar liq­uid­i­ty arrange­ments with var­i­ous cen­tral banks around the world in­clud­ing Aus­tralia, Brazil, and Sin­ga­pore.

“These fa­cil­i­ties, like those al­ready es­tab­lished be­tween the Fed­er­al Re­serve and oth­er cen­tral banks, are de­signed to help lessen strains in glob­al US dol­lar fund­ing mar­kets, there­by mit­i­gat­ing the ef­fects of these strains on the sup­ply of cred­it to house­holds and busi­ness­es, both do­mes­ti­cal­ly and abroad,” the Fed­er­al Re­serve stat­ed.

These fa­cil­i­ties were pro­vid­ed up to US$60 bil­lion.

Econ­o­mist Mar­la Dukha­ran said T&T is at risk of a de­fault/ bal­ance of pay­ments cri­sis by the end of 2022.

“Al­ready, T&T is one of the most dif­fi­cult places in the Caribbean to source USD. A bal­ance of pay­ments cri­sis oc­curs when a coun­try does not have enough for­eign cur­ren­cy to meet its for­eign cur­ren­cy de­nom­i­nat­ed oblig­a­tions, ei­ther debt or oth­er­wise,” she stat­ed.

“Our de­clin­ing FX re­serves (and Her­itage and Sta­bil­i­sa­tion Fund) in the con­text of ris­ing debt and per­sis­tent weak­ness in our ex­ports, sug­gest that at some point we will run out of for­eign cur­ren­cy, if noth­ing is done,” she said.

Dukha­ran said the cause of the coun­try’s for­eign ex­change prob­lem is not the pan­dem­ic or any ex­ter­nal fac­tor but rather as a re­sult of poor pol­i­cy-mak­ing by this Gov­ern­ment and the one be­fore.

Dukha­ran said de­val­u­a­tion is but one pol­i­cy op­tion, but by it­self will achieve noth­ing pos­i­tive.

“We need to bal­ance the fis­cal ac­counts, re­struc­ture debt to elim­i­nate the pri­ma­ry deficit, ad­dress deep and long-stand­ing ease of do­ing busi­ness con­straints, and on­ly then will ad­dress­ing the over­val­ued TTD make any sense,” she said.

“And a one-off de­val­u­a­tion is not the an­swer in my view. A re­turn to the auc­tion sys­tem even to­day, would be­gin to put things on a more sus­tain­able path, and this is what I would rec­om­mend. This mech­a­nism worked well un­til it was dis­man­tled by the pre­vi­ous Cen­tral Bank Gov­er­nor, and main­tained by this ad­min­is­tra­tion, even though the cur­rent min­is­ter of fi­nance promised to rein­tro­duce it in his first bud­get speech in 2015,” she stat­ed.

But how did this coun­try’s for­eign ex­change prob­lems start in the first place?

“That forex prob­lem we are ex­pe­ri­enc­ing is di­rect­ly rat­ed to the health of the en­er­gy sec­tor,” for­mer en­er­gy min­is­ter Kevin Ram­nar­ine sat­ed.

“Our com­mer­cial banks get for­eign ex­change from two sources, the first source is the Cen­tral Bank, the Cen­tral Bank in­jects for­eign ex­change in­to the com­mer­cial bank­ing sec­tor and the sec­ond source would be when the en­er­gy com­pa­nies sell for­eign ex­change to the bank,” he said.

En­er­gy com­pa­nies sell the for­eign ex­change to get TT dol­lars to run their op­er­a­tions in the coun­try.

Ram­nar­ine said both flows have been re­duced.

“The rea­son for that is there is less ac­tiv­i­ty in the en­er­gy sec­tor, there is less drilling tak­ing place, drilling is down by a fac­tor of al­most five com­pared to six years ago, there is less turn­around ac­tiv­i­ty tak­ing place in the Point Lisas In­dus­tri­al Es­tate which al­so dri­ves ac­tiv­i­ty lev­els in the en­er­gy sec­tor,” he said.

Ram­nar­ine said 75 per cent of the hold­ers of the VAT bonds is­sued last year were en­er­gy com­pa­nies so when they sold those bods they re­ceived TT dol­lars so there was less need for them to ap­proach the banks for lo­cal cur­ren­cy.

Dukha­ran said our for­eign ex­change re­serves have been steadi­ly de­clin­ing since De­cem­ber 2014, when it had reached an all-time high of US$11.5 bil­lion or 13 months of im­port cov­er.

“The lev­el of FX re­serves now stands around US$7.2 bil­lion, re­turn­ing to the lev­el of Feb­ru­ary/March 2008, fol­low­ing an uptick from the June 2020 US$500 mil­lion bond is­sue. This US$7.2 bil­lion lev­el rep­re­sents a de­cline of 37 per cent from the all-time high in De­cem­ber 2014,” Dukha­ran stat­ed.

“If we back out the im­pact of US$500 mil­lion in debt is­sued in June 2020, and look at what has been earned or­gan­i­cal­ly by our econ­o­my, we can see that we have been los­ing on av­er­age over US$70 mil­lion per month for over five years. This is not a sus­tain­able sit­u­a­tion, and it will end in de­fault / bal­ance of pay­ments cri­sis if main­tained,” she stat­ed.