Last week’s column presented a flow analysis demonstrating how commercial banks deal with the public’s foreign currency deposits. There were many comments on some chat sites, most of which were “unfriendly”, suggesting that the article was biased towards defending the banking sector. Some had difficulty understanding why customers could not withdraw their foreign currency deposit in foreign cash. Or why a depositor could not transfer (meaning sell) their foreign currency deposit to a third party. Another suggested that commercial banks were always “long”, meaning banks held more forex assets than liabilities, thus reducing the supply available to the market.
The short answer to the first comment is that banks hold minimal foreign cash balances. Central Bank (CBTT) monthly data show that banks’ foreign cash holdings are approximately one per cent of their foreign assets. Further, most forex deposits are made through “instruments”, meaning cheques, bankers’ drafts, or electronic remittances, not cash. Therefore, the banks will never have enough foreign cash to give customers who want “cash in hand”.
In the old days, cash would be supplemented by travellers’ cheques. Now, the presumption is that customers would use their debit or credit cards to access cash at an ATM or pay for their purchases. Currently, only one bank has an internationally accepted debit card.
The Central Bank constantly advertises that purchases or sales of foreign exchange are legal only if done by licensees. There is no local settlement system that allows customers/depositors to transfer domestic forex balances between themselves. To do so, customers must ask a commercial bank to make the transfer.
By law, banks have a monopoly on electronic money transfers except for Western Union. The bank would refuse unless it could be demonstrated that it was a valid commercial transaction. Banks can use discretion with “retail” gifts between customers. One should remember that legal tender in Trinidad and Tobago is the TT dollar, and the banks have the legal right to “discourage” US dollar sales between customers.
Chart 1 details holdings of US dollar assets and liabilities for the commercial banking sector as detailed by the CBTT’s Monthly Asset and Liability Statements. The graph shows that foreign assets and foreign liabilities were virtually identical until 2012, when foreign assets began to outstrip foreign liabilities.
As of December 2024, that difference amounted to USD 730 million. It is not clear what this difference represents. Banks and their subsidiaries have increasingly acted as investment agents for customers.
There is public cognitive dissonance and bias regarding the foreign exchange scarcity. This translates into the “perception” that the forex scarcity is a result of the commercial banks preferring corporate customers at the expense of the average citizens and their “smaller needs”.
The difference between foreign currency liabilities and foreign asset holdings has been interpreted as commercial banks investing funds on their own behalf that could be sold to the public. The CBTT’s Annual Economic Survey 2024 corroborates the increase in bank holdings of short-term debt securities.
The CBTT is the appropriate authority to clear up this perception by identifying the reasons for the change. It is also noteworthy that the compounded growth rate (CAGR) for foreign currency deposits between 2014 and 2023 is almost identical to the broad money supply, 1.9 per cent compared to 1.95 per cent.
CBTT data showing purchases and sales of forex is clear. There is a market shortfall in available foreign currency. The amount of forex sold to the banking sector is less than demanded, and the CBTT’s monthly injection is insufficient to fill the gap. The current scarcity has been compounded by a sharp decline in export receipts/revenue as prices of ammonia, methanol, and urea declined sharply, resulting in a trade deficit.
The 2024 Review of the economy documents this change, noting as follows, “The deterioration in the trade balance during the review period was sparked by a 28.4 per cent contraction in total exports from $54,086.2 million in 2023 to $38,721.2 million in 2024, compounded by a 19.3 per cent expansion in total imports from $33,566.3 million to $40,029.0 million (Appendix 29).”
The CBTT reported that the visible trade position improved in 2024’s fourth quarter, recording a surplus of USD 417.5 million. However, this suggests that 2024’s net position was negative. By now, first-quarter trade data should be publicly accessible. It is not.
More importantly, as Marla Dukharan has ably demonstrated, the CBTT needs to address the persistent outflows related to net errors and omissions, which continue to weigh on liquid foreign-exchange reserves.
Mariano Browne is the Chief Executive Officer of the Arthur Lok Jack Global School of Business.
