Mar­i­ano Browne

Com­plaints about the dif­fi­cul­ty of ac­cess­ing for­eign cur­ren­cy (forex) from the T&T com­mer­cial bank­ing sec­tor have been a hot-but­ton top­ic for busi­ness own­ers and the pub­lic for many years. Busi­ness own­ers com­plain that they can’t ac­cess suf­fi­cient forex to buy the goods and ser­vices need­ed to meet cus­tomer de­mand. The pub­lic com­plains that they can­not get cash to meet their trav­el, ed­u­ca­tion and health­care needs. The change in gov­ern­ment has led to re­newed calls to “fix” the prob­lem, in the hope that this ad­min­is­tra­tion will have greater suc­cess than its pre­de­ces­sor.

Be­fore the elec­tions, Stu­art Young and Colm Im­bert held dis­cus­sions with com­mer­cial banks to al­le­vi­ate the sit­u­a­tion. Noth­ing changed, and the scarci­ty per­sist­ed.

Un­doubt­ed­ly, the new Fi­nance Min­is­ter will do the same thing at some point. A new Cen­tral Bank (CBTT) Gov­er­nor has been ap­point­ed.

A ca­reer banker and a for­mer fi­nance min­is­ter, he should bring a fresh per­spec­tive. This will be the first time that some­one with ac­tu­al bank­ing ex­pe­ri­ence will be the gov­er­nor.

Speak­ing to the Guardian Me­dia, he not­ed that the forex is­sue had to be ad­dressed care­ful­ly, con­sid­er­ing the op­tions avail­able “from a mon­e­tary point of view and from a for­eign ex­change point of view to en­sure that we can cre­ate the most val­ue for the econ­o­my from what we have at the mo­ment.” Good luck to Mr Lar­ry Howai.

Im­plic­it in the pub­lic out­cry is the per­cep­tion that there is a dis­tri­b­u­tion prob­lem, mean­ing that the way banks sell forex is “un­fair,” as it ben­e­fits “the priv­i­leged some” at the ex­pense of oth­ers. How do banks get for­eign ex­change, and how is it dis­trib­uted? Who gets the forex? Hence, the call for the pub­li­ca­tion of the largest users of forex.

Like any oth­er com­mod­i­ty, cur­ren­cies are bought and sold. On­ly in­sti­tu­tions li­censed by the CBTT (com­mer­cial banks and cam­bios) can be le­gal in­ter­me­di­aries in for­eign cur­ren­cy in T&T.

A per­son in re­ceipt of forex cur­ren­cy (cash, cheque or oth­er in­stru­ment) can ei­ther de­posit it in­to their ac­count at an au­tho­rised deal­er, or sell it for the TT dol­lar equiv­a­lent at the pre­vail­ing rate.

If de­posit­ed, the bank owes the cus­tomer. The cash is sold to the pub­lic, whilst cheques and oth­er in­stru­ments are sent to a cor­re­spon­dent bank abroad for de­posit to the bank’s ac­count.

The cor­re­spon­dent bank now owes the T&T bank, which in turn owes de­pos­i­tors.

A cor­re­spon­dent bank acts on be­half of an­oth­er bank, typ­i­cal­ly in a dif­fer­ent coun­try or re­gion, to fa­cil­i­tate its in­ter­na­tion­al bank­ing re­quire­ments.

Apart from the cash, all cus­tomer for­eign cur­ren­cy de­posits are held with cor­re­spon­dent banks.

On­ly a small frac­tion is held in cash by lo­cal banks for trans­ac­tion pur­pos­es. In this elec­tron­ic era, trav­ellers’ cheques have been re­placed by deb­it and cred­it cards. Banks hold a lim­it­ed amount of for­eign cur­ren­cy and on­ly sell the pub­lic small amounts of cur­ren­cy.

For­eign cur­ren­cy is earned from ex­ports, div­i­dends from for­eign in­vest­ments, and re­mit­tances, which are ei­ther de­posit­ed in lo­cal com­mer­cial banks or with banks abroad. A de­posit is a li­a­bil­i­ty/debt to the de­pos­i­tor and the com­mer­cial bank will in­vest the de­posit in a liq­uid, in­ter­est-bear­ing in­stru­ment which can be en­cashed to meet any with­draw­al re­quest. Typ­i­cal­ly, funds held with cor­re­spon­dent banks are in­vest­ed in the overnight mon­ey mar­ket or oth­er short-term in­stru­ments. Banks can on­ly sell to the pub­lic the for­eign cur­ren­cy that they own, not the funds de­posit­ed with them.

Every day at the close of busi­ness, banks are meant to have a “matched po­si­tion” in each cur­ren­cy. The pur­pose is to lim­it loss ex­po­sure. In forex mar­kets, ex­change rates change con­stant­ly. Even when mar­kets are closed, there is overnight trad­ing. If a bank has an un­matched po­si­tion, it runs the risk of los­ing mon­ey if it is “over­sold” or “over­bought” in a par­tic­u­lar cur­ren­cy. An “over­sold” po­si­tion means that a bank has sold more of a cur­ren­cy than it holds or has bought. Since it is un­like­ly that a bank will be “matched” in all cur­ren­cies, there are “risk lim­its” for each cur­ren­cy and an over­all risk lim­it.

To be clear, banks should on­ly re­sell the forex “bought” from cus­tomers, not cus­tomers’ forex de­posits. Cus­tomers con­vert/sell forex to meet TT dol­lar oblig­a­tions in TT dol­lars. Hence, Mr Im­bert’s com­ment that en­er­gy sec­tor com­pa­nies do not pay their tax­es in US dol­lars. Cus­tomer forex de­mand is greater than the amount cus­tomers sell to the bank. The CBTT sells ap­prox­i­mate­ly US$100 mil­lion a month from the of­fi­cial re­serves, with US$50 mil­lion to the Ex­im Bank as a mat­ter of gov­ern­ment pol­i­cy, thus re­duc­ing the amount to com­mer­cial banks and the pub­lic.

De­mand is ac­cen­tu­at­ed dur­ing the sum­mer months, as the hol­i­day/trav­el sea­son co­in­cides with busi­ness­es stock­ing for Christ­mas. Si­mul­ta­ne­ous­ly, en­er­gy prices have weak­ened, mean­ing less tax­es, and there­fore, less for­eign cur­ren­cy will be sold to banks. Giv­en the chron­ic short­age, com­mer­cial banks can on­ly sell the for­eign cur­ren­cy they have and will ra­tion it, even to their best cus­tomers. Banks are not de­signed to be in­stru­ments of so­cial pol­i­cy. If sup­ply is short, what mech­a­nism “can cre­ate the most val­ue for the econ­o­my from what we have at the mo­ment?”

Mar­i­ano Browne is the Chief Ex­ec­u­tive Of­fi­cer of The UWI Arthur Lok Jack Glob­al School of Busi­ness.