More US$ to meet demand
with the sizable intervention we have made we have cleared all the accumulated demand
By By CARLA BRIDGLAL
Story Created: Jun 3, 2014 at 8:33 PM ECT
Story Updated: Jun 3, 2014 at 8:41 PM ECT
With the sizable intervention we have made we have cleared all of
the accumulated demand and put more in to clear the demand going forward. We have put enough into the system to clear out all of the demand for the period ahead.
Twenty-one years after it last made a major change to the regulation of the domestic foreign exchange market, the Central Bank in April implemented a new regime that, technically, is intended to ease the tightness in the system.
“With growing tightness in the domestic foreign exchange market since the start of the year, the Central Bank reviewed its twenty-year-old arrangement for distributing foreign exchange to the financial system. Two fundamental changes were made, effective at the start of April 2014. First, we included all 12 licensed authorised dealers in the distribution system, providing everyone with greater access to more evenly distributed supply. Previously, only eight authorised dealers were part of the arrangement. Second, we made more use of the auction system so that supply of foreign exchange could go to where demand was greatest, based on price,” Central Bank Governor Jwala Rambarran said last Tuesday in his address at a Monetary Policy Forum in Tobago.
This new system, coupled with the US$610 million the Bank has pumped into the financial system for the first five months of the year will, Rambarran said confidently, end the recent tightness in the market.
“With the sizable intervention we have made we have cleared all of the accumulated demand and put more in to clear the demand going forward. We have put enough into the system to clear out all of the demand for the period ahead. June is usually a very liquid month for foreign exchange. And we’ve changed how we sell in that we will be making more timely interventions than before-even before tightness in the market, we will be coming in,” he said.
Rambarran acknowledged there were the usual teething problems after the new system was implemented, as people started getting accustomed to the change, but after nearly two months of operating the new foreign exchange distribution system, he said the Bank has made further improvements to the system’s internal back-office operations, but did not alter its fundamental parameters.
“This enhanced distribution system, coupled with more timely and sizable interventions, is expected to meet all immediate trade related demands:
from the foreign-used car dealers to manufacturing companies, small and medium businesses and conglomerates,” he said.
Trinidad and Tobago’s domestic foreign exchange market has weathered the vacillations of a dynamic global economy, as well as the changes in the local economy, and while the previous system held up admirably since 1993 when it was first adopted, the Bank felt it had not been fully adapting to the evolution of local market forces, including changing consumer appetites.
Before 1993, the country had a fixed exchange rate against the US dollar, but after a major recession in the 1980s to early 1990s when the price of oil plummeted, the country was forced to consider different monetary policy options to help the country weather that particular economic storm.
One such implementation was the liberalising of the foreign exchange market through introduction of a floating exchange rate, which would respond to market forces (demand and supply) to determine its value. Most major economies have such an exchange rate; Trinidad and Tobago’s exchange rate is not totally free-floating, but managed: depending on the strength of the market forces, the Central Bank will intervene by either injecting (if demand outstrips supply) or restricting (if supply outstrips demand) the amount of foreign exchange in the system, thereby maintaining equilibrium in the system without causing too much inflationary or even deflationary pressures.
The quantity of foreign exchange in the commercial banking system (from customer deposits) is about US$4 billion. The overall demand is about US$6 billion-a difference of US$2 billion that is usually picked up by the Central Bank.
These deposits usually come in the form of energy sector receipts (the sector contributes as much as 80 per cent of the country’s foreign exchange earnings) when they pay taxes at the end of financial quarters, flushing the system with cash.
The current foreign exchange crunch started around Christmastime 2013 into January 2014, as merchants and other vendors sought currency to pay for their foreign bought goods.
Commercial banks have been facing the ire of the public-especially businesses-who say they can’t get the full amount they request. This has led to rumours of banks hoarding cash for foreign capital investments, but the banks have remained adamant that this is not the case, there are no restrictions on funds (even if requests may not be immediately granted), and since they make money from the sale of money, it would be bad business to hoard funds.
The Central Bank did acknowledge that businesspeople were having difficulties in getting cash to pay their foreign creditors, and facilitated a special sale to deal with trade on March 5, releasing US$50 million specifically for trade.
That still doesn’t explain the apparent shortage though. But Rambarran-who was part of the team at the Bank that had overseen the market liberalisation-attempted to give insight, noting that changing consumer habits have contributed to the Bank’s decision to modify its distribution set-up.
“Over the past 20-odd years there was little, if any, modification this (system) even though the economy experienced various episodes of stabilisation, growth, stagnation, and now recovery that fundamentally altered the foreign exchange demand/supply equation. Over the last two decades, demand for foreign exchange not only expanded, but its composition changed to reflect new patterns of consumer spending (for example, use of credit cards for making online payments) and new forms of investment (with no capital restrictions, citizens can move money freely to any part of the world),” he said.
In short, currency comes in many different forms besides cold, hard cash. So even when a local customer purchases a dress on Forever21.com or another buys those new car headlights on Amazon.com, their credit card balances might be positive, but in Trinidad and Tobago dollars; commercial banks will, however, have to repay Visa and MasterCard in US dollars.
