Home' Trinidad and Tobago Guardian : December 4th 2014 Contents DECEMBER 2014 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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On Monday, speaking at the monetary policy at
a meeting hall in Chaguanas, Central Bank
Governor Jwala Rambarran noted that the T&T
economy is expected to grow by 0.4 per cent
for 2014, some businessmen were banking US
dollars meant to pay their bills and that inflation was at nine
per cent and expected to increase to double digits because of
higher food prices.
In the context of lower export earnings from oil and natural
gas, the cocktail of slowing growth, spiralling inflation and a
seemingly insatiable appetite by T&T for foreign exchange
may turn out to be a deadly brew.
Speaking during his presentation, Governor Rambarran said
that he did not intend to be the Governor who presided over
the depletion of the country s foreign reserves.
And in that context, he confirmed that the US$1.175 billion
proceeds from the sale of Clico s 56.53 per cent stake in
Methanol Holdings (Trinidad) Ltd had in fact been added to
T&T s net official foreign reserves, as had been strongly hinted
in this space in the last Sunday BG.
In his presentation, the Governor said that the US$1.175
billion had been sterilised so that its conversion to TT dollars
does not worsen the excess liquidity situation, which he said
was around $8 billion.
Speaking with reporters after his presentation, Mr Rambarran
said: "What we have done is we have actually purchased that
foreign exchange from the commercial bank and that com-
mercial bank has a client that received the foreign exchange.
"We purchased the foreign exchange and sold one-year
treasury securities to the commercial bank and the bank would
have put that into the portfolio for its client."
Asked why the US$1.175 billion needed to form part of the
net official foreign reserves, the Governor said: "It s US dollars
that came into the system. The Central Bank could not hold
that amount of US dollars as it would have hit all of our
exposure limits. Therefore, what we had to do was a one-off
treatment by purchasing the foreign exchange directly from
"There were two elements: one to prevent the Bank from
breaching all its exposure limits and two to sterilise the impact
of that amount of US dollars coming into the system.
Questioned on whether the MHTL proceeds would be used
to repay foreign debt as Finance Minister Larry Howai has
stated repeatedly, Mr Rambarran said: "That is on the CL
Financial side that we have to take into account. You are best
placed to ask the Minister about his intentions about CL
Now, because it is a matter concerning T&T s official foreign
reserves, this issue of the MHTL proceeds is a serious one.
The connection between the sale of the MHTL shares and
the increase in T&T s net official reserves would have been
apparent to anyone who had read the three statements in
October outlining the Central Bank s interventions in the coun-
try s foreign exchange market.
The Central Bank s October 16 statement recorded the net
official reserves at US$10.125 billion, but its October 22 statement
reported that the reserve position had jumped to US$11.299
billion---that is an increase of US$1.174 billion in the space of
The conclusion that was drawn was that only the MHTL
transaction could have accounted for the 11.6 per cent increase
in the country s reserves in the eight-day period.
Far be it for me to advise the Central Bank on how it should
conduct its stakeholder communications, but it seems obvious
that an institution that is striving to close the gap between
itself and the population---as is the case under Governor Ram-
barran---should have included a full explanation of this sudden
and unexpected increase in the country s reserves in the October
The explanation should have outlined the transaction, pointed
to the Central Bank s role as banker to the Government, noted
that the funds were placed in a blocked account and underscored
the point made repeatedly by Minister of Finance Larry Howai
that these funds are to repay the country s foreign debts and
not to finance the population s acquisition of SUVs and 55-
inch, curved televisions.
In fact, if the minister and the governor were serious about
preserving and protecting the long-term economic and financial
interests of T&T Inc, what they should do is bring legislation
to the Parliament outlining the proposition that this portion
of the country s reserves---and it currently accounts for 10.4
per cent of the reserves---can only be used for foreign debt
In effect, it would be the introduction to T&T of the concept
of the fiscal rule, which the International Monetary Fund (IMF)
in a September 2013 paper defined as "a long-lasting constraint
on fiscal policy through numerical limits on budgetary aggre-
gates. Fiscal rules typically aim at correcting distorted incentives
and containing pressures to overspend, particularly in good
times, so as to ensure fiscal responsibility and debt sustainability."
The fiscal rule implies that boundaries are set for fiscal policy
which cannot be frequently changed.
In other words, an agreement sanctioned by Parliament,
that all of the proceeds of the sale of CL Financial assets must
be used for the repayment of government debt---whether local
or foreign---and not for run-of-the-mill government expenditure
such as taking money from the Treasury to pay the Brazilian
contractors who are building the Point Fortin highway.
The danger of leaving the MHTL proceeds in the net official
reserve pool without putting in place "long-lasting constraints
on fiscal policy" is that we may reach a period in the future
in which expediency drives the ruling party to use the proceeds
of the sale of the CL Financial assets to build roads, expand
GATE or CDAP or maintain the outrageously inexcusable fuel
T&T s ministers of finance speak about foreign reserves in
terms of "buffers" that can be used to tide the country through
tough times---as T&T is experiencing at this time. What they
mean when they use the word buffers is that the adjustment
to a significant decline in the receipt of US dollars ---as a result
of lower export prices---can be delayed for months or even
years by the country s stock of foreign reserves.
But is delaying the introduction of adjustment policies an
appropriate response to a sharp decline in export earnings or
is it only going to increase the paid of the adjustment when
it is imposed?
Anyone who lived in T&T during the period 1984 to 1986
would know the answer to that question.
It is necessary to note again that some oil and gas exporting
countries---such as Nigeria, Mexico and Norway---have chosen
to allow their currencies to depreciate as one means of adjusting
to a reduction in the inflow of US dollars from the sale of the
While other central banks view depreciation as one form
of adjustment, in T&T our Central Bank keeps increasing its
intervention in the foreign exchange market---some US$325
million in October alone---in order to maintain the "stability"
of the US dollar selling price.
The MHTL proceeds, it seems, came at a very convenient
time for the Government and the Central Bank.
It is in the nature of West Indian-style parliamentary politics
that after the first 12 months of a 60-month term in office,
politicians ditch all policies that may require a tiny bit of
sacrifice by the population as they spend the balance of their
terms looking to get reelected.
Should fiscal rule dictate
use of MHTL's US$1.174b?
Central Bank Governor, Jwala Rambarran
Finance Minister Larry Howai
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