Home' Trinidad and Tobago Guardian : March 12th 2015 Contents MARCH 2015 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
COVER STORY |BG7
From Page 3
It is noteworthy that energy prices only collapsed
after the November 27, 2014 OPEC meeting, which
means that at least two-thirds of the energy taxes
(October and November) for the fourth quarter of
2014 would have been based on "normal" prices.
It is safe to assume, therefore, that tax revenues
for the quarter ending March 31, 2015, would be sub-
stantially below revenues in the quarter ending Decem-
ber 31, 2014, which may mean the Central Bank having
to dig deeper into the country's net official reserves.
As it stands, the Central Bank's net official reserves
totaled US$11.1 billion in January (January 28 statement)
and US$10.7 billion in February (March 2 statement).
This means that the sale of US$650 million by the
Central Bank led to a US$400 million decline in the
country's foreign exchange reserves, which means
that the bank depleted its reserves at a rate of 61.5
If the amount of energy taxes paid in the quarter
ending March 31, 2015 is substantially less than in
the previous quarter, the reserve depletion rate could
be as high as 90 per cent.
But assuming the depletion is at 61.5 per cent, all
things being equal, the sale of US$4.015 billion by
the end of this year could mean a US$2.46 billion
depletion in T&T's net foreign reserves.
If this is correct, that would mean that net official
reserves would total US$8.54 billion by the end of
2015, or US$7.36 billion without the MHTL reserves.
Remember the statement made by Mr Rambarran
at the top of this piece: that he would not be the
Governor who ran down the country's foreign reserves
to make everyone happy. Well, there have been far
fewer complaints recently about the availability of
foreign exchange, so one assumes that the retailers
are happy, but what about the country's reserves?
There is some evidence that an acceptance of reserve
depletion is part of the Central Bank's policy to appease
those outspoken importers so that they would not
complain about this controversial issue in the months
before a general election.
In terms of the evidence, in its January 28 statement
the Central Bank stated: "These larger and more fre-
quent interventions reflect the nature of Central Bank's
2015 foreign exchange management.
That statement reflects a desire by the Central Bank
to satisfy the significant demand carried over into
the start of 2015, despite the sale of US$1.7 billion to
the banking system in 2014.
According to the Bank: "The negative, national
sentiment surrounding sharply falling oil prices aggra-
vated unsatisfied demand for foreign exchange as
future demands from the public and business com-
munity have been brought forward.
"With elevated domestic liquidity levels fuelling
strong growth of consumer credit and helping to
finance substantial imports of consumer durables,
Central Bank's foreign exchange interventions are
indirectly contributing to absorbing excess liquidity
in the banking system."
The Central Bank continued by saying that one
objective of its monetary policy was "to maintain
stable conditions in the domestic foreign exchange
Its foreign exchange programme for this year "is
framed in the context of our medium-term balance
of payments outlook, which prudently views lower
energy prices as a cyclical phenomenon over the next
It said: "This year's programme is aimed at pre-
venting foreign exchange shortfalls from arising as
a result of escalating demand and reduced supply
due to lower energy export earnings."
The thrust of the statement---in which there was
no reference to the need to slow down reserve reduc-
tion---is that the Bank believes that low energy prices
are a cyclical phenomenon, rather than a structural
one. The thinking seems to be: We can afford to
flood the market with foreign exchange for a short
time because the shortfall that results from higher
demand and lower supply is a temporary event.
The Central Bank should ask the same outspoken
importers what would they do if they were selling
a product for which there was increasing demand
but reducing supply.
And the Central Bank should consider the country's
position if the reduction in global energy prices is
a structural change rather than a cyclical one.
Why is the Central Bank's more interested in pre-
venting foreign exchange shortfalls, than balancing
those shortfalls with the need to maintain the level
of T&T's net official reserves?
From Page 3
and the number of persons that demand for-
eign exchange exceed by far the number of sup-
The other feature is that the flow of demand
is consistent while supply tends to be lumpy and
comes in at discrete intervals.
This is why the Central Bank has an important
role to play in smoothing the timing differences
between demand and supply as well as in man-
aging the shortfall in supply by selling foreign
exchange from its stock of official reserves to
the banking system.
In 2008, for instance, when oil prices plum-
meted the Central Bank supported the foreign
exchange market with larger interventions from
its official reserves which fell by 7.5 per cent and
there was only a marginal depreciation of 0.5 per cent in the TT$/US$ selling
Regarding the comparisons with other countries, each country manages its
exchange rate policy according to its specific and unique circumstances. T&T, an
energy producing country, has operated a managed floating rate system since
April 1993 with the US$ as its nominal anchor.
Other energy-producing countries such as Norway, Mexico and Canada oper-
ate a freely floating exchange rate system with no nominal anchor. These three
countries all have inflation-targeting central banks whose sole mandate is to
The Central Bank has a broader mandate that includes control of inflation and
exchange rate stability. Therefore monetary and exchange rate policy considera-
tions in these energy-producing countries will vary from that of T&T and one
has to be careful about making cross currency comparisons.
The recent fall in oil prices has led to a slowdown in inflationary pressures in
Norway, Mexico and Canada with central banks in these countries easing their
On the other hand, the fall in oil prices, is being accompanied by rising infla-
tionary pressures in TT, because the local economy seems to be reaching full ca-
pacity, with the Central Bank tightening its monetary policy.
In the case of Nigeria, the sharp depreciation of its currency reflects several
factors, including political turmoil. The Central Bank of Nigeria has not only de-
preciated the rate but also continues to sell foreign exchange to the banking
system and impose exchange controls on specific consumer items.
It is not correct to make a comparison between T&T and Nigeria, since the
economic realities are totally different, and the policy options again, will vary de-
pending on the circumstances.
Not all energy producing countries have the same economic profile and there-
fore we have to be careful about duplication of economic policies used in other
The Ministry of Finance and the Economy does not dictate the price or the ex-
tent and timing of interventions into the foreign exchange market. This is man-
aged by the Central Bank. I expect that should the need arise, based on the
confluence of macro-economic factors, appropriate adjustments will be made
by the Central Bank.
We, ourselves, also have the matter under close review.
Is reserve depletion
Everyone recognises the importance of a collaborative effort.
We must build the industry and a bigger one means more for
everyone. That kind of culture has been very important for the
development of our industry which is a national industry," she
Canada already has developed itself as a niche internationally
for its financial industry.
"We already have a well-established financial industry. Coming
out of the crisis, our financial institutions survived very well.
There was no bailout or financial collapse. That underlined the
importance of Canada's financial industry to a strong economy,"
She also said the IFC in any country creates high-paying jobs.
"They are skilled jobs and create better jobs in the economy.
The Government has a big stake in keeping and attracting and
having those jobs," she said.
Mark Yeandle, director Z/Yen Group, said the Caribbean has
many small financial centres.
"If you take one by itself it is relatively insignificant in terms
of the world stage. If you put these together, it would have a
greater impact for the region. It is not a zero-sum game. I do
not think if you take money away from one centre, you will nec-
essarily take resources away from other centres. The entire region
can be more collaborative with more centres, with more liquidity.
It can only improve the region," he said.
Consultant: IFC can
contribute $7b yearly
Varun Maharaj, CEO of the TTIFC, said the business envi-
ronment is very important in creating the right conditions.
"The business environment is the centre of the work we have
done over the last year. It is really being crafted in light of
legislation in T&T. Our IFC is not in any way there as yet. What
we are seeking to do is to raise an authority which will be focused
on business development and also create a financial services
authority to regulate the institutions that choose to register; all
this according to the laws and rules of the authority," he said.
He said the TTIFC has hired a consultant and what the study
shows is in five years, the IFC can contribute TT$7 billion annu-
"We are striving to build in T&T something that is different.
It will have a principle-based legislation based on common law
that will evolve based on the law of the international community.
Our taxation will be simple and transparent," he said.
From Page 6
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