Home' Trinidad and Tobago Guardian : June 29th 2017 Contents BG18 | COMMENTARY
BUSINESS GUARDIAN guardian.co.tt JUNE 29 • 2017
Foreign exchange solutions
There has been a constant cho-
rus of complaints about the
unavailability of foreign ex-
change in the local system.
This is nothing new and has
been around for quite some
time. The truth is being exposed although it
was never really hidden, that is, our economy
is so highly dependent on the sale of gas and
oil for a supply of forex, that any shock in the
commodity prices has an immediate and direct
impact on our minuscule economy.
There have been calls and attempts at eco-
nomic diversification and most of the attempts,
so far have been false starts. The latest gas find
of 2 TCF seems to have comforted some, but
don't be fooled, this is not a long term solution
to the problem.
So what are some of the possible solutions
to the forex problem?
In this article, we touch on only four possible
3. Dollarisation and
4. Forward Markets
Each of these alternatives have a variety of
pros and cons that will have significant impacts
on different sectors.
This is what we are doing today.
Typically, when there is a shortage of any
resource, a natural response would be to start
rationing the item.
One way is to allocate forex in reduced
amounts to users based on their past needs
and requirements. However, this means com-
panies and individuals are not able to get as
much as they want, but we all do not get what
we want equally.
An "enhanced" rationing system is where
preference is given to certain sectors, in our
case manufacturing. This means "more to
some and less for others"
, like the retail sector
that is presently under stress.
However, the logic is that if we allocate the
resource to sectors that have a higher propen-
sity for earning forex, we may be able to expand
the supply, even if it takes a long time to come
on stream and make a meaningful impact.
What will be our next tactical manoeuvre?
We will have to wait and see. Tactical manoeu-
vres can be responsive in nature, but below
we examine some more strategic options that
should be examined to try to create a perma-
Depreciation is an alternative proposed by
many a renowned economist that promotes
free market ideologies, but it does have dire
According to Lloyd Best, in order for a de-
preciation to have the desired effect it must
be large enough to cause significant change
in behaviour ie our spending habits. This, of
course, with the associated inflation comes
at a hefty economic price especially for the
middle and lower income groups. It is also a
politically expensive policy decision.
Once the currency is devalued or depreciat-
ed, it rarely returns to its original value. There
is usually a recalibration and the depreciated
value becomes the new normal until some fu-
ture time when the forex problem resurfaces
and there are calls for further devaluations.
However, if the economy picks up sustained
growth momentum fuelled by increased foreign
direct investment, fortunes can be reversed
and currency appreciation is a real possibili-
ty. The TT dollar once upon a time traded at
TT$2.42 to $1 US.
Can you imagine the TT dollar regaining
that strength? It is certainly a stretch for our
imaginations. While it may be a tough pill to
swallow in the near term, depreciation is likely
the quickest route to a solution of the shortage
Dollarisation is a very controversial alterna-
tive, where we throw away our national cur-
rency and use the US$ or some other major
world currency as our own. There will be no
problem getting forex then because it will be
all that we have. It requires however, that the
government relinquish control of the monetary
The arguments for and against are numerous.
Some say this is tantamount to relinquishing
our sovereignty. But do 1.3 million Trinbago-
nians really require a currency of our own that
has very limited acceptability outside our sov-
Are we living in a fool's paradise?
Does current economics even respect sov-
Stated differently, does capital respect
sovereignty or does capital flow toward areas
where it can generate a positive rate of return
at an acceptable risk?
Going down the road of financial evolution,
we could expand the local forex market into two
segments.A spot market for retail transactions
and a customised forward market to serve the
corporate / commercial sector.
The spot market is the same as what we have
today, where you buy or sell forex at the pre-
vailing market rates dictated by the Central
Bank (but offered by the commercial banks
and a limited number of authorised dealers)
to receive whatever you can get immediately.
This spot rate can remain as a managed float
as we have today, and the central bank can de-
termine an acceptable percentage of the total
supply that will be allotted to this market.Si-
multaneously a customised forward market can
be created so that corporate entities can book
forex transactions for delivery of the currency
at some point in the future (3, 6 or 9 months).
This system will give business morecertain-
tyof when and how much forex they can obtain,
and allow them to better manage their foreign
payables etc. What is the catch?
It is that since the supply of US$ is lower
than the demand, the pricing of the forward
exchange rate will have to account for not only
the interest rate differential (as in major cur-
rency trading) but also include a premium to
account for the supply/demand imbalance.
While the Central Bank can still exercise
some control on these rates after solid quan-
titative modelling, it is a graduated move to-
wards a free market system, that will increase
the effective US$/TT$ exchange rate to high-
er levels for the corporate sector eventually
having similar effects as a depreciation. The
proviso being that the Central Bank will retain
control at all times.
So, from the four approaches, which do you
think would be the good, the bad and the ugly?
Bhushan Singh (email@example.com) is a
former executive at a large financial institution
and is currently a lecturer and consultant at the
Lok Jack GSB.
Navin Dookeran (n.dookeran@lokjackgsb.
edu.tt) is a lecturer and programme director
of the Executive MBA at the Lok Jack GSB
and was previously the head of credit risk for
Manulife Bank and Trust, and worked at the
RBC Financial Group on Bay Street in Toronto,
The good, the bad and the ugly
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