It’s a well or­gan­ised net­work and if you’re part of it, you’re lucky.

This from one small busi­nes­sown­er (who did not want to be named) who de­scribed to the Busi­ness Guardian how she ac­cess­es forex via un­con­ven­tion­al means to pay for in­puts for her can­dles and soaps busi­ness.

“My cred­it card can on­ly cov­er so much of my cost be­cause the lim­it is US$1,500. Ob­vi­ous­ly, that is not enough be­cause things like fra­grances, to put in­to the can­dles, to the dec­o­ra­tive jars keep go­ing up, not to men­tion the cost to clear the goods.

“To cov­er the ad­di­tion­al cost, I know peo­ple whose cred­it card lim­it is much more than mine, as much as US$5,000 to US$$15,000. I use their card and re­pay in TT cur­ren­cy. But this comes at a cost. De­pend­ing on the per­son lend­ing the mon­ey, the ex­change rate can range from $8 to US$1 to as much as $10 to US$1,” she ex­plained.

She’s not the on­ly one do­ing this. She said there are oth­er en­ti­ties, par­tic­u­lar­ly mi­cro en­ti­ties, who are strug­gling to build their brand who are al­so part of this flour­ish­ing en­ter­prise.

The busi­nes­sown­er said she went to her bank to have her cred­it card lim­it in­creased twice, but she was de­nied as the bank felt that she may be un­able to re­pay. An­oth­er SME who brings in sea­son­al items such as Christ­mas gifts like dec­o­ra­tive mugs, house­hold items and even py­ja­mas as well as goods for oth­er pe­ri­ods such as East­er and Moth­er’s Day, ad­mit­ted that she too us­es forex from oth­er peo­ple’s cred­it cards to make pay­ments.

“I was put on to this by a friend who has a small cloth­ing store and he too was hav­ing dif­fi­cul­ty get­ting US to pay for his goods. If he had not in­tro­duced me to this net­work I don’t think I could con­tin­ue with my busi­ness be­cause my lim­it is US$2,500 and there is on­ly so much that can do es­pe­cial­ly as every­thing keeps go­ing up. This has al­so re­al­ly helped me to grow my cus­tomer base,” she said.

The sto­ry of how these two busi­ness­es fi­nan­cial­ly sur­vive is re­flec­tive of the fact that the black mar­ket for for­eign ex­change has con­tin­ued to per­sist for years.

How­ev­er, Econ­o­mist Dr Vaalmik­ki Ar­joon is adamant that this has in­ten­si­fied in the last decade due to a sig­nif­i­cant short­age of forex sup­ply in the bank­ing sec­tor.

As a re­sult, many by­pass banks for the black mar­ket to meet their forex re­quire­ments, lead­ing to two ex­change rate—an of­fi­cial rate and a high­er black-mar­ket rate.

Not­ing that there is no sin­gle rate used in the black­mar­ket Ar­joon said prices charged can al­so be ar­ti­fi­cial­ly in­flat­ed – if a sell­er typ­i­cal­ly charges $7.50 but re­ceives an of­fer of $8 from a dif­fer­ent group of buy­ers, he may raise the rate to $8 across the board.

This ac­cord­ing to Ar­joon fre­quent­ly oc­curs, for in­stance, when Venezue­lan mi­grants of­fer to pay these high­er rates in the black­mar­ket to se­cure US dol­lars to send to their fam­i­lies in Venezuela.

Nat­u­ral­ly, since busi­ness­es pay more for forex on the black mar­ket, the over­all cost of do­ing busi­ness in­creas­es and this hurts over­all prof­itabil­i­ty.

Ar­joon out­lined that for many, this high­er cost ham­pers their abil­i­ty to ex­pand op­er­a­tions, hire new work­ers, while some may have laid off em­ploy­ees or cut salaries to be able to af­ford high­er black-mar­ket costs.

“Low­er prof­itabil­i­ty al­so re­duces the tax con­tri­bu­tions to the state. Fur­ther, some busi­ness­es who ac­quire large sums from the black-mar­ket to pay for im­ports may un­der-in­voice on these im­ports, to avoid scruti­ny about the sources of forex to pay for im­ports. By un­der-in­voic­ing, the im­porter al­so ends up pay­ing low­er im­port tax­es to the State. Busi­ness­es will al­so pass on this high­er black-mar­ket cost to con­sumers in the form of high­er prices,” he fur­ther ex­plained.

Fur­ther, Ar­joon said with the low con­fi­dence in the econ­o­my and the TT dol­lar, many al­so pur­chase funds in the black mar­ket to in­vest in as­sets abroad (cap­i­tal flight) or sim­ply to hoard US dol­lars in for­eign ac­counts.

This ob­vi­ous­ly de­prives the lo­cal pri­vate sec­tor from much need­ed forex which could have been put to more pro­duc­tive do­mes­tic in­vest­ment.

Ar­joon not­ed that it al­so fa­cil­i­tates laun­der­ing of TT dol­lars earned through il­le­gal means such as the nar­cotics trade, where those look­ing to laun­der funds go to the black­mar­ket and pay a much high­er pre­mi­um to se­cure US dol­lars, which is then in­vest­ed abroad in prop­er­ties and oth­er as­sets or held in for­eign ac­counts.

This al­so ar­ti­fi­cial­ly dri­ves up the black­mar­ket rate.

More­so,the ques­tion of cor­rup­tion al­so aris­es.

“Are a few work­ing in the of­fi­cial forex sys­tem re­ceiv­ing in­cen­tives to fa­cil­i­tate black­mar­ket ac­tiv­i­ties by sell­ing forex at the low­er of­fi­cial rate to per­sons who then re-sell this forex in the black mar­ket for a pre­mi­um?” Ar­joon asked as he al­so not­ed that this dis­rupts cen­tral banks’ con­trol over ex­change rates and mon­e­tary pol­i­cy, by cre­at­ing ex­change rate dis­par­i­ties, there­by un­der­min­ing con­fi­dence in the of­fi­cial rate, es­pe­cial­ly since the black mar­ket rate has be­come the pri­ma­ry de­ter­mi­nant of im­port costs.

De­spite these chal­lenges, the black­mar­ket has some pos­i­tive ef­fects. Ar­joon said it sup­ports pro­duc­tive busi­ness ac­tiv­i­ty by pro­vid­ing for­eign ex­change ac­cess for busi­ness­es who are un­able to meet their forex needs through banks.

“Al­though they pay a pre­mi­um in the black­mar­ket, this ac­cess al­lows time­ly sup­pli­er pay­ments, help­ing many, es­pe­cial­ly SMEs, avoid scal­ing down or shut­ting down,” he ex­plained, adding that the black­mar­ket boosts re­mit­tances, as vis­i­tors of­ten use un­of­fi­cial chan­nels to gift forex to rel­a­tives or ex­change US dol­lars for TT dol­lars as they re­ceive more favourable rates than in banks.

Should the of­fi­cial ex­change rate there­fore be moved in line with the black­mar­ket rate?

Stat­ing that some ar­gue that de­valu­ing the of­fi­cial ex­change rate to match the black­mar­ket rate could sig­nif­i­cant­ly re­duce black­mar­ket ac­tiv­i­ty, Ar­joon said this re­duc­tion would on­ly oc­cur if forex de­mand fell enough for banks to meet it ad­e­quate­ly, re­duc­ing re­liance on un­of­fi­cial chan­nels.

How­ev­er, he out­lined that giv­en the coun­try’s high de­pen­den­cy on im­ports used dai­ly—in­clud­ing raw ma­te­ri­als and ma­chin­ery for man­u­fac­tur­ing, phar­ma­ceu­ti­cals, tech­nol­o­gy, elec­tron­ics, re­tail goods etc.—de­mand for forex is high­ly in­elas­tic and like­ly to re­main high even at a de­val­ued rate.

“A de­val­u­a­tion would not sub­stan­tial­ly ease de­mand, as the econ­o­my lacks the pro­duc­tive ca­pac­i­ty and di­ver­si­ty to sub­sti­tute im­ports lo­cal­ly. As a re­sult, the black­mar­ket would like­ly per­sist and could even re­spond by rais­ing rates, per­pet­u­at­ing the cy­cle of dual ex­change rates,” Ar­joon said.

Ad­di­tion­al­ly, he not­ed that de­val­u­a­tion would do lit­tle to boost ex­ports sig­nif­i­cant­ly.

Apart from the en­er­gy sec­tor and some man­u­fac­tur­ing, ex­port ca­pac­i­ty is lim­it­ed, and key man­u­fac­tur­ing in­puts, as well as ship­ping costs, are priced in US dol­lars, Ar­joon stat­ed as he ad­vised that with­out a mean­ing­ful rise in ex­port earn­ings, forex short­ages would en­dure, sus­tain­ing black­mar­ket de­mand.

“There­in lies the long-term so­lu­tion – it is not to make the rate more ex­pen­sive to de­ter de­mand, but shift the fo­cus to in­creas­ing sup­ply, dri­ven by en­hanced pri­vate-sec­tor pro­duc­tiv­i­ty and com­pet­i­tive­ness, which will in­crease ex­ports and forex in­flows,” he added.

This, Ar­joon sug­gest­ed, re­quires re­mov­ing busi­ness ob­sta­cles to boost pri­vate sec­tor in­vest­ment, such as im­prov­ing SME fi­nanc­ing, re­duc­ing port/cus­toms de­lays, mit­i­gat­ing crime and pro­mot­ing spe­cial eco­nom­ic zones for greater FDI.