As T&T marks the first day of 2017, one of the most in­tractable prob­lems fac­ing the cur­rent ad­min­is­tra­tion is the in­creas­ing un­cer­tain­ty sur­round­ing the avail­abil­i­ty of for­eign ex­change.

The un­avail­abil­i­ty of for­eign ex­change threat­ens to deep­en the al­ready se­vere con­trac­tion in T&T's do­mes­tic econ­o­my, po­ten­tial­ly lead­ing to sig­nif­i­cant re­trench­ment of the em­ploy­ees of re­tail­ers and dis­trib­u­tors and a short­fall in the Gov­ern­ment's rev­enue ex­pec­ta­tions.

The prob­lem of for­eign ex­change avail­abil­i­ty is now so crit­i­cal that com­mer­cial banks are rou­tine­ly lim­it­ing over-the-counter sales of US dol­lars to US$500 or less, im­porters are be­ing made to wait for weeks to pay for­eign in­voic­es, and one of the coun­try's largest for­eign ex­change users has sig­nalled a cut­back in im­ports.

In short, the over­ar­ch­ing prob­lem is that de­mand for for­eign ex­change far ex­ceeds the sup­ply of it, with T&T's earn­ings of US dol­lars hav­ing plum­met­ed in 2016 as a re­sult of the col­lapse in both the prices and the pro­duc­tion of its en­er­gy-sec­tor ex­ports. That means the to­tal sup­ply of for­eign ex­change has been re­duced.

On the de­mand side, the coun­try's thirst for for­eign ex­change re­mains un­quenched de­spite the Gov­ern­ment's at­tempts to rein in de­mand by in­creas­ing tax­es and re­duc­ing ex­pen­di­ture.

Un­der the cur­rent for­eign ex­change al­lo­ca­tion sys­tem, en­er­gy-sec­tor com­pa­nies that earn for­eign ex­change sell the US dol­lars to T&T's 12 au­tho­rized deal­ers in pre­scribed per­cent­ages. The Cen­tral Bank al­so sets the sell­ing and buy­ing prices of US dol­lars and pro­vides for­eign ex­change to deal­ers, at the mar­gins.

One year ago, the Cen­tral Bank de­cid­ed to lim­it its sup­ply of for­eign ex­change to the au­tho­rized deal­ers to about US$150 mil­lion a month, to­talling US$$1.8 bil­lion for 2016, or 30 per cent less than in 2015.

Up to De­cem­ber 23, 2016, the bank­ing sys­tem, which ex­cludes the few non-bank au­tho­rized deal­ers, pur­chased US$5.9 bil­lion from the Cen­tral Bank and the wider pub­lic (most­ly the en­er­gy com­pa­nies) com­pared with US$7.5 bil­lion in 2015–21 per cent less than in 2015.

The Cen­tral Bank seems to have adopt­ed the po­si­tion that with less for­eign ex­change be­ing earned by the coun­try, it will ra­tion the amount it sells to au­tho­rized deal­ers, as it tries to slow down the de­ple­tion of T&T's for­eign re­serves.

But such a pol­i­cy pos­ture has con­se­quences.

In pre­vi­ous years, queues for for­eign ex­change were episod­ic and sea­son­al. In 2016, those queues have been trans­formed in­to a per­sis­tent, seem­ing­ly per­ma­nent un­avail­abil­i­ty of for­eign ex­change, which is dam­ag­ing the cred­it rat­ings of busi­ness­es, large and small, be­cause of de­lays or in­abil­i­ty to pay for­eign sup­pli­ers.

And the sys­tem may be im­pos­ing hid­den costs on con­sumers as more and more dis­trib­u­tors and re­tail­ers are forced to seek for­eign ex­change on the black mar­ket at sub­stan­tial­ly high­er prices than the Cen­tral Bank rates.

This black mar­ket in for­eign ex­change–which is il­le­gal, but seem­ing­ly un­po­liced and cer­tain­ly un­pros­e­cut­ed–may it­self be prop­a­gat­ing crim­i­nal­i­ty, as those who re­ceive US dol­lars through drug traf­fick­ing, cor­rup­tion or mon­ey laun­der­ing are able to sell their ill-got­ten gains at huge prof­its.

The TT-dol­lar pro­ceeds of this to­tal­ly dys­func­tion­al sys­tem are then be­ing used to pur­chase large swathes of prop­er­ty and in the con­struc­tion of fan­tas­tic man­sions by peo­ple who de­clare pover­ty-lev­el in­comes to the Board of In­land Rev­enue.

In ef­fect, then, the Cen­tral Bank's cur­rent for­eign ex­change sys­tem may, un­wit­ting­ly it is hoped, be fa­cil­i­tat­ing an ex­treme­ly lu­cra­tive trade among T&T's un­der­world el­e­ments.

There is al­so clear ev­i­dence that the ra­tioning of for­eign ex­change by the Cen­tral Bank may in fact be con­tribut­ing to a wors­en­ing of the sit­u­a­tion.

Ac­cord­ing to analy­sis by the In­ter­na­tion­al Mon­e­tary Fund pub­lished in its June 2014 Ar­ti­cle IV staff re­port on T&T, the cur­rent sys­tem is ex­ac­er­bat­ing the short­ages in the sys­tem be­cause "re­peat­ed short­ages have re­sult­ed in in­cen­tives to hoard for­eign ex­change."

In most oth­er mar­kets, if a com­mod­i­ty is in short sup­ply, the mar­ket dic­tates a high­er price such that the re­duced sup­ply is brought in­to equi­lib­ri­um with re­duced de­mand.

This ap­proach was re­ject­ed by Min­is­ter of Fi­nance Colm Im­bert in the 2017 bud­get pre­sen­ta­tion, when he said: "...a free-float­ing ex­change rate car­ries enor­mous risks for small, de­vel­op­ing coun­tries. These in­clude se­ri­ous in­fla­tion­ary pres­sures, the pos­si­bil­i­ty of a wage-price spi­ral and, as a con­se­quence, ad­verse in­come and dis­tri­b­u­tion ef­fects."

If the min­is­ter of Fi­nance has no faith in the mar­ket, be­liev­ing that the con­se­quences of a free-float­ing ex­change rate are too dire, he must come up with a non-mar­ket so­lu­tion that fix­es the now chron­ic prob­lem of the un­avail­abil­i­ty of for­eign ex­change.

But dire con­se­quences of in­ac­tion re­quire a so­lu­tion now–not af­ter months of study, con­sul­ta­tion, more analy­sis and more con­sul­ta­tion–and that is even be­fore it is tak­en be­fore Cab­i­net, which has adopt­ed the speed of mo­lasses be­ing poured up­hill.

On bal­ance, it is clear that the cur­rent for­eign ex­change sys­tem is dys­func­tion­al and in­ca­pable of work­ing.

The longer the cur­rent sys­tem is main­tained, the greater are the risks to the econ­o­my through high­er lev­els of un­em­ploy­ment, deep­er eco­nom­ic con­trac­tion, less in­vest­ment in pro­duc­tive en­ter­pris­es, and gen­er­at­ing as­tro­nom­i­cal prof­its for crim­i­nals.