A former deputy governor of the T&T Central Bank and Economist Dr Terrence Farrell criticised economist Marla Dukharan’s report last month for drawing “sensational conclusions” which claimed that T&T has US$25 billion over the last 12 years in the errors and omissions aspects of T&T’s balance of payments.
Her analysis was published in July titled, “T&T is the world’s largest loser (not user) of foreign exchange” in her July 2024 Caribbean Monthly Economic Report.
In the report, she said that while authorities complain that citizens are demanding too much foreign exchange for luxury goods, billions of dollars in scarce foreign exchange are mysteriously disappearing.
Farrell spoke last Friday on the topic of “Forex leakages in T&T and its impact on trade and development outcomes” in a webinar hosted by the Department of Trade and Economic Development, University of the West Indies (UWI) St. Augustine.
“Marla has identified an important problem and we must commend her for raising the issue. The bigger issue that she has raised is the whole issue about data collection and the need for good, timely data to support good policymaking. That’s absolutely critical...but I think that the conclusions that she drew were a bit, how should I put it, sensational. They were over the top and they led to a certain kind of speculation about what is going and which I think that is not what the problem is. Most of those flows relate to the services account. The US$25 billion which is missing is not missing at all as we have already spent it and consumed it,” Farrell said.
He referred to her article about the money “missing” and money “disappearing” and criticised her conclusion.
“Marla said somethings which I think are actually…quite frankly they shocked me and I think they shocked a lot of people that reached to me and asked me if it is this true…I think that is the kind of language that got people wondering what is going on. So certainly, the people who are political and so on…they were saying this is another indication of some kind of malfeasance going on.”
He added that it is not a case of money “disappearing” but simply that it has been spent.
“All that money that you are talking about that is missing somewhere…the money is gone, yes it is gone but is it because we have spent it. It goes back to the point that Roger Hosein made earlier about how we consume foreign exchange.”
Dukharan also said the US$25 billion that has gone missing is about 77 per cent the size of the economy (2022, IMF) and over US$16,000 per person.
Farrell was critical of her method of calculation and how she interpreted the data.
“She also said that it is 77 per cent of the size of the economy. In other words, I think what she seemed to have done is taken the US$25 billion, converted it to TT dollars and divided it by T&T’s current GDP levels to get the 77 per cent of the size of our economy. That is actually a wrong way to look at the problem.
“Marla also said that the TT dollar is overvalued vs the blackmarket forex exchange rate. That is not language quite frankly that economists would use in terms of looking at overvaluation. We don’t calculate or assess overvaluation or undervaluation in relation to the black market. On social media there were people speculating about capital flight, the drug trade, human trafficking and so on. Marla herself encouraged that kind of speculation in her own speculative comment talking about money leaving the country via cash and jewellery and so on.”
He reminded listeners that in the early 1990s, the Government lifted currency controls.
“In 1993, we floated the exchange rate but we didn’t just only float the exchange rate, we abolished exchange controls. This is important to understand. We abolished the exchange controls not only on the current account but also on the capital account. This was unprecedented at the time for a country like T&T to abolish exchange controls on the capital account as well. It means that if a T&T company wants to invest overseas it does not need to go to the Central Bank to get any money. That change that we made in 1993 was a profound change. The abolishment of the exchange controls meant that the Central Bank no longer had access to the data on all of those transactions on the services account.”
Contrary to what Dukharan claims, Farrell gave the view that not all forex inflows into and out of the country are easily monitored by the Central Bank as in the past.
“The Central Bank at the time had exchange controls…the Central Bank knew every transaction. The commercial banks could not sell you anything unless it had an approval from the Central Bank. We knew all the information because we had it first. This is extremely important to understand what it had then and what we have now. Financial flows as related to exports and imports from the upstream energy sector do not- and Marla is wrong about this- they do not flow through the local financial system. So, to say that the local banking system has all of the information is absolutely totally wrong.”
He also said that technology has also rendered the Central Bank’s oversight over all transactions as obsolete as people no longer need to go to the Central Bank for travellers’ cheques as they now use credit cards.
“People now have credit cards which they can use for anything.”
He criticised bodies like the Central Statistical Office (CSO) for not producing data in a timely manner.
“Gross domestic product (GDP) from the expenditure side, we have not calculated that for how long. Ask what is the investment rate in this economy and nobody knows. I do not know if the CSO knows but I have never seen any publication of the national income accounts that tells me what the investment rate is. We have a huge data problem. The CSO has collapsed on itself. This goes back to the 1980s.”
Dukharan who also took part in the webinar discussion acknowledged the critical reactions to her analysis but defended her position.
“You do have statistical problems. You have timing errors, you have misclassification errors, you have all kinds of errors but if we use the complete data sets we have from the banks and we still cannot explain US$2 billion that should be in our reserves roughly every year yet it is not there… so if we have to stick it in the errors and omission item then this is a massive problem.”
She added: “The thing about the errors and omission item is it says it is the item that captures errors and of course anytime you start to measure anything, you start to make errors and I mentioned in my article that some of what is in the errors and omission item will be statistical errors. But there are other explanations for the errors and omissions item.
“None of the reactions or explanations that I have gotten address the fact that this problem, this errors and omissions item suddenly became large and negative in 2011 and remained large and negative since then with the exception of the COVID years, 2020 and 2021. So, it suggests that if you use the argument that it is all statistical error, did we suddenly have a collapse in our statistical infrastructure in 2011 and one that persisted since then? Perhaps? But then why has it and why hasn’t it been addressed?”
Finally, she said that the Government has not done enough to identify and to solve the problem.
“I would think that any reasonable Government that thinks that US$2 billion is unaccounted for leaving our country every year, they would salivate at solving this problem, identifying where this is coming from and fixing it. Right now, the Government is trying to borrow $100 million for Petrotrin, we would not have to borrow these sums presumably if we did not have these kinds of leakages.”
