The Cen­tral Bank of Trinidad and To­ba­go (CBTT) is the gov­ern­ment’s banker. As the gov­ern­ment’s bank, it ef­fects gov­ern­ment re­ceipts and pay­ments in both for­eign and lo­cal cur­ren­cy and man­ages the pay­ment of gov­ern­ment debt and the coun­try’s for­eign ex­change re­serves. Best prac­tice ar­gues the Cen­tral Bank should be in­de­pen­dent of the Gov­ern­ment. In prac­tice, the Cen­tral Bank Gov­er­nor is a crea­ture of the Fi­nance Min­is­ter and must work close­ly with the Fi­nance Min­istry. As the fi­nan­cial sec­tor reg­u­la­tor, the Cen­tral Bank’s mon­e­tary pol­i­cy is im­por­tant as an econ­o­my needs a sta­ble fi­nan­cial sec­tor to con­duct busi­ness. Fis­cal pol­i­cy al­so sets the tone and in­flu­ences the econ­o­my’s per­for­mance.

A key area of eco­nom­ic per­for­mance is the abil­i­ty to do busi­ness with the rest of the world. Very few coun­tries are self-suf­fi­cient and all must trade with oth­er coun­tries to sur­vive. In­ter­na­tion­al in­ter­de­pen­dence is es­pe­cial­ly true for small de­vel­op­ing coun­tries. To be part of the world trad­ing or­der, busi­ness­es need for­eign ex­change (forex) to pay for­eign sup­pli­ers. Be­fore April 1993, one had to ob­tain per­mis­sion from the CBTT per the Ex­change Con­trol Act to ac­cess forex.

That act was sus­pend­ed in 1993. All com­mer­cial banks now have the au­thor­i­ty and ca­pac­i­ty to treat with cus­tomers’ forex de­mands. They need on­ly re­port for sta­tis­ti­cal pur­pos­es the vol­ume of for­eign cur­ren­cy trans­ac­tions and the rea­sons for same. The CBTT re­tains the le­gal au­thor­i­ty to in­ter­vene in the forex mar­ket and op­er­ates as a forex sup­pli­er of last re­sort. This means that it will sell forex to the do­mes­tic bank­ing sec­tor when and if com­mer­cial banks’ nor­mal sources of sup­ply run short. By do­ing so it can in­flu­ence the price of for­eign cur­ren­cy trans­ac­tions (the do­mes­tic forex rate). The coun­try is meant to be fol­low­ing a float­ing rate forex pric­ing mech­a­nism.

In­ter­bank trans­ac­tions are not done in cash. Forex bal­ances are held with for­eign cor­re­spon­dent banks and in­ter­bank pur­chas­es are set­tled through these cor­re­spon­dent banks with­out any phys­i­cal move­ment of cash. This is how the CBTT trans­fers forex to banks. Banks hold very lim­it­ed in­ven­to­ries of phys­i­cal for­eign cur­ren­cy as phys­i­cal cash gen­er­ates no rev­enue and has car­ry­ing costs. At peak pe­ri­ods banks must im­port phys­i­cal cash to meet the de­mand. This ex­plains why re­tail cus­tomers can on­ly get small amounts of for­eign cur­ren­cy when trav­el­ling. Cam­bios are meant to fill this mar­ket gap. Banks en­cour­age cus­tomers to use “plas­tic” ie, cred­it cards and vir­tu­al mon­ey cards as these can be used at ATMs when one trav­els.

Re­pub­lic Bank’s de­ci­sion to cut the forex lim­its on its cred­it cards is an im­por­tant sig­nal. It is the largest T&T bank by as­set size and is pre­sumed to have the largest source of for­eign ex­change. A bank will not de­lib­er­ate­ly dis­com­fort its cus­tomers with­out good rea­son. Since it has not giv­en rea­sons pub­licly, the pub­lic has in­ter­pret­ed the move as a sig­nal that there is a wider forex short­age. The CBTT has been silent.

The fi­nance min­is­ter has said that us­ing cred­it cards has in­creased the de­mand for forex. It is note­wor­thy that busi­ness­men have nev­er stopped com­plain­ing about forex un­avail­abil­i­ty. Since the min­is­ter al­so boasts that the coun­try has eight months of im­port cov­er and that the CBTT sold .6 per cent more forex to the com­mer­cial banks this year, there should be no short­age of for­eign ex­change. Yet, in­sur­ance com­pa­nies com­plain pri­vate­ly that they can­not ac­cess for­eign cur­ren­cy to meet their rein­sur­ance pay­ments

Tem­po­rary changes sort them­selves out. But these com­plaints are not tem­po­rary. There are three pos­si­ble ex­pla­na­tions.

First, there is a world in­fla­tion­ary spi­ral. Since this coun­try im­ports al­most every­thing, im­port­ing the same vol­ume of prod­uct as last year means that more forex will be re­quired to meet the same vol­ume of im­ports. This in­fla­tion­ary trend is re­flect­ed in the do­mes­tic in­fla­tion rate change. One can pre­sume that forex de­mand would in­crease by the in­flat­ed im­port costs or ap­prox­i­mate­ly five per cent. That means that the CBTT forex sales should in­crease by the same amount ie, five per cent, not .6 per cent.

Sec­ond­ly, in­flows of forex from the en­er­gy sec­tor (oil, gas) and petro­chem­i­cals (now in­clud­ed in man­u­fac­tur­ing) have de­clined be­cause in­ter­na­tion­al prices have de­clined. At the mid-year re­view, the fi­nance min­is­ter re­count­ed that en­er­gy prices were 30-40 per cent low­er than the pre­vi­ous year. That de­cline has con­tin­ued, mean­ing the coun­try’s terms of trade ra­tio has de­te­ri­o­rat­ed and we can im­port less at the same vol­ume of ex­ports. Nat­ur­al gas pro­duc­tion is in sec­u­lar de­cline mak­ing this a long-term prob­lem as this is the ma­jor source of forex earn­ings.

Third, when con­fi­dence de­clines, cit­i­zens move mon­ey abroad to safer ju­ris­dic­tions. Peo­ple al­ways try to min­imise risk and save for the rainy day. In­ter­est rates are ris­ing in hard cur­ren­cy mar­kets and savers can be bet­ter pro­tect­ed by park­ing their mon­ey abroad at high­er in­ter­est rates.

While the fi­nance min­is­ter may want to fo­cus on in­di­vid­ual be­hav­iour, all three rea­sons are in­flu­enc­ing forex de­mand. The min­is­ter has ac­cess to all the da­ta nec­es­sary to un­der­stand the mar­ket forces and give prop­er ex­pla­na­tions. When mar­ket de­mand ex­ceeds sup­ply, the price will in­crease in the short run, un­less there is an in­crease in sup­ply. No amount of win­dow dress­ing can change that. It is an un­com­fort­able re­al­i­ty for any politi­cian.

Mar­i­ano Browne is the Chief Ex­ec­u­tive Of­fi­cer of the UWI Arthur Lok Jack Glob­al School of Busi­ness.