Jan 2015 Financial News

Will IMF mission propose forex change?

Jan 18, 2015

On Friday, the Ministry of Finance issued a news release advising that the International Monetary Fund (IMF) will be conducting its annual staff visit to Trinidad and Tobago during the period January 19 – 26.

Although it is not explicitly stated in the release, the purpose of the Fund’s mission presumably is to conduct the annual Article IV consultation with T&T in which IMF staffers hold bilateral discussions with representatives from ministries, the Central Bank, government departments and agencies and private sector organisations. 

The IMF team will be led by Elie Canetti, (see photo at right) who is the advisor in the IMF’s Western Hemisphere Department. Canetti delivered an address at the InvesTT investment forum held in New York in September last year and also attended the Fund’s high-level conference on development in the Caribbean in Montego Bay in October.

According to the Finance Ministry statement: “This staff visit by the IMF to Trinidad and Tobago was arranged for January 2015 following discussions between IMF Staff and the T&T delegation to the 2014 Annual Meetings of the IMF and the World Bank in Washington D.C. over the period October 9th - 12th, 2014.

The staff visit forms part of its regular meetings with the Ministry of Finance and the Economy and the Central Bank, which have been an annual feature since Trinidad and Tobago became a member of the IMF in 1963.

“On a regular basis—usually once each year—the IMF holds detailed discussions with member countries regarding economic and socio-economic developments. These discussions also allow the institution to obtain a firsthand view of the country’s fiscal position.”

The statement quoted Finance Minister Larry Howai as advising that he would focus this year’s discussions around the impact on the national budget of the recent declines in energy prices and the measures being taken to address the shortfalls in revenue.

In the statement, Minister Howai said that he was “pleased with the timing of this visit as it offers an opportunity to obtain in-depth information from a major multi-lateral institution on the likely trajectory of oil and gas prices and best practices in managing the effect on the country’s overall fiscal situation.”

The statement from the Ministry of Finance was issued 54 minutes before a Central Bank release announcing the first foreign exchange intervention by the Bank for 2015.

The intervention involved the Central Bank selling US$200 million to authorized dealers of foreign exchange on Thursday, which was the same day that Prime Minister Kamla Persad Bissessar met with private sector leaders—who complained bitterly about the continuing problems of availability of foreign exchange—at the Diplomatic Centre in St Ann’s.

Since its second intervention in May (announced on May 23) the Central Bank has always disclosed the amount of the country’s net official reserves as of the date of the statement and the number of months of import cover. There have been eight statements giving this important information.

Interestingly, the January 16 statement from the Central Bank does NOT contain information on T&T’s net reserves and months of import cover. 

While this may be a simple oversight, it may also be that the Central Bank has changed its policy on making public the country’s net official reserves numbers. 

Those reserves totalled US$11.3 billion as at November 7, which was the last time the Central Bank made an intervention announcement before Friday’s announcement. The November reserves number included the US$1.17 billion from the sale of Clico’s 56 per cent stake in Methanol Holdings (Trinidad) Ltd.

In the 2014 Article IV consultation, which is dated June 4, the IMF team said: “Greater flexibility is needed in the foreign exchange market. Despite sizable reserves, foreign exchange shortages, which impose unnecessary economic costs, have recurred. There is no concrete evidence of either a parallel market or arrears on foreign exchange, and the Central Bank has recently sold foreign exchange with the objective to clear the market, but a recurrence of the situation could indicate the existence of an exchange restriction. The Central Bank can address the problem through increased flexibility in the foreign exchange system.” 

In that report, the IMF team said that participants in the foreign exchange market had reported “fairly widespread and persistent foreign exchange shortages since the fourth of 2013.”

According to the IMF, the persistence of the shortages, in contrast to previous episodes, “may suggest growing balance of payments pressures stemming from high domestic liquidity, rather than merely a temporary mis-calibration of short-term shifts in supply and demand.”

It seems to me that the IMF’s call for greater flexibility in the foreign exchange market and its suggestion that the long queues for foreign exchange may be an indication of a balance of payment problem must tell the T&T authorities that the current system for allocating foreign exchange is a major contributor to the problem of availability of foreign exchange.

The IMF’s view is that “the current system of foreign exchange allocation has imposed easily avoidable costs, despite the high level of foreign exchange reserves” and it raised as a possibility, back in June 2014, that Trinidadian businesses “may suffer damage from being unable to pay their foreign suppliers and those parties unable to purchase foreign exchange from authorized dealers at the official exchange rate could be incentivized to pay a premium to purchase foreign exchange elsewhere. 

The IMF opines that “repeated shortages have resulted in incentives to hoard foreign exchange,” which means, to me at least, that the current allocation system is contributing to the problem of availability.

The IMF concluded that greater flexibility can be achieved through an unconditional commitment to meet foreign exchange demand or by greater flexibility in the pricing mechanism (e.g. by widening the limits on the exchange rate). 

It seems to me that the possibility of an unconditional commitment to meet foreign exchange demand is out of the question because of concerns about the reduced supply of foreign exchange as a result of the collapse in energy prices. 

It would seem, therefore, that widening the limits on the exchange rate—which would mean allowing the rate to find its true value—would be the preferred option for the IMF. 

But it added: “Either way would likely restore confidence in the foreign exchange market, eliminate shortages and hoarding, and provide authorities a rapidly responding barometer of foreign exchange supply and demand conditions, thus providing useful signals about macro-economic policy.

“It may be that recent shortages are masking budding balance of payments pressures, stemming from high government subsidies and transfers and bank credit for imported goods (notably automobiles). 

“Should there be continued pressures for foreign exchange, notwithstanding the changes introduced by the CBTT in late May, a failure to introduce greater flexibility into the foreign exchange market could lead to renewed shortages, indicating the existence of an exchange restriction.”

If the T&T foreign exchange system is found by the IMF to constitute a “restriction” this country would be in breach of Article VIII of the IMF’s charter which states that “members shall not impose or engage in certain measures, namely restrictions on the making of payments and transfers for current international transactions, discriminatory currency arrangements, or multiple currency practices, without the approval of the Fund.”

It is also interesting to note a statement made in each Monetary Policy Report issued by the Central Bank, which is that the Bank “conducts monetary policy geared towards the promotion of low inflation and a stable foreign exchange market that is conducive to sustained growth in output and employment.”

Can the Bank say it has achieved these goals with inflation at 9 per cent and a forex market that has led to queueing by legitimate businesses for up to six weeks to get enough money to pay legitimate foreign bills and invoices?

 

Source:
Trinidad Guardian
Sunday January 18, 2015

http://www.guardian.co.tt/business/2015-01-17/will-imf-mission-propose-forex-change