Tuesday 29 September, 2020

Expect Christmas surge in black market USD, say finance experts

Businesses unable to procure foreign exchange in the run-up to Christmas may resort to buying USD through illegal means.

Elson James, CEO JMMB Express Finance, said that the situation has remained the same over the past few years however with added purchasing over the Christmas period, some black market activity may occur.

“We are not seeing any increased volumes (of USD) coming in, we expect the Central Bank to step in as needed but…we’re not seeing increased volume. it’s relatively the same compared to what we’ve seen in the last few years and you will start seeing demand picking up as we move into Christmas, that increased stress in US dollars, and that could lead to greater black market (activity),” he said.

(Photo: Economist Dr Roger Hosein, former minister in the ministry of finance Mariano Browne, former energy minister Kevin Ramnarine, Caroni Central MP Bhoendradath Tewarie, Elson James, CEO JMMB Express Finance, and GTCIC President Vivek Charran discuss post-budget concerns.)

James and others were speaking at a post-Budget session at the University of the West Indies hosted by the Greater Tunapuna Chamber of Industry and Commerce, the San Juan Business Chamber, and Arima Business Chamber to discuss measures proposed by Finance Minister Colm Imbert in Monday’s national budget presentation.

Former minister in the ministry of finance, Mariano Browne, again raised the issue of the foreign exchange shortage, saying this can be solved by floating the TT dollar.

“If we know that the exchange rate on the black market is $7.50, all of you all are businessmen, so don’t tell me you don’t know, and don’t tell me you aren’t buying it at $7.50 either,” he joked.

“If you’re lucky and you can get some from the bank at $6.80 then you’re lucky, but if you’re not meeting your requirements…you know what the position is, it isn’t about devaluation anymore, it’s about allowing the rate to float. We will get all the foreign exchange we need if there’s the right rate in position,” he said.

Browne said instead of using savings, the country is expending its foreign exchange reserves.

“The bottom line is you can run through your savings accounts very quickly if you haven’t put an alternative strategy in position, you can’t live on savings forever.”

“Trinidad and Tobago is in position now. We’re not running down the HSF, we’re running down the foreign exchange reserves.”

“Every time we run an expansionary budget deficit, were essentially keeping the same consumption model in position and it consumes foreign exchange.”

“What are we doing to increase exports and what are the areas that we’re going to be increasing exports in?”

Browne added that government’s announcement of $2.4 billion recouped due to a tax amnesty isn’t a dependable source of revenue either.

“In the short-to-medium term, you’re surviving, and I think that’s where we are. (But) 10 years down the road if we don’t make the change today, we’ll be doing the same thing.

“Hard decisions have to be made and they have to be made early. The longer we delay, the harder it is. Everybody is afraid of the word devaluation…the only reason why our foreign exchange reserves went up in August was due to the tax amnesty.

“That’s one of the reasons why we got $2.4 billion (in tax returns) (much) of that comes from oil and gas companies and the rest comes from some insurance companies. The penalty for non-payment is 20 percent. So we have to discount that, that’s not recurrent,” he said.

Browne added that the country’s dependence on natural gas must be diversified.

“Foreign investments (in natural gas) moved us to a second boom. (But) how do you use the boom to position the economy? It’s important to understand why you’re being successful so you’ll know what you’re doing next when the business runs into trouble. Well, the business has run into trouble.”

“We have to recognise that we’re a mature province, and what we have to look at are alternatives to natural gas. The budget says stability, I’m not clear what that means except to say that in real terms, it means that we ought not to be spending more than our revenue on a long-term basis, because we’re running more budget deficits,” he said.


What is a Floating Exchange Rate?

A floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate.

Floating exchange rate systems mean long-term currency price changes reflect relative economic strength and interest rate differentials between countries.

Short-term moves in a floating exchange rate currency reflect speculation, rumours, disasters, and everyday supply and demand for the currency. If supply outstrips demand that currency will fall, and if demand outstrips supply that currency will rise.

Extreme short-term moves can result in intervention by central banks, even in a floating rate environment. Because of this, while most major global currencies are considered floating, central banks and governments may step in if a nation's currency becomes too high or too low.

A currency that is too high or too low could affect the nation's economy negatively, affecting trade and the ability to pay debts. The government or central bank will attempt to implement measures to move their currency to a more favourable price.

(Source: Investopedia)

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