Introduction
Foreign exchange (FX) markets in the emerging market economies are under pressure as economic growth in China slows and the Federal Reserve scales back asset purchases (takes liquidity out of the economy). The global financial markets are already anticipating higher interest rates as we would expect. Therefore, market participants are already increasing the interest rates under their control. These events are having a tremendous negative impact on FX markets from Argentina, India, South Africa to Russia. Although less severe compared with the global jitters, the Guyana dollar also depreciated against the US$ in 2013.
I will use the column space to explain some recent trends in the domestic FX market. In the coming weeks, 
I will keep on the topic of national currencies and develop an extension of the convergence idea resurrected by Mr. Winston Dookeran, Minister of Foreign Affairs, Trinidad and Tobago. I will then explain why banks hoard Treasury bills in an economy like ours, drawing heavily on my forthcoming book.
A brief note on the Chief Justice’s ruling
For a brief digression: some students have asked me for my opinion on the recent Chief Justice’s ruling on the budget cuts. The ruling has given the kleptocratic communist party of Guyana, the PPP, the right to continue to project its undemocratic instincts and unenlightened ways on the people. Imagine the elected leaders of 52% of the electorate cannot have a say in the spending of their tax dollars. For those who thought a new President will change the mode of governance, think again. GT&T has recently complained the government is preventing it from expanding into certain wireless services. Previously some of us were puzzled why NICIL would sell the government’s shares in the lucrative GT&T. If one thinks in terms of the kleptocracy model, he/she will understand that the path is being cleared for two children of PPP Inc. to control this business space. The ruling has just made it easier for the government to do as it pleases and to shun transparency. That 52% of the population voted against the government does not matter. I would not say more on this issue, since I will not be able to write kind words about the generation of rhetorical swindlers who engineered this curse of a constitution the young must bear.
Some FX market trends
Now let’s return to the relatively more genteel world of international finance. The first stylized fact to note is the Guyana dollar has depreciated slightly against the US$ moving from $205 in Dec 2012 to $208 as at end Dec 2013. These are the average selling rates of the bank and non-bank cambios. This is a relatively small depreciation compared with market convulsions of the early 1990s. Nevertheless, it comes after a period of tremendous stability in the exchange rate from 2005 to 2012. That was an important episode of stability in the FX market that did not reflect the weak fundamentals of the economy, including the primitive structure of exports. Along with another researcher, I have explained the successful fixed rate by observing the increasing concentration of foreign exchange trades among a few large commercial bank traders. This makes it easier for the monetary authorities to use moral suasion as a tool to control the rate. This is perhaps the main reason why Guyana is yet to experience a much deeper depreciation relative to Turkey, India or Argentina in recent weeks.
The second point to note is the flow of foreign currencies passing through the market has decreased significantly. The main currency traded is the US$, but there are also smaller trades in Euros, Canadian dollars and the British pound sterling. The data for analysing these flows are only available as at end September 2013; therefore, I will make the comparison between Sep 2012 and Sep 2013. In Sep 2012 the total value in US$ of all foreign currencies purchased by the commercial banks was US$181.3 mill. In the same period the non-bank cambios purchased US$6.8 million, thus showing that the commercial banks continue to be the dominant traders. For Sep 2013 the total FX purchased by the banks is US$108.7 mill, a decline of US$72.6 mill flowing through the market as purchases. For Sep 2013 the non-bank cambios purchased US$3.3 mill, a decline of US$ 3.5 mill. These numbers indicate a steep decline and we should appreciate the monetary policy operations of the Bank of Guyana that would have prevented an even greater depreciation of the Guyana dollar. In future columns, I will explain the role Treasury bills play in this stabilization.
From where does foreign exchange come so that the bank and non-bank cambios can purchase them? They come from Bank of Guyana sales (interventions) in the market, remittances, exports, foreign grants, capital inflows and underground economic activities. I am not going to spell out the data on the selling side of the market as space does not permit. The same trends hold. Commercial banks are the main sellers (over 90%) and both bank and non-bank cambios saw steep declines in sales volume. The lesson here is there is a smaller volume of foreign exchange flowing through the market. It will take a deeper analysis of exports, remittances and capital inflows to find the main reason. One misconception being peddled is the failure of Parliament to pass the anti-money laundering amendment bill is the explanation. The previous data clearly show the decline occurred long before Nov 2013.
One possibility could be the rice for oil barter with Venezuela. One could argue against this thesis because foreign exchange lost because of not selling rice is gained by not having to pay for oil. There should be the netting out in the long run. The foreign exchange rate, however, has long-term and short-term variables affecting its movement. In the long-term the barter argument does not apply since the rate is determined by monetary policy, fiscal policy and production and export structure of the economy. In the short-term the volume of foreign exchange and order flows matter for movements in the rate. If the cambios sense a shortage of volumes on the purchase side, they would also affect the rate and volumes on the sales side of the market. The cambios sell foreign exchange for businesses to import and for people to send money and invest overseas. Exports, imports, remittances, etc, do not align in time with order flows of foreign currencies. They flow through the market with some delay.
The third trend to note is the Bank of Guyana has stepped up interventions into the FX market by selling more hard currencies in 2012 and 2013 than previous years going back to 2005. This is a clear signal that the market is under pressure. As a result, net international reserves of the Bank of Guyana fell from US$825.2 mill as at Dec 2012 to US$653 mill as at Nov 2013. The net foreign assets of the commercial banks have also fallen from US$257.5 mill in Dec 2012 to US$228.3 mill by end Nov 2013.
Comments: tkhemraj@ncf.edu
