The flow of foreign currency through the Guyana market dropped significantly in 2013 and this coincided with a depreciation in the local currency versus the US$.
Economist Tarron Khemraj writing in his Development Watch column in Wednesday’s edition of Stabroek News said that the data for analysing these flows was only available up to the end of September 2013 and so therefore he compared the positions as of September 2012 and September 2013.
In September 2012, he said that the total value in US$ of all foreign currencies bought by the commercial banks was US$181.3M. In the same period the non-bank cambios bought US$6.8M, thus showing that the commercial banks continue to be the dominant traders.
For Sept 2013 the total foreign exchange bought by the banks was US$108.7M, a steep drop of US$72.6M coursing through the market as purchases. For Sept 2013 the non-bank cambios purchased US$3.3M, a drop of US$ 3.5M.
“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”, Khemraj said.
He pointed out that the Guyana dollar has depreciated slightly against the US$ moving from $205 in December 2012 to $208 as at end December 2013.
These comprised 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”, Khemraj wrote.
He said that along with another researcher he had explained the successful fixed rate by adverting to the increasing concentration of foreign exchange transactions among a few large commercial bank traders. He argued that this makes it easier for the monetary authorities to employ moral suasion as a tool to control the rate. He said that this was perhaps the main reason why Guyana is yet to experience a much deeper depreciation.
Addressing the mechanics of the market, the available foreign exchange is derived from Bank of Guyana sales (interventions) in the market, remittances, exports, foreign grants, capital inflows and underground economic activities. 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”, Khemraj contended.
One possibility could be the rice for oil barter with Venezuela. He said that one could argue against this thesis because foreign exchange lost from not selling rice is gained by not having to pay for the purchase oil.
There should be a netting out in the long run but he posited that the foreign exchange rate 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”, Khemraj asserted.
He said that a third point to note was that the Bank of Guyana has pumped up interventions into the foreign exchange 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”, Khemraj declared. As a result, he said that the net international reserves of the Bank of Guyana fell from US$825.2M as at Dec 2012 to US$653M as at Nov 2013. The net foreign assets of the commercial banks have also dropped from US$257.5M in December 2012 to US$228.3M by the end of Nov 2013.
