Movement of money
One of the most important aspects of the global political economy is the finance structure. This is the part that deals with foreign debt, foreign currency relationships and international payments. This is the pattern of money flows between and among nations. The finance structure defines who 
has access to money, how they gain access to the money and on what terms are they able to do so. The movement of money could take many forms. One is the movement as a loan. Another form is the movement as foreign direct investment. Further, the movement of money could involve the exchange of currency. An important part of that structure in Guyana is the cambio market. Given the significance of this market to the proper functioning of the Guyana economy, it is useful to examine this market periodically. This article provides some observations of the cambio market.
Aggregate value
The cambio market is the place where people exchange Guyanese dollars for foreign currency. The aggregate value of transactions makes the cambio market the largest market in Guyana. In 2014, the value of the market was about US$1.4 billion. Like many commodity markets, the foreign currency market is considered highly decentralized. Competition in the market could only be measured by the visible transactions that are reported by the licensed dealers. When one considers the way the foreign exchange market works, one soon realizes that the market never sleeps. People are always looking to buy foreign currency and can get it even when officially-established institutions shut their doors. There are options trading, futures contracts, forward contracts and spot trading. In Guyana, no one is known to operate any of the derivative markets. It must be kept in mind though that the foreign currency market is not totally transparent and things could be going on that few people know about. Therefore one cannot be certain of all the types of trade that might be taking place in that market.
Cambios
The Lucas Stock Index (LSI) fell 0.069 percent during the final period of trading in January 2016. The stocks of three companies were traded with 30,680 shares changing hands. There were no Climbers and one Tumbler. The stocks of Banks DIH (DIH) fell 0.5 percent on the sale of 28,482 shares. In the meanwhile, the stocks, Demerara Distillers Limited (DDL) and Demerara Tobacco Company (DTC) remained unchanged on the sale of 2,075 and 123 shares respectively.
Trades in the foreign currency market are executed through cambios. The cambios were introduced in the 1980s as Guyana was trying to restructure its economy. Everybody sells over the counter in face-to-face transactions using what could in effect be regarded as a horizon date, the immediate exchange of currency for equivalent value at the moment of the exchange. Since the foreign currency trading affects the money supply in the country, the Bank of Guyana (BOG) has an interest in what goes on in the foreign currency market. It exercises some control over the industry by issuing licences to those who meet certain criteria and administering the law that governs their conduct.
The nature of the cambio market looks quite different today than it did 15 years ago. In 2001, there were 24 licensed dealers of foreign currency. By 2014, the market had undergone significant change. There were 18 entities that were identified with trading in foreign currency. Six of them were commercial banks while the remaining 12 were not. Despite the decline in identifiable entities, the number of locations from where foreign currency could be bought and sold had grown exponentially. It had more than doubled in size moving from 24 to 52 outlets across Guyana where transactions in foreign currency could take place.
Trading locations
Seventy-seven per cent of the trading locations are owned and controlled by commercial banks while 23 per cent are owned and controlled by non-bank operators. In 2001, only one cambio or four per cent of the locations could be found outside of Georgetown. Now, there are 29 locations or 56 per cent of cambio sites outside of Georgetown where foreign currency transactions can take place. Almost all of the growth took place outside of Georgetown. A segregation of the locations by county would show that the Essequibo county saw the largest increase in new sites. It got 11 or 38 per cent of the physical growth in cambios. Berbice and Demerara each got 31 per cent of the growth. The growth in the number of locations is associated with the expansion of the business activities of the commercial banks. As a consequence, the commercial banks control the foreign currency market outside of Georgetown. The existence of bank branches outside of Georgetown made it convenient for persons who did not live in Georgetown to do business.
Market share
At one time, it was felt that the non-bank cambios would dominate the foreign currency market. However, that has not happened. In 2001, the value of currency traded in the foreign currency market was about US$425 million. By 2015, the value of currency traded had more than tripled to in excess of US$1.4 billion. The share of business done by the cambios of commercial banks was equivalent to 89 per cent of the value of currency traded. This meant that the non-bank entities had 11 per cent of the market. However, things have moved against the non-bank enterprises since then. Their market share had fallen to four per cent by 2014. The commercial banks are therefore in a dominant position in the cambio markets and have been able to use it to their advantage. Commercial banks have been able to sell their foreign currency at far higher rates than the non-bank cambios could. As such, the banks have been able to maintain a healthy spread between their selling and buying rates. The non-bank cambios on the other hand have been unable to maintain as high a spread as the banks.
Tandem movement
The money supply and the supply of foreign currency tend to move in tandem. As the supply of foreign currency declines so does the money supply and vice versa. The foreign currency market makes up about 90 per cent of the money supply in Guyana. This tandem relationship between the foreign currency market and the money supply reflects the extent to which the economy is dependent on the foreign sector. Based on the data in the current account of the Balance-of-Payments, all of the foreign currency traded by the cambios is used for external trade transactions. The foreign currency trade therefore plays a major role in supporting the domestic production operations in Guyana. It appears to play no role in the foreign investment undertaken by Guyanese investors.
It should be no surprise to see that the demand for foreign currency continues to outstrip its supply. This difference between supply and demand enabled the cambios to earn in excess of $13 billion in profits last year. The commercial banks would have earned in excess of $12 billion in gross profits or the equivalent of $2 billion per location. The non-bank cambios would have earned $520 million in gross profits or $43 million each.
Individuals and businesses
Foreign currency is supplied and purchased by individuals and businesses. Foreigners who visit Guyana as part of their tourism experience supply foreign exchange. Investors who come to do business also bring foreign currency to the country. Foreign aid or loans also enable Guyana to gain access to foreign currency. Notwithstanding the many sources, one of the single largest sources of foreign currency is Guyanese who work abroad. This has consistently been the case since the start of the new millennium. By 2014, inflows from persons living abroad made up 23 per cent of the foreign currency purchased by the cambios. Guyana’s exports on the whole have been the principal drivers of its foreign currency acquisition. In this group, gold by far has been the biggest contributor and with production set to expand into the future, it will remain that way for a while.
Gap in wealth
One of the things that the foreign currency market helps us to see is the movement in the gap in wealth between Guyana and other countries. The key instrument is the exchange rate itself. Since most of our transactions are done in US dollars, it enables us to get a glimpse of how fast the wealth between the US and Guyana has changed over the years. The depreciation of the Guyanese dollar by eight per cent during the period 2001 to 2014 suggests that the gap in wealth between the USA and Guyana would have grown by no less than eight per cent.
