Govt needs to stimulate export sectors – Ali

Foreign exchange crisis

Pumping foreign currency into the market will not solve the crisis facing the local economy, according to economist Irfaan Ali.
The Opposition Member of Parliament said in order to address the problem in the long run, Government must implement policies which stimulate export sectors that generate foreign revenue.
He said the recent move by the Bank of Guyana to intervene in the foreign exchange market validated the position that the foreign exchange market was not clearing.

“It took some time for the Bank of Guyana and Minister of Finance (Winston Jordan) to accept the bitter reality that businesses are unable to access foreign currency and were placed in queues when they approached the cambios. However, as the good book says ‘confession is always good for the soul’,” Ali said in a statement to Guyana Times.
However, the MP, who is also Chairman of the Public Accounts Committee (PAC) in Parliament, said while intervention by the central bank would address the prevailing market imbalances, it could only serve to provide temporary ease.
“This measure cannot and should not be treated as a permanent or long-term solution to the turbulence in the foreign exchange market. A permanent solution requires measures that would ultimately increase the supply of foreign currency as well as reduce pressures on the demand for foreign currency,” he explained.

Controls
Ali pointed out that the foreign exchange market, referred to as the cambio system, was established in the early 1990s after the adoption of the Economic Recovery Programme (ERP). In this market, buyers and sellers can trade foreign currencies at market determined prices in accordance with Dealers in Foreign Currency Licensing Act, No 19, of 1989.
According to the Act, cambios are permitted to buy, hold and sell foreign currency, and are also allowed to determine the buying and selling rates and display these prices in a prominent position at their business places. The only restriction for cambios is they are not allowed to borrow, lend and accept deposits. Given the legal framework governing the trade in foreign currencies, market prices are expected to be determined by demand and supply conditions.
Therefore, Ali argued that the action by the Bank of Guyana to directly control the bid-ask spread (that is, the difference between the buying rate and the selling rate) and force cambios to trade (buy and/or sell) and hold currency could, therefore, be regarded as a subtle form of bullyism and was certainly illegal.
He explained that the supply of foreign currency is derived primarily from the export of our major commodities, namely rice, sugar, bauxite, gold, and timber. The other major sources of foreign currency include: workers’ remittances, short-term inflows, Foreign Direct Investments, long-term foreign loans and grants.

Poor performance
Based on the 2017 Budget speech, the foreign currency earnings from every major export, except gold, declined during 2016.
The poor performance of the key export sectors may be linked directly to the actions of the A Partnership for National Unity/Alliance For Change (APNU/AFC) Government, he noted.
“For instance, upon assuming office, the coalition disbanded the Petro-Caribe deal which provided a guaranteed market for rice at preferential prices. To date, the same Government has failed to find alternative markets or re-negotiate the Petro-Caribe deal to help the rice sector. The forestry sector, on the other hand, witnessed sharp decline because of the deliberate efforts of the coalition Government to expel some export companies,” he stated.
Moreover, the economist predicted that the decline in export revenue from key sectors was likely to persist in 2017 and beyond. He noted that this was due to the decreased investment in the key export sectors given the unfavourable business climate and onerous taxes that increase the operating cost of export businesses.

Demand
Meanwhile, the demand for foreign currency is driven by imports, Ali highlighted. Available forecasts suggest that imports will increase further over the next five years by an annual average of 6.8 per cent. It, therefore, means the demand for foreign currency will increase in the near future.
But given the contraction in supply of foreign currency and demand pressures, the market participants anticipate continued shortage of foreign currency.
“Consequently, they will buy and hold rather than dispose the foreign currency they acquire. This practice is only rational and not necessarily driven by any evil or devious intentions,” Ali explained.
“The market is experiencing excess demand for foreign currency, that is, the demand for foreign currency is outstripping the supply. This is evidenced by the continuous complaints from members of the Private Sector that they’re unable to access foreign currency and are placed in queues,” he stated.
Ali said at best, any injection of foreign currency by the central bank may only serve to partially satisfy the demand by those currently waiting in the queues to settle outstanding payments.
However, he said such an injection would not address the fundamental supply problem in the market and would hardly discourage the market participants from buying and holding.
“This behaviour will persist until the market participants are confident that supply of foreign currency will improve to satisfy their demands. In other words, like rational investors, the market participants will buy and hold foreign currency once the export sector – which is responsible for the supply of foreign currency – continues to limp along to the graveyard,” he stated.
Ali reiterated that the prevailing crisis in the market, therefore, could not be addressed by merely pumping foreign currency in the market.
He reasserted that the only viable solution was to stimulate the export sectors.