During last week, there were two new press releases on the foreign currency matter. It is therefore vital that I turn my attention to these new developments and seek to incorporate them in my analysis for today. In the context of these articles and my own workings over the past few weeks, my emphasis is on the need for capital controls and improved macroprudential regulations. At this point, I wish to make it crystal clear that my position on this is specific to foreign investments by commercial banks. It is crucial that I ensure clarity in this respect, because capital control covers a very broad spectrum.
I am of the strongly held view that the central bank should consider setting a ceiling limit on the amount of foreign currency commercial banks are allowed to invest in overseas markets.
In reference to my first article, published on April 23, 2017 to establish whether my findings and conclusion were correct, you would recall I provided evidence in support of this. The evidence showed that commercial banks’ foreign holdings at the end of 2015 were US$ 273.7M, and at the end of 2016, were US$278.1M, which gave rise to an increase of US$4.4M in 2016.
We also saw that commercial banks’ foreign investments for 2015 were US$204.3M, which in effect left US$69.4M available to accommodate foreign currency transactions in the domestic market. In 2016, foreign investments increased to US$247.9M from US$204.3M in 2015, which left a meagre US$30.2M available to accommodate foreign trade transactions in the domestic market. As you can see, demand did in fact remain constant, and therefore the reduction to US$30.2M in 2016 from US $69.4M in 2015 ultimately caused the distortion in the domestic market and the depreciation of the exchange rate. This is thus a classic illustration of financial arbitrage, to which I alluded last week.
With this in mind, how did the exchange rate stabilise? And where did the excess US currency come from that has stabilised the rate? Noting that there was no substantial increase in export earnings recently, where did it find its way back into the system? Here’s where we could make a safe assumption as to where it came from: Up until February 2017, if you were to examine the statistical bulletin published by the Bank of Guyana for March 2017, you will find that total commercial banks’ foreign holdings stood at US$282M, which is virtually within the same range it had been as at December 2016.
In March 2017, however, commercial banks’ net foreign holdings decreased by US$29M (substantial) to US$256M. At this point, it would be difficult to ascertain definitively how much of this amount was utilised for investments abroad by the commercial banks. Normally, these figures can be extracted from the annual reports of the commercial banks, as they are not stated anywhere in the statistical bulletin published by the central bank. Restating the figures for the last two years, nonetheless, in order to draw a reasonable inference: in 2015, foreign investments stood at US$204.3M, and in 2016, it was a whopping US$247.9M. We can therefore safely assume that the commercial banks broke their investments abroad in the month of March 2017 and brought back US$29M into the local market, which also includes a US$7M injection by the Bank of Guyana, thereby stabilising the exchange rate.
In conclusion, if I were to suggest anything to the Governor of the Bank of Guyana, I would quite frankly be an advocate to have the commercial banks bring back into the domestic market those sums of foreign currency invested in foreign markets, as there is where one important element of the problem lies. This validates my contention in regard to instituting controls on the amount of foreign assets commercial banks are allowed to invest in foreign markets. Additionally, I wish to say this rather boldly, and perhaps in defence of the Central Bank Governor, whose professional stature one of the articles this week sought to discredit. The Governor is not the one to be penalised. It is the commercial banks that are employing financial arbitrage tactics at the cost of distressing the domestic economy. The task of regulating and supervising the financial sector, which is the heart of an economy, is indisputably challenging, especially when it is expected to be done within the framework of a rather deteriorating economy, which is miraculously being kept afloat on only one productive and export sector.
