Before I delve into today’s area of focus on this issue, I wish to make another critical point, which I did not highlight last week to corroborate my arguments. I found it difficult to fathom the rationale behind the assumptions put forward on the matter, in which the Minister of Finance had posited that some exporters are hoarding foreign currency in their retention accounts, and are buying up foreign currency in the local foreign currency market instead, thereby causing the shortage.
First and foremost, I haven’t seen any solid evidence cited to substantiate these assertions, though I am cognisant that the Central Bank Governor referred to the high balances held in those retention accounts as evidence. While this may be correct, it does not necessarily mean that exporters haven’t utilised these balances, as you would have to examine the movements of balances in these accounts to ascertain such an outcome.
Suffice it to say that this, therefore, is a critical element of the Governor’s statement which was ignored, hence it would be safe for me to presume such claims are rather speculative in nature. If one were to make any reasonable inference, however, putting this idea into perspective, I am sure anyone would agree with me that there is no logic behind the idea of hoarding foreign currency and having to pay more in the local market. It is not financially and economically sensible. Why would I pay GY $218 to G$230 for US$1 when I have US currency sitting in an account? Put another way: why would you want to pay more money for something that you already have?
Assuming that this turned out to be true for whatever unknown and absurd reason, then surely something is wrong with the intellectual faculty of reasoning of the financial managers of these companies, or they perhaps have an agenda to deliberately weaken the financial footing of their companies, which in turn would translate into a contracting economy. In fact, the economy is already in a declining state, so I should say further contribute to a declining economy. Might I mention at this point that this is a different topic altogether, which I will surely deal with in forthcoming articles?
Recall that, in the previous weeks, I have ascertained the primary cause in which the commercial banks have been investing more heavily abroad, thus leading to the shortage in the local market. This is an example of — or a practise rather — akin to that of ‘financial arbitrage’, and is being exploited in the absence of sound macroprudential regulations and capital controls aimed at restricting such practices.
Reflecting on the most recent global financial crisis of 2008/2009, one of the many contributory factors to the financial crisis was the inability of the relevant regulatory bodies to keep up with the rapid pace of innovative developments which the global financial system had undergone – financial instruments coupled with developments in technology that enabled cross border financial transactions among other features. With the benefit of hindsight, excessive risk-taking was also deemed a norm; all of these interacting together, among many other causes, led to the financial crisis.
Point to note, however, in light of the 2008/2009 financial crisis and against the backdrop of the lessons learned therein, the increasing need to engage a new paradigm is necessary – a shift in focus from micro prudential perspective on financial regulation to macroprudential policies and their relationship with monetary policy, and not exclusive of their implementation and effectiveness.
Within this respect, I will now turn my attention on capital controls and macroprudential regulations. International capital flows can create significant financial instability in emerging economies, because of pecuniary externalities associated with exchange rate movements (IMF Working Paper, 2015).
This aspect of the discussion I will continue next week, when I would examine the Bank of Guyana’s current regulations, macroprudential tools, and reserve management practices before attempting to summarise the revised foreign exchange reserve management guidelines developed by the IMF, capital controls and macroprudential policies.
