– In the context of a currency crisis
In light of the previous columns over the last three weeks, it is necessary to understand the domestic foreign exchange (FX) market. The Guyanese FX market is comprised of both bank and non-bank cambios, legally referred to as dealers in foreign currencies.
Another component of the FX market is money transfer activities. Citing the Bank of Guyana’s Annual Report for 2017, the total volume of foreign exchange transactions increased by 3.2 percent to US$7,149.3 million. Money transfer transactions were valued at US$278.5 million, reflecting a 48 percent increase from the 2016 level. There was a net purchase of US$50.2 million, which caused the Guyana dollar to remain stable against the U.S dollar at G$206.5.
The most dominant players in the FX market are the commercial banks. Between 2000 and 2007, the bank cambios accounted for 90 percent of all trading activities, while the non-bank participants accounted for the remaining FX trades (Khemraj and Pasha, 2014). Another important feature of the FX market is the practice of bank cambios to maintain large foreign currency balances: at the end of 2017, net commercial bank foreign assets stood at US$276.5 million.
Khemraj and Pasha (2014) further noted that the quantity of US dollars retained by commercial banks increased dramatically, and coincided with the growth in foreign investments. There was a notable sharp decline in the turnover ratio, which when taken together reflects the tendency of bank cambios to mobilise FX to engage in foreign investments abroad, rather than to resell.
This was precisely the case back in 2017, when there was a huge uproar at the time that there was a foreign currency shortage, when the commercial banks were claiming a shortage of foreign currency and, as a consequence, customers were placed on a waiting list to effect payments to suppliers abroad, and likewise for incoming transfers from abroad. One would recall that a number of different theories and assumptions were developed, including hoarding, among others, to the point where at one time the Minister of Finance threatened to close the retention accounts held by exporters to remedy the situation. It was at that time that this column was first started, and this was the first topical issue the author dealt with at the time in a series of articles addressing that particular matter.
To this end, it was shown that the net foreign assets held by commercial banks increased by US$4 million, or 1.6 percent, in 2016 in comparison to a decrease in 2015 by US$22.7 million. While a marginal increase was recorded in 2016, the composition of commercial banks’ net foreign holdings evidently changed quite significantly.
Commercial banks’ investment in foreign markets in 2015 was recorded at $204.3 million, reflecting an increase in foreign investments of US$6.3 million, or 3.1 percent. In 2016, however, commercial banks increased their level of foreign investments by a whopping US $43.6 million, or 21.3 percent. (See full article here: https://guyanatimesgy.com/the-foreign-currency-fiasco-is-there-really-a-shortage/).
This level of increase in foreign investments in effect reduced the availability of foreign currency held by commercial banks to accommodate international trade emanating from the domestic market. This was highlighted in the first article under this column, published on April 23, 2017, wherein it was concluded that there was evidence that the Guyanese dollar had depreciated against the U.S currency and the simple demand and supply dynamics can explain this. Of key note, however, one of the main causes for this was the dramatic increase of foreign investments by the local commercial banks, mirroring the behaviours of investment banking during the latter part of 2016. Albeit this move was arguably quite logical, as the commercial banks found foreign investments more lucrative at a time when the domestic economy was experiencing a decline in economic activities amidst a sea of uncertainties and instabilities inherent within the environment that they operate.
(This discussion will be continued next week).
