In last week’s edition of this column, the author demonstrated the main features and characteristics of the domestic FX market. It was shown that the dominant players tend to be the commercial banks, which in effect determine the exchange rate through price leadership premised upon the oligopolistic structure of the banking sector, a notion also highlighted by Khemraj and Pasha (2012). It was further established and demonstrated, evidently, that as far as a shortage of foreign currency is concerned, so far there hasn’t been a real shortage. Rather, an artificial shortage tend to be created from time to time, wherein the commercial banks, narrowing this down, two commercial banks are the real culprits that distort the domestic market by investing a greater portion of their foreign currency balances in foreign assets abroad, to simply earn higher returns and to prop up their profits, instead of focusing on lending wisely and more prudently in the domestic economy. 
In so doing, this practice effectively constrains the availability of foreign currency in the domestic market to accommodate foreign currency transactions. In other words, the commercial banks behave like investment banks – a practice which the legal and existing regulatory environment does not restrict, but is nonetheless a regulatory arbitrage, given that the practice of investment banking comes with its own set of regulatory requirements. Commercial banks therefore should contain the level of their foreign investments, given the implications of this practice on the domestic economy against the backdrop of their dominant role in the FX market, and hence its impacts.
The author also wishes to reiterate these points, especially having recently reviewed a programme titled “the economy in focus”, in which the shadow Minister of Finance of the political Opposition in Parliament made a presentation on this very issue of a foreign currency shortage. In reviewing the contents of that presentation, the Opposition MP contended that the directive issued by the Central Bank of instituting a $3 spread is the resultant factor of a sharp decline in foreign currency. While the MP, in that presentation, failed to effectively and evidently demonstrate the correlations thereto, the aforesaid real factor was completely omitted. In fact, the Central Bank’s directive to limit the spread was an excellent short-term policy directive against the real causation of this problem; that is, the creation of an artificial shortage. Had this policy directive not been instituted, the outcome would have been an unfortunate scenario in which the domestic currency would have been significantly depreciated against the U.S. dollar, which would have also fuelled inflation to the extent where there would have been hyper-inflation.
It is important to note that the key benchmark one needs to focus on in order to ascertain whether there is a real foreign currency shortage is to first examine the import cover benchmark, which should constitute three months of import cover. Import cover simply means having enough foreign currency to pay the country’s import bill. To this end, at the end of December 2017, the Central Bank’s international reserves stood at US$584 million, which represented four months’ import cover, which is above the minimum benchmark.
Looking at the import figure for 2017, one would arrive at an import cover of US$408 million (US$1,632 million representing imports for 2017/12 months x 3 months). This therefore means that at the end of December, 2017, there was an excess of US$176 million held in the Bank of Guyana’s international reserves. This, therefore, engenders a stable exchange rate.
It is true that the banking system’s net foreign assets have been depleted over a period of time, as was highlighted in previous columns and by other commentators, but it is also true that there is no real shortage of foreign currency at this point in time. To further corroborate this argument, the table below illustrates this point by showing data over the last 11 years. Pay attention to the international reserves held by the Bank of Guyana, import cover and the level of import cover maintained.
