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Will forex shortages trigger higher inflation?

Thursday, June 8, 2017
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In his May 10 mid-year budget review, Finance Minister Colm Imbert made the following important observation about the current inflation rate in T&T: “It is also noteworthy that notwithstanding the expansion of the VAT base, the gradual 7.0 per cent depreciation of the currency over the last year, increases in fuel prices, and other tax adjustments, inflation has remained subdued with the 12-month increase in the retail price index hovering at between 2.5 and 3.6 per cent.

“Food inflation has generally trended downwards since 2014 from a high of 18.2 per cent in October 2014 to 7.7 per cent in January 2017.

“This containment of inflation is a deliberate strategy of this Government, designed to cushion the effect on the most vulnerable of the reduced national income, and it has worked so far.”

As an update to Mr Imbert’s information on the country’s interest rate, at the end of last month the Central Bank disclosed that the 12-month headline inflation rate in March was 2.8 per cent, up from 2.6 per cent in the previous month and close to the 3.0 per cent average of the last six months.

And the Central Bank added: “In its deliberations, the Monetary Policy Committee noted that the domestic economy continued to need support toward recovery, and that the risk of overheating did not appear imminent in light of the recent information on inflation.”

So, we can conclude from recent statements from the Minister of Finance and the Central Bank that T&T’s inflation rate has remained subdued and that the repo rate has remained at 4.75 per cent because “the risk of overheating did not appear imminent in light of recent information on inflation.”

Also, as Mr Imbert made clear, the containment of inflation is not only a “deliberate strategy” of the government, it is also an important focus of the government’s macro-economic strategy.

Given that the Central Bank has held the repo rate—by which the Central Bank signals commercial banks where it wants lending rates to go—at 4.75 per cent since December 2015, when Governor Alvin Hilaire was appointed, is there a chance that the monetary authority would start to push up the cost of borrowing if the rate of inflation doubled from, for example, 2.8 to 5.6 per cent?

Into this possible scenario must be placed another important focus of the government’s macro-economic strategy—the maintenance of exchange rate stability.

Or as Mr Imbert said during his mid-year budget review: “We have also made it clear that we will work in tandem with the Central Bank to ensure there is an orderly and stable exchange rate regime, based on foreign exchange inflows and the demand for foreign exchange, with a suitable focus on the facilitation of exports. There will be no drastic or sudden depreciation of the currency.”

But this “orderly and stable exchange rate regime” has meant that businesses that need foreign exchange to buy imports have not been able to source the US dollars from the authorised dealers which, for the most part, are the country’s commercial banks.

On last night’s Money Matters programme on CNC3, which I co-host with Judy Kanhai, marketing director of local chicken producer Arawak, Robin Phillip, said his company requires between US$600,000 and US$700,000 a week to purchase grain, some hatching eggs and nutrients and pharmaceuticals for the animals. Now US$600,000 to US$700,000 a week is between US$30 and US$35 million a year.

Mr Phillip also disclosed that Arawak gets between 25 and 30 per cent of its foreign exchange requirements from the “established distributors as determined by the Central Bank.” That means, by my calculation, Arawak gets between US$7.5 and US$10.5 million from T&T’s authorised dealers of foreign exchange.

Asked by Ms Kanhai where Arawak was getting the balance of its annual foreign exchange requirements from—between US$22 and US$25 million—Mr Phillip said: “As a business, we have to consider that we have a commitment to our customers, our employees and our shareholders and therefore we have to find all the legitimate means to access foreign exchange to meet our commitments. Because our suppliers, at the end of the day, don’t want to hear excuses of why we did not get money this week.”

Ms Kanhai then put to Mr Phillip that if Arawak is a getting US dollars from outside the authorised dealers, it has to pay more than the exchange rate set by the Central Bank which is about $6.78 to US$1.

Mr Phillip explained that sometimes their bankers facilitate them by providing them with euros which, when translated into US dollars, works out at a rate of beyond $7.25 to US$1; because of the US to euro exchange rate.

“If you go outside of that system, where money is available from legitimate sources, you will find it is closer to what is quoted on the street, which is between $7.60 and $8 to US$1.


Mr Phillip said: “We have a business to run. We cannot throw our hands up in the air and say we can only get 25 per cent (from the authorised dealers) so let’s cut back our production by 75 per cent. That just will not do for our customers, our employees or our shareholders.”

He then disclosed that Arawak gets between 40 and 50 per cent of its foreign exchange from “other” sources, while about 25 per cent comes in the form of euros and another 25 per cent from the authorised dealers.

So, here is an executive of a legitimate company producing a commodity that is in daily use in a majority of the country’s households disclosing that close to half of the foreign exchange that that company needs is purchased at a higher rate than the officially quoted Central Bank exchange rate.

Now, strictly speaking, accessing US dollars from other than the authorised dealers is illegal because, as I have pointed out in this space on a number of occasions, it contravenes the Exchange Control Act Chapter 79.50 which states at section 6 (1): “Except with the permission of the Central Bank, no person shall in T&T, buy or borrow any gold or foreign currency from, or sell or lend any gold or foreign currency to, any person other than an authorised dealer.”

Any person who contravenes this section of the Exchange Control Act is liable on summary conviction to a fine and to imprisonment for two years and to a fine and imprisonment for five years if convicted on indictment.

One can only conclude that the Central Bank is aware of this trade in US dollars by unauthorised dealers.

One can also only conclude that any system that forces businessmen to break the law—in order to continue providing work for their employees, a vital source of protein for their customers and a return on the investment of shareholders—is a total failure and should be scrapped immediately.

And the exchange rate regime that Mr Imbert insists on may not be capable of maintaining a low rate of inflation for much longer.

On CNC3’s Business Watch on Tuesday night, Ms Kanhai reported that the price of chicken at pluck shops across the country has been increasing by small amounts for much of this year.

She interviewed Rasheed Karim, head of the Pluck Shop Association, who confirmed that the price of a live chicken in some areas has increased to $44 from $39—nearly 13 per cent.

Mr Karim said all of the three large producers of chicken in this country increased their prices “because of the foreign exchange problem that they are faced with and because they have some extra costs.”

So, here is a situation in which the price of the country’s main source of meat has increased because producers are unable to get the US dollars they need from the official channels and are being forced to pay more for the US dollars from unauthorised channels.

This means that the Ministry of Finance and the Central Bank are fuelling the illegal black market in US dollars and enriching those who have access to US dollars and are able to sell to legitimate businesses at up to $8 to US$1.

The Ministry of Finance and the Central Bank are also forcing legitimate businesses to enter into US dollar loans with commercial banks on which the interest rates are probably unregulated and certainly usurious.

And this is all to protect an exchange rate regime that is only able to meet about half of the existing legitimate demand.

This cannot be right!


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