Time to modernise Exchange Control Act

RUSHTON PARAY

THE RECENT announcement by Scotiabank to reduce the monthly limit on foreign purchases using personal credit cards to US$2,000 and business cards to US$5,000 has reignited a crucial conversation about foreign exchange (forex) distribution in Trinidad and Tobago.

This policy change, effective December 1, underscores persistent challenges businesses and consumers face in accessing foreign currency. It highlights the urgent need for regulatory intervention to ensure fair and equitable distribution of forex resources.

For too long our economy has grappled with forex shortages that stifle business operations, inflate costs, and hinder economic diversification. Small and medium-sized enterprises (SMEs), in particular, bear the brunt of these shortages, struggling to import essential goods and remain competitive both locally and internationally.

The concentration of forex reserves within commercial banks, without adequate mechanisms to redistribute them effectively, exacerbates these challenges.

Economists like Dr Vaalmikki Arjoon have pointed out that while banks accumulate significant forex reserves, these funds are not sufficiently channelled into productive economic activities that benefit local businesses or citizens. This accumulation can lead to inflationary pressures and widen economic disparities.

The business community shares these concerns. The Chaguanas Chamber of Industry and Commerce, represented by Bhadal Maharaj, has voiced that current forex controls strain small businesses, many of which struggle to access the necessary currency for importation.

This not only hampers their operations, but also threatens the broader goal of economic diversification, as non-energy sectors find it increasingly difficult to compete and expand without reliable access to forex.

Given these pressing issues, it is imperative that the government considers amending the Exchange Control Act to address the shortcomings in forex distribution. While the act was liberalised in 1993 to allow more open foreign exchange dealings, the current challenges highlight the need for further refinements to the regulatory framework.

I propose the following amendments to improve transparency, accessibility, and fairness in forex distribution:

Mandatory forex allocation for priority sectors

Commercial banks should be required to allocate a defined percentage of their foreign currency reserves specifically for SMEs, essential importers, and sectors critical for economic diversification. This would ensure that priority sectors have predictable access to forex, supporting economic resilience and growth.

Increased transparency requirements

Banks and authorised dealers should publish quarterly reports on foreign exchange sales, detailing total volumes, sector breakdowns, and customer categories. Enhanced transparency would allow for better monitoring of forex distribution and ensure that sectors receive appropriate access.

Creation of forex redistribution mechanism

Establishing a central forex pool managed by the Central Bank, where banks contribute a percentage of their holdings, could help redistribute forex based on demand priorities. This mechanism would act as a buffer against supply shocks and ensure that high-priority sectors receive the necessary currency.

Enhanced compliance and accountability measures

Stricter compliance guidelines on forex handling, coupled with penalties for non-compliance, would ensure that banks adhere to fair distribution policies and discourage hoarding of reserves.

Forex diversification incentives

Offering incentives for businesses that invest in export activities or diversify their forex sources – such as tax relief or lower forex fees – would encourage them to earn forex independently, reducing dependence on bank-supplied currency.

Real-time forex allocation platform

Requiring banks to participate in a central, real-time platform managed by the Central Bank would improve visibility and accessibility of forex. This platform would facilitate transparent transactions and reduce delays in allocation.

Limiting banks’ forex holdings

Implementing limits on the amount of forex banks can hold relative to their financial obligations would prevent excessive hoarding. Excess reserves could be periodically released back into the market, increasing availability for businesses and consumers.

Establishing Central Bank-mediated clearing system

Introducing a forex-clearing system where the Central Bank can intervene directly during severe shortages would provide a safety net, ensuring that essential sectors have access to necessary forex even when commercial banks are constrained.

Implementing these amendments would require collaboration between the government, the Central Bank, financial institutions, and the business community. It is crucial to strike a balance between necessary regulatory oversight and maintaining healthy market dynamics.

Regular policy reviews and the establishment of an oversight committee under the Central Bank would ensure that these measures remain effective and adapt to economic shifts.

The challenges we face with forex distribution are not insurmountable. By taking decisive action to amend the Exchange Control Act, we can promote a more balanced and transparent framework that addresses immediate accessibility issues while fostering long-term economic stability and growth.

The current situation presents an opportunity for us to reassess and improve our approach to forex distribution. It is essential that we act now to support our SMEs, encourage diversification, and ensure that our economy remains robust and competitive on the global stage.

Rushton Paray is the MP for Mayaro