Howai: US$ crunch may spur rate hike

CENTRAL Bank Governor Larry Howai has signalled there could be a change in the interest rate as a measure to address the foreign exchange (forex) shortage facing Trinidad and Tobago.

Speaking at media engagement event at Central Bank on September 4, Howai noted the interest rate differential when comparing US banks with TT banks remains negative.

He explained up to 2016 TT had better interest rates than US banks, but this has changed with US banks providing better rates every years since 2017, with the exception of 2021.

Howai said this acts as a deterrent to bringing US currency into the TT banking system and suggested a monetary policy change is required to address this issue.

"People are complaining they can put their money in a US bank and get a good rate of interest and put it in a TT bank and get a poor rate of interest.

"At some stage we will have to change this and put this back again so that people in TT have an incentive to bring their US from the US and deposit it here rather than in the US.

Howai noted while some businesses may not be receptive to the policy change it would be beneficial for the most part.

"I have signalled to the business community something they don’t necessarily want to hear, that interest rates will have to go up.

"But on the other hand they want to hear it because many businesses export and they say when they bring their money back they aren’t getting a competitive rate of interest.

"So, we have to increase the rate of interest so that businesses can get a competitive rate when they bring their money back to TT and they have an incentive to bring it back rather than leaving it outside so we have more US flowing into the system."

Howai warned though, not all the US currency that comes back into the system though this measure will be available for public consumption.

"Some of that may not be available for sale, it may be for the asset/liability books in the banks.

"Nevertheless, it affords us more flexibility the more we can repatriate back into TT. So interest rates will have to go up."

Howai said the move was becoming even more necessary as Central Bank US reserves are on the decline

"It’s getting to the point where you, the public, has more foreign exchange than us, the Central Bank."

Pointing to a chart, he outlined the gradual increase in forex deposits in the banking system versus the gradual decline in Central Bank forex reserves.

In 2015, Central Bank US reserves were valued at just over $60 billion, and have declined to around $38 billion in 2024.

Meanwhile, forex deposits in the banking system grew from approximately $25 billion to a high of around $32 billion in 2022, before dropping to just under $30 billion last year.

According to Howai, "The public has more forex reserves than Central Bank itself, if deposits in foreign banks by locals are taken into account."

No evidence of 'forex cartels'

During a post-cabinet news conference at the Red House, Port of Spain on May 15, Prime Minister Kamla Persad-Bissessar said government will compile a report on forex distribution and leakages over the last decade.

She said the report will be made public to identify the main users and facilitators, and "explain to the public how his entire forex distribution cartel and conspiracy between certain operatives and businesses were functioning."

Asked about Persad-Bissessar’s comments, Howai said, "From our perspective we have no evidence that would suggest there is a cartel."

He said he was made aware, though, there are questionable forex practices taking place in TT.

"I've been told that there is a black market somewhere out there. The extent of that black market, how pervasive it is, I have no real data on that right now."

He added a "grey" market also exists where people generate forex using local assets but stash the money abroad.

"An ambassador might come and rent your house and he pays you the US dollar but he credits your account in Florida or New York or somewhere.

"You have some areas where foreign exchange legally doesn't enter into the system. It's not illegal, it just doesn't come into the system."

Howai reiterated this was an example of why the measures such as increased interest rates were necessary.

"We have to find ways to incentivise people to move the grey market… and the black market into the normal market."

Less than a week after Howai’s conversation with the media, Central Bank issued a public notice warning of the risks of buying forex from unauthorised sellers.

On September 10, Central Bank in a Facebook post said it "has observed with concern an increasing number of advertisements on social media platforms purporting to offer foreign exchange to the public."

The bank added buying, selling, borrowing and lending foreign exchange without the required authorisation of the Central Bank is an offence under the Exchange Control Act.

Central Bank warned, "Members of the public who conduct business with unauthorised persons do so at their own risk including the risk of non-recovery in the event of financial loss, fraud and disputes."

It urged the public to only conduct forex transactions with authorised dealers such as recognised banks including ANSA Bank Ltd, ANSA Merchant Bank Ltd, Citibank (TT) Ltd, First Citizens Bank Ltd, CIBC Caribbean Bank (TT) Ltd, JMMB Bank (TT) Ltd, RBC Royal Bank (TT) Ltd, Republic Bank Ltd, Scotiabank TT Ltd, Development Finance Ltd, Massy Finance GFC Ltd, NCB Merchant Bank (TT) Ltd and Export-Import Bank of TT (Eximbank).

Howai: Govt determines exchange rate

Howai sidestepped questions on the exchange rate and Central Bank's role, insisting that was out of the bank’s hands.

"That is not a question for us. That decision is made across in the other tower (Ministry of Finance offices)," he said when asked if he was committed to maintaining the exchange rate.

Howai said the bank provides guidance that can used to determine what the real exchange rate "could or should be," but added the decision ultimately lies with the government.

"We do different scenarios and computations on the effect of any possible change on inflation and other things.

"We do all the work that is required but it is not a decision that we make. That is a policymaker’s decision by the people who were elected to make those kinds of decisions for us.

"We don’t venture into that."

Howai said given the numerous implications, it was best left to the government to make such a complicated decision.

"Given the entire ambit of all the things that are affected by that, some will be positive and some will be negative, they will have to weigh the suite of issues they address."

Howai was asked whether keeping the current exchange rate contradicts Central Bank’s mission of promoting monetary, credit and exchange policies that would foster monetary and financial stability and public confidence and be favourable to the economy of TT.

He reiterated altering the exchange rate is government’s decision, but defended the decision to leave it as he said sudden decisions could create "significant distortions" for an economy.

"I expect that what is happening is policymakers are looking at how is this going to affect the small man, and how is it going to affect their ability to live at a basic level.

"Over time, I suppose they will try to roll out different initiatives on their side, as we roll out on our side, to see how we could get a level that minimises the disruption that comes from an exchange rate adjustment."