Our local economy in Trinidad & Tobago is currently facing a growing Balance of Payments deficit arising out of low oil prices; the impact of which is even more potent for our commodity driven country. The need to attract more foreign exchange and preserve our existing level of cover is becoming more and more obvious every day. As such, in 2012, the International Monetary Fund (IMF) made several recommendations which include the implementation of an auction system for the allocation of United States Dollars to the financial system. The intention was to make the market more competitive while allowing for tighter monitoring and trying to prevent capital flight. However, with dwindling supply from low oil prices and an unsustainable level of demand, this system led to a certain amount of precautionary and speculative demand in addition to the true level of demand. Financial institutions as dealers in foreign exchange were forced to ration scarce Central Bank allocations in order to prevent a depletion of our current levels.
The situation is certainly not ideal, and it raises the question of allocational efficiency. While under the old system, US allocations were granted based on the institution’s customer base, in recommending the current system the IMF’s intention was to allow dealers to bid for allocations thereby creating more competition, greater allocative efficiency and even the creation of a deeper market in the long run. Yet the question arises of if this system is truly in everyone’s best interest. Perhaps by allowing motives relating to market share become the deciding factor, we are somehow robbing ourselves of the opportunity for ensuring that it is applied to its best and highest use.
Now this decision will not be easy…
Should priority be given to exporters? This will certainly direct the resources to those who can contribute to continuity of its flow. However, as far as I’m aware, the number of existing exporters is most likely woefully inadequate to create sufficient flows for any sort of real impact to be felt. Not to mention that encouraging local businesses into exportation before they are ready might not necessarily be the best idea.
Should priority be granted to social service suppliers such as those companies which import medical supplies and equipment for hospitals, the national security divisions or even the education industry. In that case, who gets to determine the boundaries of the qualifying criteria for this parameter. Would pharmacies then receive priority? What about the entertainment industry? Couldn’t they also argue that they are providing a vital service for the betterment of society as well?
This also begs the question, if priority were to be given to any one industry, what about the consequences for the other industries? Starving them of much needed supplies will lead to losses and possibly even unemployment. Any of the above-mentioned categories would likely exclude the majority of business owners and so will have a pretty large impact on the economy as a whole and increasing unemployment will definitely have an impact on our quality of life not to mention local crime levels.
The goals of policy makers include those of greater efficiency and hopefully greater transparency as well as the creation of a more robust market. Yet what are we doing to measure our progress? Is there any form of proactive monitoring of the industries or any potential negative consequences of our current system? What about measuring the activities of the existing dealers to ensure that their activities and exposure are not potentially dangerous for themselves or the market? Given the pro-cyclical nature of our economy, are any measures being put in place to create sustainable or perhaps simply reliable flows?
All in all, there are so many questions to be asked and so many different ways to look at the issue however in my opinion, we as a society, tend to protest very passionately at first but unless there is a political motive or any other ongoing exposure to the problem at hand, our voices tend to peter out as we become resigned to the situation as it is. Please don’t get me wrong, there isn’t much that CAN be done to increase the amount of flows available however that doesn’t mean that there still aren’t other questions that should be answered.
What do you think?
Please feel free to leave your comments below, I would love to hear from YOU.