The foreign exchange allocation system was changed to ensure a more equitable distribution and to expand the number of authorised foreign exchange dealers, Finance Minister Larry Howai told the Senate yesterday.
“The intention was to have a larger number of dealers who could deal with the business community where pricing could be done on a more competitive basis and which allow the community to benefit from the competition which would normally provide lower prices,” he said in response to questions from Diego Martin North East MP Colm Imbert.
Imbert asked Howai to explain how a more competitive pricing would be achieved. He said by having more people with foreign exchange to sell, a broader range of sellers would increase the scope for negotiation and for better prices in purchasing foreign exchange.
Imbert also asked how the addition of merchant banks—which are not retail banks and do not have large numbers of customers—could improve the system.
Howai said these institutions have a number of customers who are themselves large purchasers of foreign exchange. He said the largest purchasers of foreign exchange tended to be the business community as opposed to individuals, whose total demand is smaller than what is required by the business community.
Howai said the authorised dealers in 2013 were the Bank of Baroda, Citibank, CIBI First Caribbean, FCB, Intercontinental Bank, RBC Royal Bank, Republic Bank and Scotiabank. He said in 2014 four more dealers were added to this list: AIC Finance, Ansa Merchant Bank, DFC and General Finance Corporation Ltd.
Howai said from May, 1, 1993, to April 30, 2012, the Central Bank sold foreign exchange to authorised dealers through a non-competitive allocation system. He said from May 1, 2012, the Central Bank introduced a multiple price auction system to operate alongside the non-competitive allocation that had existed.
He said all authorised dealers are included in the option system. He said bids were assessed based on multiple prices. He said allotments were made from highest prices to lowest price, until the auction volume is fully allocated. He said all bids were caps at 20 per cent of the total auction volume.
He said the Central Bank modified the arrangements in 2012 in an attempt to ensure widespread distribution of foreign exchange.
By more dealers it would introduce more competitiveness in the market which would become more liberalised than it had been. “We are operating under what is called a “managed float”, some people call it a “dirty float”.
“The intention is to get to a position at some point in time where the market resembles an open, less controlled and less restrictive market, a market more akin to the dynamic markets that operate in other parts of the world,” he said.
He noted there was a further change to the system. (On April 1, a new system was instituted by the Central Bank.)
Rowley asked whether given the fact that instability, loss of confidence and shortages were the effect of these changes, if the minister could state whether the Central Bank was now required to put more money to maintain the supply and restore confidence in the system, was there an increase flow from the Central Bank to the market to treat with the instability.
Howai said around June, July and August, there tended to be a larger demand for foreign exchange because a number of things are happening: merchants place orders (for Christmas), vacation travel, and registration for overseas schools. He said he needed to do further analysis before he addressed this issue of whether there was an increased injection from the Central Bank.