Mary King

Part II

AS a result of my article published in the Express on April 8 (Page 13) “The dollarisation of the T&T Economy”, I was asked why T&T needed the services of correspondent banks to conduct international foreign exchange transactions, while this is not the case for, say, the UK, Japan and others that maintain their own local currencies. These latter countries can participate in the international banking networks, SWIFT and IBAN.

The basic answer is that no one needs or uses the T&T dollar (TT$) to purchase anything from the world at large. In particular you may have as many TT$s as you like but a US shipper will not send any goods to you in exchange for these TT$s. The UK and Japanese currencies are traded in the world currency markets in which their exchange rates among others are set according to the mutual demand for the currency. Hence any of these currencies can be used outside of the parent country to purchase goods and services since they can be converted into each other in the markets. However, the exchange rate of the TT$ is primarily set by Central Bank of T&T and the TT$ does not feature on any of the world money markets. If the T&T economy were dollarised, i.e. it uses the US$ as its only trading currency locally and otherwise, then T&T can be part of the SWIFT/IBAN commercial banking networks.

Another query was whether it would be difficult to transit from the TT$ based economy to a dollarised one. A colleague even suggested that this should be done gradually. Indeed Dr Delisle Worrell made a cryptic statement on how this could be done. Listen to him:

“All Caribbean Central Banks and monetary authorities have foreign exchange reserves sufficient to retire the domestic currency (notes and coins) in full at current exchange rates, which is all that would be required to convert fully to the use of the US$... Nowadays we have local currencies which are no longer needed for transactions, which are used as the basis for determining the value of the bank deposits, which are the principal form of money used in most transactions.”

Consider the following theoretical economy. Assume this economy has some L$100million (local dollars) in coins and notes. Some L$10million is held in the pockets of the population and the rest, L$90million, is deposited into the local commercial banking system. This value is allocated to the bank accounts held in the banking system, i.e. the value of the bank accounts is L$90million. At any one time loans would have been given out to the population. The traditional way that this is done is to create an account to the benefit of the borrower in the value of the loan and also a debit loan account in the value of the loan that is drawn down as the loan is repaid. The value of these two accounts taken together is zero; i.e. the total value of the accounts across the commercial banking system remains at L$90 million.

If now the State has assets/reserves of the order of some US$50 million and the exchange rate is 10:1, then by purchasing some US$10 million in notes and coins from the US Federal Reserve and exchanging these for the L$100 million in local notes and coins, the local economy now has US$10 million in notes/coins that refer to money in the pockets of the population and accounts in the commercial banks. The value of these accounts is now in US$s; simply their original amounts in L$s divided by the exchange rate, 10. The assets in the local banks are worth US$9million, in the population hands, US$1 million and the reserves are now US$40 million. Such an economy is eligible to participate in the international banking networks and would not need correspondent banks.

Also, the concern that many of us have is how we should control the economy when, for example, the foreign income drops below that which is needed for the normal imports, and remains so for a prolonged period of time. In T&T’s case where a substantial amount of government’s income is in foreign exchange from the energy sector (some 35%), the government’s ability to meet its Budget spending is curtailed. Though it may be possible to maintain the level of imports by using the foreign exchange reserves, this is short term. Still, the demand for imports will remain, putting a stress/strain on the economy with capital flight, black markets in US$s and the usual call for a currency devaluation to curb demand.

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Since in our small open economy anything produced locally requires imports, a reduction in the ability to import will reduce the production, the economic activity in the country. The result will be a slowdown of the economy, increased unemployment, closure of firms etc. It is worth noting that in these circumstances increased government spending of local dollars cannot stimulate the economy since the culprit is lack of US$s to fund imports. Existing demand or not the imports cannot be had, though the use of fiscal methods may reduce demand, the stress/strain in the economy.

In a dollarised economy, reduction in export earnings, US$ income to T&T, reduces the country’s capacity to import, reduces economic activity, reduces US$ income to the population at large.

All of this occurs at the individual level so automatically reducing demand, preventing capital flight and there is no black market for the US$.

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