The non-bank cambios have outlived their purpose

Aug 12, 2023 Features / Columnists, Peeping Tom

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Kaieteur News – How is it that Guyana is now earning significant oil revenues, believed to be in the tune of US$1B in 2023, which is about 70% of the country’s Budget in 2019, and yet the exchange rate has not appreciated? How is it that billions of dollars of foreign direct investment is being pumped into the economy and this had has little or no impact on our exchange rate?

These are the questions which the government and its defenders are avoiding. Instead of trying to explain the paradox surrounding the value of the Guyana dollar, the government and its mouthpieces are clouding the issue with a lot of theory about fixed and floating exchanges rates.

So for the benefit of our readers, let me explain the two systems. A fixed exchange rate refers to a system in which the value of a country’s currency is pegged or fixed to the value of another currency, a basket of currencies, or a commodity like gold.  This means that the government or central bank actively intervenes in the foreign exchange market to maintain the set exchange rate. Guyana had a fixed exchange system when, for example, the official rate was pegged at US$1=G$10.

On the other hand, a floating exchange rate, also known as a flexible exchange rate, is a system where a currency’s value is determined by the foreign exchange market based on supply and demand factors.

The main difference between fixed and floating exchange rates lies in the level of control and stability they offer. Fixed rates provide stability and are suitable for countries with well-managed economies and low inflation.  But they do require constant intervention to maintain the pegged rate. Floating rates, while less controlled, allow currencies to adjust naturally to changing economic conditions.

Guyana once had a fixed exchange rate. But when foreign exchange became scarce it led to the emergence of an underground foreign exchange market in which, at one stage, the rate in the informal market was more than four times the official rate.

Eventually, under the Desmond Hoyte government an attempt was made to merge the two markets. This is how the country moved from a fixed to a flexible foreign exchange rate.

But this is where the floating exchange rates started and ended. It was part of an attempt to link the official exchange rate with the rate in the informal foreign exchange market.

The floating exchange rate system has proven to provide the greatest stability. While there have been periods of steep appreciation of the exchange rates – the rate has hardly ever fallen significantly. The exchange rate has remained stable over the past 17 years. According to World Bank data, in 2006, the rate was US$1+G$206.  In 2o21, the exchange rate of the US dollar was around US$208.

Since oil production began there has been no major appreciation of the Guyana dollar. This is where the paradox arises because Guyana is now the fastest growing economy in the world, foreign investment flows are said to be the highest in Latin America and the Caribbean. Guyana’s export earnings in 2018 was US$1.56B. Last year, this increased more than eight-fold to US$11.2 B. So against this background, how is it that the Guyana dollar has not strengthened against the US currency?

The theorists and mouthpieces of the government will tell you that it is an intricate number of factors that are involved in determining the exchange rate under a floating exchange rate system. They will point to fluctuations in demand and supply within the foreign exchange market. They will identify a multiplicity of factors including persons not remitting their foreign currency earnings in a timely manner. They will even blame bottlenecks in the internal foreign exchange market.

All those explanations should be dismissed without credence. The floating exchange rate system is only in theory. What Guyana has, for all intents and purposes, is a de facto fixed exchange rate. That is why the country’s currency has been so stable against the US dollar.

It is in the interest of the government to not allow the Guyana dollar to appreciate. If the Guyana dollar should appreciate, it will affect the windfall of local dollars earned from exports, particularly from rice and gold. And these commodities may even become less competitive globally if the dollar appreciates.

But there is also another principal reason why Guyana has a de facto fixed exchange rate. There are powerful players in the country – both in the business sector and within the non-bank cambio system – that have the muscle to control the country’s foreign exchange rate. If they wish the currency to depreciate tomorrow, they can create an artificial shortage. If they wish it to appreciate,  they can do so with the click of a finger.

The reason why the non-bank cambios were established was to allow for an integration of the official and informal rates. The non-bank cambios have outlived their purpose. It is time for them to be disbanded and allow for the formal banking sector to handle all foreign currency transactions.

But this will never happen because some players within the non-bank cambios have incestuous relations with the country’s political elites. They fund political events and support the ruling party. As such it is unthinkable to imagine that the government would disband the non-bank cambios.

It is in the interest of the political elite to have non-bank cambios even though there is now no informal foreign exchange system. And it is also in the interest of the government, that is tied to this elite, to maintain the exchange rate at or around its present levels.

(The views expressed in this article are those of the author and do not necessarily reflect the opinions and beliefs of this newspaper and its affiliates.)

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• oil, Peeping Tom, purpose, revenues, significant

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