Balances due from abroad and the foreign exchange “shortage”

On August 19, the Stabroek News reported that the government is willing to make necessary interventions in the foreign exchange (FX) market in order to enable the smooth access to hard currencies. In the same news report, Vice President Jagdeo noted that there is ample foreign exchange if one considers the total amount available to the market. The Vice President further noted that the reason why some folks have to queue up for foreign currency has to do with the dysfunction in the local interbank market.

I have no reason to doubt the explanation of temporary or localized shortages. I have long written about foreign exchange frictions or constraints, causing temporary shortages, in the FX market that I first estimated around 2005-06 when I was conducting my graduate studies in New York City. Any market characterized by frictions is not working as well as it should. I found that banks in Trinidad and Tobago and Guyana often place customers in a queue, resulting in a period of waiting (a foreign exchange constraint). The constraint has implications for bank portfolio adjustments in terms of their investment in loans, Treasury bills, foreign assets, and excess reserves.