Rise in foreign currency rates reflects speculation - Dr Ganga Stabroek News December 29, 2000 The value of US drafts at the largest city bank has not wavered from US$1 = $190, but rates at two other leading banks remained unchanged at $186 on Wednesday. The National Bank of Industry and Commerce Ltd (NBIC) continued to sell drafts at US$1 = $190, but the Guyana Bank for Trade and Industry and Demerara Bank Ltd had theirs priced at $186. NBIC raised its rates a few weeks ago and Director of Research at the Bank of Guyana, Dr Gobind Ganga, said the movement in the exchange rate was not explained by its fundamental determinants but rather reflected speculation for profitability. Dr Ganga argued that the fragmented nature of the foreign exchange market created opportunities for speculation which was the result of the inefficiency of the market. He argued that there had been a net supply of funds to the system which showed that the exchange rate need not have deteriorated. "When there is a net supply, the exchange rate should appreciate or remain stable and one would expect this to occur in the Guyanese situation," Dr Ganga posited. He debunked arguments that the exchange rate movement reflected a lack of foreign investment as well as slow growth in exports relative to imports. He pointed out that actual foreign exchange flows were not the same as export proceeds and the current account balance was not a reflection of exchange rate movements. He said export receipts from the foreign direct investments in Guyana to date had been relatively small and had come in the form of royalties, fees and payments for local goods and services. "In contrast, there has been a sharp increase in inflows from the significant growth in nontraditional exports," Dr Ganga argued. He also pointed out that a current account deficit, because of relatively larger imports, was not a true reflection of excess demand in foreign exchange and hence exchange rate depreciation. The current account balance, he noted, could be financed through private capital flows from the capital accounts. This, he said, was the case of Guyana. Dr Ganga was also critical of remarks that a net supply of foreign exchange might indicate money laundering. "It is absurd to see the link between net supply of foreign exchange and money laundering, especially in a relatively small foreign exchange market where off-trend flows can be easily detected," Ganga said. The research director opined that because expectations play a crucial role in the behaviour of the exchange rate and ought to be based on relevant information, some of the analyses presented in the newspapers were contributing to destabilising speculation on the exchange rate. Foreign currency purchases and sales up to the end of the third quarter this year were below that of the corresponding period for 1999 with the trend showing that purchases exceeded sales by cambio dealers. Total foreign currency purchases denominated in US dollars were US$294 million compared with $300 million for the period under review last year. This compared with total sales for the period of US$291 million and was US$7 million lower than the previous year. In terms of US dollar purchases up to September 2000, US$274 million was purchased and this compares with US$280 million for the corresponding period in 1999. Sales of US dollars were US$270 million at the end of September compared with US$277 million for the previous year's corresponding period. This meant that there was a surplus of US$3.4 million in the cambio system at the end of September of this year. The average selling rate of the US currency at the end of September was US$1 = $182.70 compared with $179.37 in September last year. Follow the goings-on in Guyana in Guyana Today