Revisiting Trinidad’s Exchange Control Act: Balancing Legal and Cultural Norms

December 5, 2024

The Exchange Control Act in Trinidad and Tobago (T&T) has long been a subject of debate, especially when examining its impact on foreign exchange transactions involving private individuals and small businesses. This legislation, originally designed to regulate forex transactions and maintain economic stability, has increasingly come under scrutiny as the nation’s economic landscape evolves. Despite the legal framework intended to control these transactions, informal exchanges among family members and friends persist. Insights from economists Dr. Vaalmikki Arjoon and Dr. Vanus James offer a detailed analysis of the necessity to revisit and update this legislation to better align with T&T’s current economic realities.

The Exchange Control Act: Legal Framework and Practical Challenges

The Exchange Control Act prohibits individuals from buying or selling foreign exchange (forex) from anyone other than an authorized dealer unless they have received permission from the Central Bank. Though the goal of this legislation is to control forex transactions and help stabilize the economy, the practicality and enforcement of these measures face significant hurdles. Dr. Vaalmikki Arjoon points out that due to longstanding cultural practices, preventing private transactions of forex is virtually impossible in T&T. These informal exchanges have been a common occurrence for decades, driven by limited access to US currency through the banking system and the convenience they offer compared to formal banking channels.

Visitors who might need to exchange currency often encounter long wait times and cumbersome procedures at banks, thus opting for informal exchanges with friends and family. This tendency not only underscores the limitations of the Exchange Control Act but also highlights the challenges in enforcing such regulations in an environment where informal forex transactions are the norm. Arjoon suggests that the Central Bank consider revising the Act to better reflect these cultural practices while also ensuring the effectiveness of the forex system.

Cultural Practices and Forex Transactions

In T&T, American dollars are often sourced through visiting relatives or friends, underscoring a well-established cultural norm. Despite being technically illegal according to the Exchange Control Act, these practices persist. Even if there were increased currency exchanges in banks, it would not significantly resolve the chronic forex shortage within the banking system. This cultural reliance on informal forex exchanges reveals the limitations of the Act in addressing the real-world behaviors of T&T’s population.

Dr. Arjoon advocates for the Central Bank to introduce a legal limit on the amount of forex that can be exchanged from visitors while ensuring these transactions occur at the official exchange rate. Despite his recommendations, he acknowledges that even these measures may fall short in effectively monitoring and enforcing the informal forex exchanges. The broader issue at play is not these small-scale transactions but rather more substantial economic problems.

Broader Economic Issues and Forex Shortages

The core of T&T’s forex dilemma is linked to its dependency on imports, the shortage of US dollars through authorized channels, and the marked decline in the local economy since 2014. This economic downturn, combined with inflating prices and declining confidence in the TT dollar as a store of value, compels many citizens to hoard US dollars as a safe-haven asset. Dr. Arjoon stresses the need for comprehensive strategies to enhance T&T’s economic productivity, reduce its import dependency, and improve the export sector’s competitiveness.

Arjoon urges a fundamental shift from a “lazy economics” approach to a more proactive one. This paradigm shift would involve removing barriers to business operations, promoting productivity in non-energy sectors, and mitigating forex leakages through improved management of trade, transfer pricing, and capital flight. These reforms aim to address the broader economic issues contributing to the forex crunch and establish a more resilient and diversified economic base.

The Central Bank’s Role and Economic Reforms

Dr. Vanus James offers further analysis on the Central Bank’s vigilant stance, especially during peak spending periods like Christmas, when pressures on official reserves intensify. The consistent high demand for imports of goods, capital items, and essential services places considerable strain on the country’s foreign exchange reserves. This dependency on imports and the resultant forex shortages pose systemic challenges that necessitate careful and strategic economic management.

James discusses potential economic reforms, including dollarization—a policy where T&T might formally adopt the US dollar as legal tender alongside the TT dollar. This move could provide stability and confidence in financial transactions, although it should be considered cautiously. Dollarization is not a substitute for the necessary boost in export competitiveness required to increase US dollar revenues. The focus must remain on enhancing the country’s productivity and reducing forex dependency through sustainable economic policies.

Legal Implications and Enforcement Challenges

Dr. Nigel Stoddard of the Financial Intelligence Unit (FIU) underscores the legal implications of the Exchange Control Act. He reiterates that any individual engaging in buying or selling foreign exchange without an authorized dealer’s license from the Central Bank is in violation of the Act. However, he notes the widespread cultural practice of informal forex transactions and the difficulties in monitoring and enforcing these laws. The penalties for violations under the current Act are severe, designed to deter unauthorized transactions.

Violators can face substantial fines and imprisonment. For corporate bodies engaging in unauthorized forex transactions, directors and responsible officers may also be held accountable unless they can demonstrate due diligence in compliance. These stringent measures emphasize the government’s intent to exercise strict control over foreign currency flows, though enforcement remains a significant challenge due to entrenched informal practices.

Pathways for Improvement

The Exchange Control Act in Trinidad and Tobago (T&T) has been a contentious topic for quite some time, particularly in its effect on foreign exchange transactions involving private individuals and small businesses. Originally established to regulate forex transactions and maintain the nation’s economic stability, this legislation is now under heightened scrutiny as T&T’s economic environment continues to change. Despite the legal framework designed to oversee these transactions, informal exchanges among relatives and friends remain common and widespread.

Economists Dr. Vaalmikki Arjoon and Dr. Vanus James have provided comprehensive analyses that highlight the need to reassess and modernize this legislation to better suit T&T’s current economic conditions. They argue that the law, while initially effective, has become outdated and requires significant amendments to address contemporary economic challenges and realities. This includes taking into account the informal exchange practices that persist despite regulatory measures.

Updating the Exchange Control Act could potentially provide a more robust economic framework, enabling greater flexibility and support for private individuals and entrepreneurs in their foreign exchange activities. This step might also foster a more transparent and efficient economic system, keeping pace with global economic trends and ensuring T&T’s economic policies are not left behind.

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