Raphael John-Lall

A pro­posed re­gion­al pay­ments sys­tem could low­er the cost and de­lays as­so­ci­at­ed with in­tra-CARI­COM trade, but Uni­ver­si­ty of the West In­dies (UWI) Pro­fes­sor of Eco­nom­ics Roger Ho­sein be­lieves its suc­cess will ul­ti­mate­ly de­pend on whether the re­gion ad­dress­es deep­er con­straints af­fect­ing pro­duc­tion, for­eign ex­change and trade.

The Cen­tral Bank of T&T, in a news re­lease on Sep­tem­ber 18, in­di­cat­ed that re­gion­al cen­tral banks were ad­vanc­ing work on the pro­posed Cari­com Pay­ments and Set­tle­ment Sys­tem (CAPSS), with a pi­lot ex­pect­ed af­ter fur­ther con­sul­ta­tions and tech­ni­cal eval­u­a­tions in the com­ing months.

CAPSS is in­tend­ed to make re­gion­al pay­ments faster, cheap­er and more ef­fi­cient while strength­en­ing trade and eco­nom­ic in­te­gra­tion among mem­ber states.

It would be a re­gion­al pay­ment sys­tem that could al­low con­sumers and busi­ness­es to make in­stant cross-bor­der pay­ments in lo­cal cur­ren­cies, cut­ting trans­ac­tion costs and re­duc­ing re­liance on for­eign re­serve cur­ren­cies.

In analy­sis shared with the Sun­day Busi­ness Guardian, Ho­sein said CAPSS is mod­elled part­ly on Africa’s PAPSS and is in­tend­ed to al­low cross-bor­der trans­ac­tions to be set­tled more quick­ly and cheap­ly, with busi­ness­es pay­ing in do­mes­tic cur­ren­cies and re­cip­i­ents re­ceiv­ing funds in theirs. The ini­tia­tive re­sponds to the con­tin­ued re­liance on US dol­lar set­tle­ment, cor­re­spon­dent bank­ing fees, ex­change-rate con­ver­sion costs and pay­ment de­lays in re­gion­al com­merce.

Un­der the pro­posed arrange­ment, cen­tral banks and par­tic­i­pat­ing fi­nan­cial in­sti­tu­tions would man­age clear­ing, liq­uid­i­ty and fi­nal set­tle­ment of net po­si­tions.

He said the ra­tio­nale is that busi­ness­es should not have to re­ly on a third-par­ty re­serve cur­ren­cy for every trans­ac­tion be­tween Caribbean economies. By re­duc­ing those fric­tions, CAPSS could make it eas­i­er for firms to trans­act across bor­ders, but the pay­ment mech­a­nism can­not by it­self de­ter­mine whether those trans­ac­tions are eco­nom­i­cal­ly sus­tain­able or whether the re­gion has enough com­pet­i­tive pro­duc­tion to sup­port durable trade growth.

How­ev­er, he cau­tioned that CAPSS should not be re­gard­ed as a com­plete so­lu­tion.

“CAPSS may, there­fore, re­duce the use of US dol­lars in the set­tle­ment of the re­gion­al trans­ac­tion with­out nec­es­sar­i­ly re­duc­ing the US dol­lar con­tent of the pro­duc­tion process it­self.”

For­eign ex­change con­straint

Ho­sein’s first con­cern is that CAPSS can­not elim­i­nate the for­eign-ex­change re­quire­ments em­bed­ded in re­gion­al pro­duc­tion.

He used the ex­am­ple of a T&T com­pa­ny which may ex­pand sales to Cari­com and re­ceive set­tle­ments through CAPSS, but could still need US dol­lars to pur­chase ma­chin­ery, tech­nol­o­gy, pack­ag­ing, raw ma­te­ri­als and in­ter­me­di­ate in­puts from out­side the re­gion.

Con­se­quent­ly, in­creased re­gion­al ex­ports could raise pro­duc­tion while al­so in­creas­ing de­mand for scarce hard cur­ren­cy. He said T&T must there­fore con­tin­ue to fo­cus on gen­er­at­ing for­eign ex­change be­yond the re­gion­al mar­ket, since re­gion­al trade can­not au­to­mat­i­cal­ly re­place hard-cur­ren­cy-gen­er­at­ing ex­ports.

Ho­sein drew a dis­tinc­tion be­tween the gross val­ue of ex­ports and their net for­eign-ex­change con­tri­bu­tion.

“For me, the key an­a­lyt­i­cal dis­tinc­tion is there­fore be­tween gross ex­ports and net for­eign ex­change earn­ings.”

He il­lus­trat­ed the is­sue with a hy­po­thet­i­cal T&T com­pa­ny sell­ing US$25 mil­lion of goods in­to Cari­com through CAPSS while re­quir­ing US$18 mil­lion in im­port­ed in­puts to pro­duce them. The US$25 mil­lion head­line ex­port val­ue would not re­veal the trans­ac­tion’s full con­tri­bu­tion to the coun­try’s ex­ter­nal fi­nanc­ing ca­pac­i­ty.

The more im­por­tant mea­sure, he said, is the us­able hard cur­ren­cy gen­er­at­ed af­ter ac­count­ing for im­port­ed in­puts. If an ex­port gen­er­ates lit­tle hard cur­ren­cy while cre­at­ing a sub­stan­tial ad­di­tion­al re­quire­ment for US dol­lar im­ports, its net for­eign-ex­change con­tri­bu­tion could be small or neg­a­tive.

This means ex­port pol­i­cy should in­creas­ing­ly dis­tin­guish be­tween gross ex­port val­ue, do­mes­tic val­ue added and net for­eign-ex­change con­tri­bu­tion. A re­gion­al ex­port with high do­mes­tic in­put con­tent could gen­er­ate greater na­tion­al ben­e­fit than a larg­er ex­port heav­i­ly de­pen­dent on im­port­ed in­puts. The ob­jec­tive, there­fore, should be to max­imise do­mes­tic in­come and for­eign ex­change re­tained af­ter pro­duc­tion-re­lat­ed im­ports are tak­en in­to ac­count.

Al­ter­na­tive to US dol­lar

Econ­o­mist Dr An­tho­ny Gon­za­les said it is dif­fi­cult to say if this pro­posed sys­tem will have a pos­i­tive or neg­a­tive im­pact.

“It re­quires se­ri­ous study and some ex­per­i­men­ta­tion. One has to know the de­tails un­der which it will op­er­ate. I guess the idea of a pi­lot scheme is a good one as some ver­sion of the sys­tem will be test­ed over a pe­ri­od of time. A look at the African scheme should al­so shed some light. A lot seems to de­pend on the op­er­a­tions and un­til that is clear­ly fac­tored in its suc­cess is not easy to pre­dict.”

He al­so point­ed out that more coun­tries are do­ing trade by by­pass­ing the US dol­lar.

“As far as I can re­call, not too many in­te­gra­tion arrange­ments have gone that way. To­day, how­ev­er, we see more and more coun­tries on a bi­lat­er­al lev­el trad­ing by avoid­ing the US dol­lar, so there is a bit more hope now that more trade is pos­si­ble with less use of the US dol­lar. Cari­com in­tra-re­gion­al trade is small rel­a­tive to its ex­tra-re­gion­al trade so the gains are not that size­able.”