Fri | Sep 22, 2017

Nothing sinister about foreign exchange auction, says BOJ

Published:Friday | November 25, 2016 | 11:00 AMMcPherse Thompson
John Robinson, senior deputy governor of the Bank of Jamaica.

Senior Deputy Governor of the Bank of Jamaica (BOJ) John Robinson is assuring authorised foreign exchange dealers and cambios that there is nothing sinister about the decision to institute a multiple-price auction system.

Robinson said the auction system will be more efficient, competitive, and transparent, although it has the potential to leave some of the very small traders without a guaranteed market for their foreign exchange.

It will also be different from the foreign exchange auction in the 1980s when importers and other users had to surmount bureaucratic hurdles to buy or sell currency, he told the Financial Gleaner.

Robinson said that what is proposed is for the central bank to buy foreign exchange competitively from the market rather than buying a set proportion of all their purchases.

Under the current system, authorised dealers and cambios are required to surrender up to 25 per cent of their purchases to the BOJ.

According to Robinson, some suggested that if the surrender amount was less, they would have more discretion over the allocation of their funds.

The central bank, in turn, said that it could reduce the surrender amount, but it needed a means of buying from dealers and cambios to meet the public's needs.

"They suggested that a good way to do that would be to put out our bids and have dealers compete to sell to us. And that's the multiple-price competitive auction. Nothing fancier than that," said the Deputy Governor.

He explained that at the moment, the BOJ buys a proportion of foreign currency from all authorised dealers and cambios to settle the needs of the public sector such as paying debt and for imports such as oil and resells some to the market. Robinson said the BOJ proposes to replace that method of buying.

For example, he said, under the auction system, "if we offer to buy US$2 million and somebody sells us at $125 for some and $126 for some, then that is how the multiple-price comes in, but it is a competitive process of buying in which we enter."

Robinson said that under the auction system established in the 1980s, the central bank was the sole distributor and intermediary of foreign exchange. All foreign exchange went to the BOJ and was sold by the bank after having ascertained that the purposes for which it was to be used fitted within the regulations then.

"Importers had to submit documents, all kinds of bureaucracy surrounded that," he said.

The BOJ is introducing the multiple-price auction system to buy and sell foreign exchange in the market under Jamaica's standby agreement with the International Monetary Fund. The rules governing the new system are expected to be published by March, while the system is expected to go live in July 2017.

"All we are introducing now is a mechanism for buying from people who want to sell to us by saying, 'we want to buy (for example) US$10 million today', make us an offer rather than say, 'since you bought US$40 million today from your customers, you have to sell US$10 million to us'. That is how we do it now," Robinson said.

"We are moving to a more transparent, more competitive system of buying foreign exchange from the market, and we will use a similar mechanism when we want to sell foreign exchange to the market," he said. "Nothing sinister, nothing to be feared."

Asked if the system would disadvantage small holders of foreign exchange, Robinson said small dealers might be worse off because they may not be able to compete and supply meaningful amounts at competitive rates.

"In that sense, it's less equitable than the system we have now of buying, say, a proportion of purchases from each dealer or each cambio," he said.

"If you are a small cambio in the country and you bought US$1,000 today, you are certain as to how you will sell 25 per cent of that: it's going to BOJ at a price. If BOJ is only buying competitively, then you may not have the wherewithal to enter into that bidding process."

Under the auction system, he added, small traders would have "more latitude over what they buy".

mcpherse.thompson@gleanerjm.com