Caricom Multilateral Clearing Facility: A Brief Note
Payments clearing and settlement in the Caribbean has historically been a battleground of discontent. There have been many attempts since the Colonial period to structure the payments landscape but none of these efforts have been successful. This blog will briefly outline one such effort — the Caricom Multilateral Clearing Facility.
The Caricom [Caribbean Community]Multilateral Clearing Facility (1977–1983) introduced a centralized accounting system for all eligible payments institutions within the region. The original agreement establishing the CMCF was signed by the Central Bank of Barbados, the Monetary Authority of Belize, the East Caribbean Currency Authority, the Bank of Guyana, the Bank of Jamaica, and the Central Bank of Trinidad and Tobago.
The Central Bank of Trinidad and Tobago (CBTT) acted as the agent bank for the CMCF. That is, the CBTT carried out the secretariat functions as well as being responsible for the accounting records and distribution of cash settlements.
The main objectives of the CMCF were to:
- facilitate settlement on a multilateral basis of eligible transactions between participating countries;
- promote the use of currencies of members in settling eligible transactions between the individual countries, thereby economizing on the use of foreign exchange; and,
- promote monetary co-operation among the participants, thereby contributing to the expansion of trade and economic activity within Caricom.
Advantages of multilateral clearing to regional banks:
- reduction of correspondent deposits in foreign exchange
- longer time for investment of deposits where drawn cheques are in circulation within the region
Disadvantages of multilateral clearing to regional banks:
- legal implications arising from fact that the CMCF was not established as a separate legal entity
- lack of formal enforcement mechanism in the event of debtor default
- need for an independent regulatory body
- technical and administrative complexities
The failure of the CMCF was caused by its abusive usage by some member countries. Instead of being used for its primary purpose of simply minimizing the foreign exchange requirement for intra-regional trade, some members saw it as a balance of payments support facility to allow them to continue purchasing goods which they otherwise would not have been able to. Thus the closing of the CMCF was only inevitable because of the overuse of its informal credit facility.
After the closing of the CMCF the region regressed to a costly nexus of bilateral agreements which offer far less efficiency than multilateral systems.
The demise of the CMCF was unfortunate because it was a clever device for effecting small but significant economies in the use of foreign exchange. In fact, the CMCF might have formed an institutional base for a federal system of Caricom central banks.
Source: CMCF and Caricom Trade. Ginne Lea Miller, 1993