17 July, 2019

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Blue-Collar & The Soaring Dollar

By Nishthar Idroos

Nishthar Idroos

To what extent can the government of Sri Lanka, its Central Bank and experts deliberate and work towards supporting the stabilizing process of the rupee? Given the myriad of realities that impinge the local currency both inherently and externally can the rupee actually be defended without adverse consequences? By that I mean can the downward spiral be reversed in any strategic, meaningful way and arrest its decline with the least damage? Or is this just typical Sri Lankan style politicking and bureaucratic conspiratorial grind to arrogate and advertise vain, vacuous deliberation to prolong the inevitable. 

The Governor of the Central Bank of Sri Lanka Indrajit Coomaraswamy, competent, articulate and erudite. Unfortunately his eloquence will not assuage people experiencing issues pertaining to the stability of the rupee and ramifications thereof. The Governor’s strong will to act decisively, discipline, atleast caution vain spending and assert his independence could produce results hopefully in the longer term. 

At a time when there is so much hue and cry about independent commissions why wouldn’t the governor assert his independence strongly and stridently for the sake of the people and the country to introduce prudence and regulation to steer away permanently from turbulence? 

We are yet to have a Central Bank Governor for that matter any top notch bureaucrat who was asked to leave or demoted because he opposed a government policy which had deleterious consequences to the people or himself was opposed due to a people friendly policy initiated by him. It is these kinds of principled positions that sets precedents and builds character in a system whose overhaul health doesn’t appear to look good.

A successful central bank doubtless has to be independent from politics and everything associated with it. This is of paramount importance. Credibility, trust, integrity, accountability, and transparency is about everything. It’s not just financial markets that a Central Bank should be preoccupied with. Defending the rupee is a moral obligation. I simply do not know how to over-emphasize this. This is too important a domain to be left exclusively with the politicians.

The great fall.  From the year 2009 to 2019 the Sri Lankan rupee plummeted approximately 40%. This is quite seismic. Under-currents still agitating with a roar. The precipitous nature of the local rupee continues and rings alarm bells. It doesn’t appear that politicians and bureaucrats are extending the required importance. They appear before cameras resorting to esoteric jargon beyond the comprehension of the average Joe. Rhetoric never placed food on the table nor did it save an ailing child. What common folks are most anxious about is the aggressive fall of the local rupee and how fast it could be rectified.  

Whatever direction the rupee has currently taken, it’s abysmally southern bound, that too on the express lane. It doesn’t take much intelligence to prognosticate the imminent wave of the chequered flag. That’s when she crosses the Rs 200 mark. What will that mean to the cost of living, wages, fiscal pressures, new investments, debt repayment and employment creation? 

What will that mean to ordinary Appuhamy, Perumal and Cader Nana, the blue-collar workers of Sri Lanka whose woefully fixed incomes and grievously losing purchasing power will push them to even greater economic hardship? What will this emerging reality mean to crime in the country? 

These ordinary blue-collar folks bereft of knowledge in currency de-valuation, re-valuation, inflation, exchange fluctuations, quantitative easing and many more could only become more innocent in their response as they are wholly ignorant of the process. They could only complain within unsuspecting circles and languish in pain until they pass away inconspicuously from this world and become dust and enrich mother earth. This is what happens to most, the voiceless, the marginalized. Mortality due to economic hardship is far worse than terrorism, if only you would know. 

Sincerely wish though it’s just wishful thinking that sweat of labor was rewarded with gold as the case was centuries ago. If human labor is decisive, genuine, real and palpable its wage cannot be fake. Not alluding that currency is fake but many things meted out to fiat money by remote control deracinates its true value. Some economists have even alluded to this phenomenon as unintended corollaries while some have called it theft. 

This is not something local but woefully global. It’s bound to stay and will continue for the good or worse of mankind. Actual knowledge of currency abrasion, misappropriation and manipulation seldom percolates to people. No MBA program in the world has ever included this specific dynamic of Economics to a module. Appuhamy, Perumal and Cader Nana are lost and they are livid too.

Though visible economic activity and expansion is taking place in Sri Lanka, political and economic uncertainties linger. A volatile currency is one such economic factor. Also Sri Lanka’s external debt and current and fiscal account deficits another macroeconomic fundamental of concern. The paradox of achieving growth and servicing high levels of US dollar debt on inflated rupee in a milieu of regressive tax collection underlines quite a dilemma. At the same time capital spending to facilitate intended growth cannot be stopped either. These extremely important issues unfortunately are never spoken in the parliament.

Misdirected, ill-conceived and unproductive spending is a huge deterrent against attracting investment. Huge national debt and perpetual deficit spending can also cause huge concerns even within the local corporate sector. The local corporate sector has its priorities vis a vis its profits and exposing more taxes would be anathema for the private sector. 

Governments long ceased to be the engines of growth and the catalyst of employment creation. When they falter in policy and implementation too its double jeopardy or should I say double tragedy.

Foreign investors are not champions for charity and philanthropy. They salivate for returns and that too for quick returns. They understand numbers and key indicators. A stable currency is definitely integral to the sum. 

Among other indicators in the economic fundamentals list are foreign indebtedness, growth levels, political stability, level of foreign reserves, exchange rate volatility etc. In contrast to Sri Lanka, Vietnam was attracting huge investments from China. The biggest hurdle emerging economies countenance is debt and that too ill-planned and badly negotiated debt. 

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Latest comments

  • 2
    1

    Ralli Ameen say Oink Oink…………………..

    • 1
      0

      Mr. Idroos, Thank you.
      1. Sri Lanka needs a discussion on Debt Cancellation with help of the Jubilee Debt Campaign in London. https://jubileedebt.org.uk/
      Lanka in January 2019 paid down 1 $ billion and has to pay another $5 billion of loans this year according to CBSL. To whom? which US-Euro Bond private banks and sovereign bond traders have put Lanka into a debt trap, of course, with corrupt Lankan politicians on the advice of IMF and WB?
      Coomaraswarmy who works for the Washington Consensus, America First, and the global 1 percent is not telling us to whom the $5 billions will be paid? Nor is he talking about sustainable solutions, accounatnable and ethical lending and debt cancellation with its debtors who want to asset strip this country of land and Marine resources.
      Lanka has vast marine and ocean resources and is a major security choke point for energy, trade and undersea internet data cable routes that could being down the global internet.. and US wants to set up military bases here.
      But the Central Bank is hiding the names of the bond traders to whom all this money is owed and to be paid by tax paying Lankans. Why? Why has the PCOI Bondscam Report being embargoed for 30 years?
      Check out the report on the Bail Out Business by the Transnational Institute in Amsterdam on role of big banks and 4 accounting companies – KPMG, Arthur Anderson, Delloite in the debt trap and derivatives racket and the global debt trap.
      https://www.tni.org/en/publication/the-bail-out-business
      2. There is no growth and no foreign direct investment (FDI) coming to Sri Lanka because of Corruption. No investor with a brain will go to a country where the Central Bank the most important financial governance institution was scammed by the Prime Minister because they will not be doing business on a flat playing field and no trasparency.

  • 3
    0

    Nishthar Idroos thambi,

    This is your Cader Nana. I don’t care Dollar going up, it is simple to handle it Dhorey. All I do is add an extra spoon of ghee on Barota and give it a new name to look Arabic dish and sell at triple the price. Poor Appuhamy ya gets caught usually, but no regrets he can afford it from daily “pagawa” he collects. Perumalu with no doubts buys dozens when I say Arab’s veg rotti, no regrets again because Perumalu’s children earn only in Euros and Dollars.

    Sorry, late comment. periya, periya English words, waited for a dictionary.

    • 2
      0

      Cader Nana

      Pleased to know you kaka.

      Nishthar Idroos

  • 2
    0

    The trouble is the world is so complex now, that Sri Lanka’s esteemed leaders are out of their depth. Similar problem in a number of Emerging Market countries.
    Sri Lanka will keep getting poorer because it lacks, transparency, accountability and the rule of law. Simple to speak about, very hard to implement. Any advice is ‘Western imperialism’.
    USDLKR will be past 300 soon and there will be protests in the streets, but that is the fate of countries who aren’t smart.
    In a democracy people deserve the leadership they get. Good luck.

  • 4
    0

    Nishthar Idroos: The alfa-currency US$ is not soaring but our SLR is weakening.
    If value of a currency is based on the purchasing power, US citizen Kane will tell us that the $ is also weakening.
    The blue collar win wins.
    .
    The world economic system needs this weakening to sustain.
    Some countries exploit this.

  • 4
    0

    Economics is Greek to me, but both Alex and K.Pillai seem to speak sense.
    Googled this for many important currencies:
    .

    https://www.google.com/search?newwindow=1&client=firefox-b-d&ei=hlxoXOfKA8z8rQGg_aTYCw&q=usd+to+lkr&oq=aud+to+lkr&gs_l=psy-ab.1.2.0i71l8.0.0..68736…0.0..0.0.0…….0……gws-wiz.dMZ1_Z493Gw
    .
    It made me feel this: In the long term, our currency seems to be in steady decline, since Independence. Steady till about November 2011, then began to weaken startlingly – to be obvious by April 2012. Then it lost ground again about October 2016. Another bad period in October 2018 (well known, blame Sirisena!) and it continued to weaken until reaching its nadir in the first week of January 2019. Since then (hurrah!) it appears to be strengthening.
    .
    Mr Idroos, you seem to know your onions. I just thought I’d let you know how an illiterate guy looks at it.
    .
    It seems funny that Prabhakaran’s death didn’t make an immediate difference, nor the change of January 2015. These are just the observations of a layman who feels he is illiterate when faced with all this, although I can write correct enough English.

    • 1
      0

      Let me try and explain. A currency is simply a medium of exchange of Sri Lanka’s goods and services with other countries. The more that Sri Lanka needs the more it needs to sell its currency, and buy the currency of other countries. This is why Sri Lanka puts high taxes on luxury vehicles – to deter people from buying these items and putting pressure on the currency.
      For Sri Lanka’s currency to strengthen, people need to buy more from Sri Lanka than it sells. Sri Lanka has not done this since independence. During the war Sri Lanka’s economy got less productive. Aside from the man power diverted to fighting (by both sides), laws were also eroded. Laws matter because they are essential to the ability to do business and that in turn affects the economy.
      The weakness in Sri Lanka’s economy was bridged by foreign currency loans. I.e. while Sri Lanka’s economy was weaker, the World Bank and IMF lent Sri Lanka money as it was fighting a war. The expectation was that after the war, Sri Lanka would resume being a normal democracy.
      That is why the currency didn’t decline immediately after the war ended. It took some time for lenders to recognise that Sri Lanka is not reforming. So now that lenders realise this, any debt is likely to be just bad debt. I.e. Sri Lanka will never be able to pay it back. The chinese do not mind, as they intend to take land in exchange for the debt. The IMF and the World Bank do not want land, so they do care.
      This is the reason that reforming Sri Lanka is important to the well being of all its peoples. It is not just western imperialism.

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