19 October, 2019

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CBSL’s Misleading Response To Misleading Newspaper Article

By Hema Senanayake

Hema Senanayake

The rupee is depreciating fast. This has been happening for a while now. Former governor of the central bank Ajith Nivard Cabraal squarely blamed the “Good-governance Government” and the Central Bank for rupee depreciation. His article on this subject titled “Government and CB have abdicated vital statutory duty by not being able to deal with rupee depreciation” has been published in a few newspapers on 08th and 09th October 2018, just 18 days prior to the beginning of constitutional crisis. On October 11th, the Central Bank issued a communique to the media insisting that Cabraal’s article was misleading. To my mind Cabraal’s article was misleading and the CB’s response too, is misleading, in the sense that both arguments would not stabilize the rupee putting the macroeconomic fundamentals in good shape.

Cabraal had in his article argued that, “during the nine years from 2006 to 2014, the Central Bank successfully intervened in the Forex market (in accordance with its statutory duty) with a net supply of Forex of $ 2,283m, while simultaneously building-up its Reserves by a substantial $ 5,473m. By doing so, the Central Bank was able to limit the depreciation of the rupee to a manageable 2.8% per year over the nine years 2006 to 2014; by far the lowest average depreciation since 1977.” These statistics are true. His argument is that during his period as the governor of CB, the interventions made in the Forex market by way of supplying and absorbing foreign exchange to and from the market, he and Rajapaksa regime were able to limit the rupee depreciation for 2.8% per year. This is what is false and misleading. We will discuss it later.

On the contrary CB argues, that they too, intervene in the Forex market initially under Good-governance government and has given it up now. I quote; “…during 2011, 2012, 2015 and 2016, the Central Bank has supplied to the market US dollars 3,184 million, US dollars 1,797 million, US dollars 3,429 million and US dollars 1,900 million, respectively, on a gross basis. In spite of these interventions, the rupee depreciated by 10.4 per cent in 2012 and 9.0 per cent in 2015.” This is interesting. CB concludes that interventions in Forex market did not help in stabilizing rupee in 2012 and 2015. So, the CB has changed the course.

CB argues that, “… the Central Bank has increasingly realized that efforts to artificially stabilize the exchange rate extensively by supplying foreign exchange out of its official international reserves have only worsened Sri Lanka’s macroeconomic conditions and medium-term prospects. Propping up the exchange rate through intervention makes imports artificially cheaper, contributing to a continued widening of the trade deficit and leaving the country vulnerable to exogeneous shocks. Moreover, the loss of reserves due to such intervention has been replenished mostly by commercial borrowing including the issuance of International Sovereign Bonds.” In general, all points are valid but useless in practical sense because free float of rupee will not strengthen macroeconomic conditions instead improved macroeconomic conditions would strengthen the rupee.

Let us continue with the CB’s argument further. It argues that, there are a few more factors that affect to the recent depreciation of rupee. Those are, (1) reduction in foreign investment inflows to the government securities market, (2) increased foreign currency debt service obligations of the government, (3) favorable global market conditions prevailed previously during periods of quantitative easing by major economies have now been reversed. 

Finally, justifying recent rupee depreciation, CB points out that most international currencies have depreciated against US dollar in 2018, for example Indian rupee depreciated 13 per cent, Indonesian rupiah depreciated 10.8 per cent, Australian dollar depreciated 9.4 per cent where as Sri Lankan rupee depreciated 10.1 per cent. However, missing point is that Indian currency depreciated by 5 per cent in 2015 while Sri Lankan rupee depreciated by 9.0 per cent and in addition it has further depreciated by 10.1 per cent in 2018 too. Also, some countries allow their currencies to depreciate due to various reasons such as to reduce capital outflow, to increase international competitiveness, to support (accidental) reflation etc. Hence comparing data out-of-context is not scholarly. In fact, this is what both CB and Cabraal did in their arguments. What the country need is a solution, not fake arguments.

Let me ask a fairly simple question. CB and Cabraal have agreed that in 2012 and in 2015 in spite of heavy intervention made in supplying foreign exchange to the market, the rupee depreciated 10.4 per cent and 9.0 per cent respectively. Why? We did not find any convincing answer to this question from CB’s response or in Cabraals article other than CB concluding that intervention in Forex market would not stabilize rupee. 

Now, in 2015, I pointed out that if the new government wanted to increase the salaries by Rs. 10,000/=, then the CB had to reduce the domestic credit growth, so that increased salaries would not badly affect to the country’s current account. If the CB, operates with a macroeconomic view, this was what they should have done. In the year 2014, the credit growth to private sector was 8.8 per cent and in 2015 the credit growth to private sector amounted to 25.1 per cent. In 2015 rupee depreciated by 9.0 per cent. This was the primary causal effect to depreciate the rupee in 2015 and this parameter has nothing to do with the reasons mentioned by the CB.

The same point is true in 2012 under Rajapaksa regime when Cabraal was the governor of the CB. In 2011 and till the end of first quarter of 2012, the credit growth to private sector was approximately 34%. In 2012 the rupee depreciated by 10.4 per cent. 

In fact, the point of truth is that, CB does not have an effective policy tool regulating the domestic credit growth while maintaining the stable rate of interest and regulating market liquidity. In such a circumstance talking about macroeconomic view or intervention in Forex market are both useless. Unfortunate for our country, the government is not ready to listen to those who are outside the establishment.

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Latest comments

  • 1
    1

    Depreciation of currencies is a prerequisite to sustain the prevailing world’s economic system. Even the brawny US$ depreciates.
    Right now there is a ‘run on’ the depreciation vortex. Weak currencies suffer the most.
    Former governor of the CBSL, Ajith Nivard Cabraal squarely blamed the “Good-governance Government” and the Central Bank for rupee depreciation. The present CBSL explains it.
    .
    We, the most affected, must note the “Wait and see” calculated silence of the local players!

  • 0
    2

    In Every country, the federal Bank is the one which decides the interest rates and the financial policy in the country at that time. Sri Lanka is not that. For thsi govt the PM, finance minister decided it. I think ajith Kumaraswamy is also an american, I am not sure whether he is doing it right. HE looks OK, but if he is a Foreigner, I don’t know at the end what would happen.

  • 0
    0

    What you say, Ajith Nivrad Cabbral WAs misleading and Ajith Kumaraswamy as well did the same.

  • 0
    0

    Much of Sri Lanka’s problems, including corruption in politics, economic mismanagement, nationalism and discrimination, can be solved by simply opening the money production market allowing the LKR to compete with private money producers and importers.

    This solution is the simplest and easiest thing to implement, and it based upon the book: “The Ethics of Money Production” by Jörg Guido Hülsmann who is a German economist.

  • 0
    1

    Hema Senayake: Late 2019 or Early 2020, a global recession is expected. Already the FUEL usage is decreasing and by the late 2019, US elelctions are over and Dollar may come down. What do you say ?

  • 3
    0

    Hema Senanayake

    What is wrong with all of you. Sri Lankan rupee might be falling and might have sunk to its lowest level . If the Economy picks up ( with a big IF ) it can be brought back. But it is the Sri Lankan MORALITY and cmmon DECENCY which has sunk to its lowest level and still sinking further. It will never recover in time before her SOVEREIGNTY is lost forever.
    That is where we are heading.
    Before I elaborate on this let me chersih the momemt when I learned about the fatal accident of Yoshitha ( MRS second son). I am a caring individual but when it comes to MR and his family. he has evaded justice for so long ( thanks to CROOK MS) and God has noticed it has decided to punish. him. Thajudin was killed . I hope he spends the rest of his life like Michael Schumaher .
    As for the question of Sri Lankas SOVEREIGNTY. . It will be lost or continue in a limited form after the forthcoming election. Make no mistake . People like yourself should stop writing about 19th Amendment , 20th Amendment and sinking rupee because these are not relevant in the current context. Just remember what happened in the Maldives.
    Compared to Maldives Sri Lanka lies within Indias teritorial waters. and India will never allow Sri Lanka to fall into the hands of China. china cannot and will not challenge in Sri Lanka if it comes to a straight fight.

    turn to next page

  • 3
    0

    from previous page;

    It is time all of you start preparing the majority for the forthcoming election by taking sides.

    Pro China party: MR , MS and the lot the Pankawalas Dayan the Pretender Laksri

    RW: The appeaser not by choice but by necessity.
    The TNA and the Tamils . We have no problem as we are half Indian and half Sri Lankan.

    Then the Pigs in the middle. : Some of them were former admirers of MR but then returned to RW and fought like hell to elect him but now dislike the Pig.

    For Sri Lanka it is a choice between the Devil and the Deep blue sea.

    If you elect MR ( he is curently odds on favourite ) you lose Sovereignty and become a Federal State and if you elect RW ( he is odds against) you keep your limited Sovereignty.

    We will only be able to help Sri Lankas destinty if the majority of either partyy is wafer thin.

    Choice is yours and God save Sinhala Lanka
    Start Campainging for RW now and educate the electorate.

  • 1
    0

    Dear Hema Senanayake,
    .
    So, what you are saying is that the economic disaster is owing to what the Rajapaksas and Cabral did. You have said nothing about Arjuna Mahendran, but enough has been written about him and the Bond Scam. It may be true that the real damage has been less from it, but surely those who tolerated it (Ranil etc) are very much to blame. How can we move forward if the present administration doesn’t accept responsibility? Ravi Karunanayake is back in the cabinet.
    .
    You have said nothing about the stewardship of the present Governor, Indrajith Coomaraswamy; nobody has, but we see no improvement. In fact Indrajith himself has been giving us dire warnings. He hasn’t really said that he knows what to do.
    .
    So, we may conclude that he cannot work miracles, and he is no longer a young man. He may be doing his best, but that best (for which we must be grateful) will not be sufficient.
    .
    I just don’t understand Economics at this level. However, it is clearly the politics that is to blame.

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