By Hema Senanayake –
Predictions are dire. This pandemic could continue for months and some sectors of the economy will not recover for years. Now it is high time for Sri Lanka to design its own version of “Special Purpose Vehicles (SPVs)” and tools to compensate loss of income of every citizen, jointly by the Central Bank of Sri Lanka and the Treasury. The said SPVs could be any instrument designed to prevent non-financial businesses going bankrupt which had been performing good prior to the crisis. Such instrument could be buying commercial papers, corporate bonds (if available), investing in equity, providing soft loans to businesses etc. The SPVs mentioned above would be designed to protect businesses that are critically important to the country’s economy. These businesses could be large, medium, small or even sole proprietorships. Also, perhaps the economy might need sustainable restructuring in promoting production of essentials domestically which too needs to be facilitated through SPVs.
However, any such program cannot be executed meaningfully without the support of global exchange stability arrangement led by the United States, agreed by a large community of nations and implemented through IMF. Such support is vital to remove any negative pressure that would bring upon the value of rupee in launching the said rescue program. This is true for many countries around the world. Without such an exchange stability arrangement, unfortunately, the existing economic model does not support even for the use of physical capacity of production available domestically. Hence, this is going to be another historic exchange arrangement as was done by Bretton Wood Agreement in 1944, towards the end of the World War װ. In that agreement, the pivotal currency was the U.S. dollar.
Some might have not so friendly thoughts towards the U.S. But even though the dollar and its creation is linked to the “domestic credit creation” of the United States, the dollar does not belong to the U.S. because it has already become an International Asset and as such the U.S. is obligated to treat it as so.
When the crisis hit hard on the U.S., the Department of the Treasury and the Federal Reserve (U. S. version of Central Bank) got together to design and unprecedented stimulus package. The money that is required for the stimulus will be created debt free as much as possible. Monetary theory might point out that such creation of dollars would make it weaker and eventually would crash. Nothing of that sort will happen. A few days ago, exactly on March 26, Federal Reserve Chairman Jerome Powell said that the Federal Reserve would provide essentially unlimited lending to support the economy as long as it is damaged by the viral outbreak. Can any other country do this? No. Can any country which posted continuing large trade deficits for years do this? No. Can the European Central Bank do something similar to this kind of funding? No. Bloomberg reported about the U.S. stimulus as follows:
“This scheme essentially merges the Fed and Treasury into one organization. In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it.”
This is the very reason that the U.S. can literarily support to revive the global production and exchange of goods and services disrupted by the spread of virus. To do this the world needs to preserve its sustainable productive capacities worldwide. This is an endeavor that need to be supported by Exchange Stability Arrangement, a task, that cannot be performed by IMF itself, without the ample backing of the U.S. Treasury.
However, the unique position of the U.S. dollar does not give the U.S. any superior position, instead, the acceptance of U.S. dollar as prominent instrument of international payments by a large community of nations makes the U.S. obligated to play by the rules, never marginalizing any country even though a particular country could be political foe of the U.S.