24 September, 2020

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Falling Rupee & Sliding Economy

By Ameer Ali

Dr. Ameer Ali

The Central Bank of Sri Lanka (CBSL) seems to have given up its effort to defend the depreciating rupee. Not that it does not want to but that it cannot because there are no more reserves to gamble with. The CBSL however, is trying to put a positive spin on the surrender by agreeing with the Finance Minister that it is good for the export sector. While global trade is under severe strain due to US-China tariff induced trade war, what hope does Sri Lanka have to increase its exports and to where? The unstoppable globalization of finance and financialization of economies, has made CBs powerless to control money supply through the conventional instruments of interest rates, reserve ratios and open market operations. The banking world and money markets are operating in a virtual world and new forms of money are created almost daily. CBs are unable to monitor these activities, let alone controlling them. As one expert describes, “Central Banks have become an institutional anachronism”. On top of this transformation comes rising interest rates in US which is pushing currencies of emerging markets to tumble. Let us not therefore build hopes that Sri Lanka’s CB can employ monetary controls and stabilize exchange rates. The country should look to other means to arrest the downward spiral.  The southbound journey of the rupee is partly systemic and partly and more importantly due to economic mismanagement. A depreciating rupee and a sliding economy are strongly correlated.    

The best and long lasting solution to stop both is to increase and diversify the nation’s export base. That of course will take time, capital investment and technological transformation, especially in areas where an exportable surplus could be generated and foreign markets for that surplus could be found. Even if foreign investors are enticed to enter in return for extremely advantageous benefits, the turnaround is not going to happen immediately.    

On the other hand, one measure that can be implemented immediately, and, which the government has already started doing is to control imports without hurting the poor.  Already, the first wave of import restriction on luxury motor vehicles and white goods has come into effect, and the next wave of restrictions, which will include some basic consumer items, to be justified in the name of AUSTERITY, is inescapable. However even that is not enough to arrest rupee depreciation. Because, that depreciation is caused not only by the trade deficit but also by a ballooning budget deficit. Therefore while restricting imports, public expenditure should also be curtailed. This requires a radical overhaul of the public sector. When the country switched to an open economy from the socialist dirigisme in 1977, the economic rationale for that switch was the neoclassical belief in the relative efficiency of privately operated economic enterprises and market competition. However, no economy can grow robustly solely on the back efficiency of private sector efficiency without an equally efficient and supportive public sector. Even JR Jayewardene who was an arch enemy of dirigisme and socialism failed to implement the reforms necessary to improve the efficiency of the public sector.     

The private sector comes into contact with government administration at several points. If an entrepreneur for example, identifies a profit making and market capturing investment opportunity abroad and applies to the relevant ministerial department for approval for his venture that application should be dealt with and responded to without unnecessary delay and additional expenses. Delay my cause the opportunity to pass and expenses will add to the entrepreneur’s cost and reduce competitiveness. One of the secrets behind Singapore’s economic success is the efficiency of its public administration. In certain areas Singapore’s public sector is even more efficient than its private sector. Both sectors compete in the market to attract the best talent and competitive remuneration and benefits are offered to keep that talent committed to the employer. One of the reasons why foreign investors choose to invest in Singapore is because of the efficiency of its government officers.              

There are too many wastes in Sri Lanka’s public sector, which is un-affordably overstaffed with underqualified and untrained employees working on low salaries. Many of them are honeymooning to supplement their income invariably through corrupt behaviour. When corruption creeps into the public sector, it reduces the competitiveness and efficiency of the private sector also. From government’s cabinet at the top to its departments and offices at the bottom there is excess personnel and wasteful expenses. Does Sri Lanka actually need an omnibus cabinet that it has today? What on earth are these ministers, their deputies, secretaries and attendants, with all their salaries and perks, producing to increase the nation’s GDP? Why is the economy being loaded with this excess baggage when it is struggling to produce enough to sustain this unproductive cadre? Likewise, wastage through corruption and public maladministration drain all efforts to increase productivity and growth. When the CB itself was caught with daylight robbery and when the culprits were allowed to escape unpunished how can people hold any trust on their government? Reducing the size of the public sector and improving its efficiency will reduce the budget deficit. 

Some of the projects such as the so called Gamperaliya or model villages are more politically motivated that economically sustainable and therefore are wasteful. When the government is facing a massive revenue problem how can it afford lavish expenses on rural tamashas without falling into debt? Either it has to raise revenue through higher taxes or borrow more. Either way, it is going to escalate rise in cost of living. Already the masses are increasingly becoming immiserised and some family heads are even resorting to suicide to escape from misery. Further increase in cost of living is certainly going to create mass protest with serious law and order consequences. It appears that both the government and the opposition are willing to face such an outcome to make political capital out of it.    

In modern economies, transport plays a crucial role and it is an important variable that determines the rate of domestic inflation. In this sense, fuel pricing has become the government’s nightmare. The government is deceivingly trying to justify the increase by comparing with what is happening in neighbouring India. This is a comparison not between two similar economies but between a whale and a minnow. India has the capacity to absorb the increase but not a small open economy with narrow export base like Sri Lanka. When the PM himself declares that he does not have a clue of how the pricing formula operates what can ordinary citizens expect from his government? A more efficient and modernised public transport can reduce the demand for private vehicles and reduce demand for fuel import.  

The solution to the downward spiralling economy has to include even variables outside macroeconomics. No doubt, the country’s export sector has to expand and become intensely competitive and wasteful public expenditure must be curtailed with increase in its productivity. There is also something else that requires speedy attention and solution. 

In a plural society, economic development should be the end product of the cooperative and coordinated effort of the different elements that make up that plurality. In the past, Sri Lanka did remarkably well in plurality management which produced a vibrant economy. Even without a written democratic constitution the country was democratic enough to achieve communal harmony, political stability and economic prosperity.  True, Sri Lankan society and polity have become more complex, more locally and internationally integrated and economically more challenging. However, these changes have also affected other plural societies such as Singapore and Malaysia in our neighbourhood. Singapore produced a statesman like Lee Kwan Yew, who successfully managed the nation’s plurality and left an impeccable legacy for his successors to follow. In Malaysia, Mahathir Muhammad, who, although started his political career as a Malay chauvinist, realised the futility of that policy and has come back as a reformed leader at the ripe old age of ninety-three, with an avowed purpose of cleaning that country of administrative and financial corruption and building a truly democratic society on principles of economic justice and social cohesion.  Sri Lanka desperately needs a statesmanlike political leader who could garner the support of all communities and pull the country out of its current quagmire. With the ones who are now running for power the downward spiral will continue. 

Dr. Ameer Ali, School of Business and Governance, Murdoch University, Western Australia

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Latest comments

  • 9
    0

    Dr. Ameer Ali

    RE: Falling Rupee & Sliding Economy

    “A depreciating rupee and a sliding economy are strongly correlated. “

    Yes, certainly So is a corrupt polity and a sliding economy. Example, Venezuela.

    So we have a corrupt polity, that is the cause of the sliding economy and the depreciating rupee.

    50 years ago, 1 US Dollar was about Rs.5.00. After all the corrupt politicians , over the past 50 years, 1 USD =170 Rupees.

    .

    • 4
      1

      While the country is facing an international currency crisis the former President Mahinda Rajapaksa is once again spreading lies and attempting to create divisions in the country by resorting to reviving his Neo temple Fascist Buddhist movement led by non other than the former President himself in a desperate attempt to protect himself from criminal prosecution…

      International community must keep an eye on this terrorist movement and respond before the country is sent down a dark path once again.

      #INTERPOL

    • 3
      0

      Amarasiri,
      You are right. Our politicians are not only corruptive but the policies they make are not in the interest of the country or its people. This is going on since 1948 or little earlier when the British decided to leave this country. The people of Srilanka were kept in the dark by opportunistic politians and opportunitic Buddhist leadership. The level of suffering the people undergo now is the cumulative impact of those corruptive policies which created division of people, continuous riots and armed rebellions and counter rebellions which made destruction of resources. The level of politics is much worse than the level of economy. Still our politicians are looking for how far we can cheat and put people under the misery using fake patriotism. Have we learned any lessons. No. I sure the country is getting to another bloodbath very soon.

    • 1
      1

      A
      Example, Venezuela?
      The central problem in Venezuela is meddling by the US.
      The US has from the day Chavez became President done everything possible to undermine the economy and create political instability.
      Look at what has been achieved in public health, education and social welfare before denouncing Venezuela.

  • 4
    0

    Quite right Mr. Ali, political economic solutions are necessary in the current crisis.

    1. Another solution is that Sri Lanka should continue to buy cheap oil from Iran and sell tea and ignore Trump’s sanctions against Iran, just as the EU is doing. Unfortunately, Sri Lanka’s foreign policy is not independent

    2. Cut defense expenditure by half as part of austerity measures as Sri Lanka’s defense is the biggest budget item.

    3. ask ADB, Japan Govt. and Washington Consensus (World Bank and IMF) that hold the larger shares of external debt and have put Lanka in their debt trap and “Bail out Business” to cancel debt. Also, go for Renminibi Bonds to reduce dependency on US$.

  • 8
    0

    when the president takes 63 to the UN recently according to the JVP, what is this so called financial problem.Kapalla,beepalla,jolikerapalla. Tomorrow is another day.Today we enjoy.Drink,eat,dance.

    If the people are hungry,let them eat cake.

  • 3
    0

    Economy Sliding ?????? How can it be

    It is only a Only a couple of days, since Kumar told the Yahapalanistas here that the Economy grew 6.3 % so far in 2018…

    And he is a Doctor, Kumar …
    Where is Native Vadda who did the Math to show that it was growing over 5% plus every quarter for the last 5 quarters…

  • 6
    0

    If only the power of fear that prevails among majority thinking minority taking over the country could be diverted towards achieving economic success – our country will do much better.

    Dr. Ameer Ali is talking about only the direct impacts on having over-staffed, inefficient and lethargic state-sector. Imagine the indirect impacts it has on the country

    • 1
      5

      Fathima,
      The problem is minorities who were welcomed to stay in Sinhale by Sinhala Kings have become pain in the neck of majority after the country got independence. Hindu Demalu trying to grab Northern part of the country and Muslim Demalu trying to grab Eastern part of the country and at the same time they want to live in rest of the country and exploit the majority.
      Best solution is to give 20% (Based on proportion of the total population) of the land in northern part of the country to Demala speaking people irrespective of their religion and ask all those who live in rest of the country to move to whatever the name they like to give to this homeland of Demalu.

      • 4
        0

        Eagle Eye:

        YES..YES, I see a POWER, I see an IMPACT there, and I see a REACTION there. Right now these things in you work towards counter-production, which is bad for the country progress. If these REACTIONS can be diverted towards productive achievements, we will have a better nation.

        Brother, we don’t need 20% land and daily see a poor neighbor suffering. Let’s be together, suffer a bit – one-day, when you become a matured, will enjoy the benefits together.

    • 0
      4

      Fathima

      There you’re

      What about getting rid of superiority complex of minorities in association with their kith & kin overseas?

      • 4
        0

        RR
        You should spend a little time with minorities who are living below poverty line as a result of the war, and about whose rehabilitation the state has done nothing.
        There is nothing called “superiority complex”. There is only stupid arrogance, common to all narrow nationalists, minority or or not.

      • 3
        0

        RR,
        I am not sure or have seen there is such a superiority complex exists, after all, we all are Sri Lankans. However, we should not let such false beliefs to create any inferiority complex

  • 2
    0

    (From government’s cabinet at the top to its departments and offices at the bottom there is excess personnel and wasteful expenses)..
    This adds sault to wound..
    Corruption is one of main reason why we not do with any problems in Sri Lanka .
    It’s starts with politicians?
    Who bribes?
    It is with support of politicians?
    Many of them are corrupt ?
    We do not have honest political leaders except with JVP..

  • 1
    0

    Dr Ali,
    You repeatedly though may be indirectly underpin the argument that democracy is the most critical neccessity for economic well being. I have my doubts… for example how about China? I think the most important is the clarity in business processes established thru law & order. That aspect is not doing too well in our country. And did not exist towards the end of 2014.

    • 0
      0

      J f M
      We know only one kind of democracy, that of party politics and the ballot box.
      The say that people have over their lives is the essence of democracy. Despite the fall of socialism, Chinese society still has better democratic values at community level than we have.
      State power is in the hands of a party elite but is it any better in the US?

  • 1
    2

    I suggest we put an advertisement in CNN and BBC that reads as follows to attract tourists:
    “Visit Sri Lanka the Paradise Island that wiped out the deadliest terrorist organization LTTE”

    • 1
      0

      Eagle Eye,

      Whatever has to be done to run the state-sector dansala..

    • 1
      0

      Eagle Eye, brother, why do you sound so arrogant, rude and racist most of the time? Please join the conversation, BTW, we are talking about a better approach to manage the situation than fully depending on those retired budgeted tourists’ few peanuts..

  • 0
    0

    The best solution is for the government to balance its budget and stop printing money by borrowing from the Central Bank and the banking system. This latter course should be totally prohibited and the government should fund its expenditure entirely from its revenue flows and spread its expenditure accordingly.Allowing temporary borrowings from the Central Bank to fund the timing gap in expenditure and revenue has been misused to run permanent borrowings from the Central bank through roll-over.
    R.M.B Senanayake

  • 3
    0

    Ask Ranil to give more salary increase to his Mps….
    The main problem is most elected mps of three communities are not patriotic to Sri Lankan soil..
    Many of them milking the system and using their positions to earn money and accumulate money ..
    Big cars; how many setvnsts; how many civil servants; housing allowance and so many allawances;
    Be honest; many Sri Lanka government servants misuse their post and jobs to milk the system ..
    It is from school teachers; university lecturers; to Mps ..
    That is why I’m saying appoint only honest people in all departments ..
    How do you know it ..
    Now ..
    Appoint a secret groups of detectives from CID..to monitor; detect and find all those who take fraud ..
    Name them and shame them in public .
    Sri Lanka media could play a big role .
    Some media people are good and honest ..
    They do not have place …
    No matter who take fraud from mps to teachers ..
    Ban them from government jobs for 10 years ..
    Put them red notice on their profile ..
    Name them and shame them with evidence ..
    Seek advice of atterney general ..
    AG. Should design this ..
    But; if AG office is corrupt in Sri Lanka ..
    What could we expect ..
    Paradise of earth is made hell of earth by these poltiicans…

  • 0
    0

    All dress designers and tailors know a cardinal rule –
    cut your cloth according to your size. Finance and
    Media Minister should know this better.

    He recently boasted that Sri Lanka’s economy is the
    best managed in Asia. Obviously he does not seem to
    know economics or financial management.

    If he had only endeavored to save from wastage and
    corruption, part of the problem could have been resolved.
    Whatever the problems are, President, the Prime Minister
    or even Mr Samaraweera does not curtail their travel abroad.
    Even to Somalia, they will travel if they have an invite, spending
    public funds.

    It is good both for the country and for him if the Minister of
    Finance resigns. He may do better as a Textile Miinister. That
    again is if he can summon sufficient strength to work and not
    shirk. He has got used to the latter culture.

  • 0
    0

    Let us prevail on the government to pass a Balanced Budget Law requiring the budget to be balanced and if those in charge fail to do so after the results are announced they should be surcharged the excess.
    Keynesian deficit budget case does not apply in a developing country but only in a developed country where there is a temporary decline in Aggregate Demand due to a temporary excessive savings or hoarding. Developing countries do no suffer from such temporary declines in Aggregate Demand since such Demand is more or less constant or increasing with the increase in population.

  • 0
    0

    Let us prevail on the government to pass a Balanced Budget Law requiring the budget to be balanced and if those in charge fail to do so after the results are announced they should be surcharged the excess.
    Keynesian deficit budget case does not apply in a developing country but only in a developed country where there is a temporary decline in Aggregate Demand due to a temporary excessive savings or hoarding. Developing countries do not suffer from such temporary declines in Aggregate Demand since such Demand is more or less constant or increasing with the increase in population.

  • 0
    0

    We have to research and observed impending uncertainties of market catastrophe arise US economy. This is where that arise of that Global Economic leads new crisis in that world-wide scale impact of current globalization has reached. Needless to say that root cause are behind inventible crash of market Economy of USA on or before end of this year.

    There is revolution of political-economy brewing in USA, well it will not that orthodox of right-wing , but the economic turn into radical center.
    We have seen two bankrupt .
    1 National debt all time high:
    1996 Govt. debt US $ 4 Trillion
    2008 Govt. debt US $ 8 Trillion
    2014 Govt. debt US $ 16 Trillion
    2016 Govt. debt US $ 20 Trillion. Which that USA GDP comes to US $ 19.6 Trillion over 110% debt ration of that GDP against US Economy.
    The World total Debt amount of that accounts comes to US $ 150 Trillion in terms of US currencies.

    2 Corporate debt 1955 US $ 0
    1965 US $ .03 T
    1975 US $ .06 T
    1985 US $ 1.00 T
    1995 US $ 3. T
    2005 US $ 3.5 T
    2015 US $ 6 T

    3 Student Debt 2007 US $ billion 400
    2009 US $ 600 Billion
    2012 Us $ 1 Trillion
    2015 US $ 1.2 T
    2016 US $ 4 T
    The OMEN has been prediction that 100% accurate at predicting market crashes. Since 1990 that changes is driven by globalization reorganization of production that is called the (GVC) revolution.

  • 2
    0

    Close down the unnecessary diplomatic missions except for the important ones until the situation improves. Embassies in Poland, Sweden, Indonesia, Kenya, Afganistan, South Africa, Brazil and many others can be closed down easily.
    At the same time Sri Lanka has to undertake a critical review of Commercial Representations. At present we have got a set of very lethargic and inefficient set of Trade Officers in our embassies. What have they contributed for the development of new business and markets for our exporters. In some places we got two commercial officers! What is their output? Are there any performance testing methods in place? Do they go out and meet with potential importers? How many market studies have they undertaken? Can they talk business effectively with potential importers ? Sadly the answer is “NO”. But everybody says that increasing exports is the answer to the problem the country is facing now and curtailing imports is only a temporary measure.
    Maintaining these so called diplomats their families and children means a colossal waste of valuable foreign exchange. Role and functioning of our embassies should be completely overhauled. Again turn to Singapore and see how they promote their exports and how Malaysia and China promote their exports.
    Sri Lanka has got well trained young and experienced marketing professionals with sound qualifications and communication skills but the Foreign Service does not offer them opportunities to serve the country. As a pilot project they should advertise all the available vacancies for Commercial posts and recruit the best on competitive basis ensuring that political interference in the selection process is not tolerated. At a time things are changing rapidly we have to think out of the box solutions to face such situations to make Sri Lanka’s presence felt in the world market as an emerging supplier of goods and services.

  • 3
    0

    Take a lesson from Rwanda. Now the miracle of Africa. The Hutus and Tutsis who killed each other in 1994 are now partners working hand in hand to develop the country. Their economy is growing not sliding like in Sri Lanka. Sri Lanka needs racial and religious harmony, where every citizen is a Sri Lankan first and only a Sinhalese, Tamil, Muslim or Burgher second. However, with dirty politics, rampant corruption, and a bunch of garbage politicians we have no hope for the future. Which ever party comes into power will make no difference.

  • 1
    0

    Put the nooze around Cabraal, the Rupee will strengthen.

  • 1
    3

    Monks offered prayers at various locations regarding devaluation of currency. Other non patriotic religions did not do anything.

    • 4
      0

      Worshipping trees is no remedy for economic ills.

    • 3
      0

      Whom were the monks praying to ? Hope they have a good understanding of economics and world currencies. Wonder when the payers will be answered ?

  • 4
    0

    Eagle Eye..
    May I call you blind eye..
    You may not be blind ..but your heart is blind; your mind is blind ..
    Shall I tell how ..
    Minority communities help this island more than any one .
    1 million upcountry Tamils work day and night keep tea expert survive;.
    1 million Sri Lanka work in Europe.most Tamils to keep your economy goes on..
    3.million Lankans works in.middle East..most from minorities ..
    Poor Muslim community work day and night in their retail shops to keep your business goes on .
    Poor farmers in east work day and night to feed the country .
    Still you blind man point the finger for minorities ..
    That is why I say your heart is blind not your eyes .
    You are not a human being..but you are sub- human not accpet fact ..

  • 2
    0

    Steve ..

    You are right .
    We need to learn from Africans.
    We will never .
    Without peace no prosperity.
    These people do not know that ..they know but do not want to apply

  • 1
    0

    The problem is that most of our economists are not capable. Look what Arjuna Mahendran did. Then came along that joker Indrajit. Just like his sister Radhika, I believe he is not up to the mark. Indeed, his main obsession seems to be competitiveness… depreciate the rupee further or cut wages… all things that he learnt from his mentor Raj Rajaratnam!

    Harsha De Silva is also another joker. This monetarist doesn’t know the difference between a Volkswagen factory and a soap factory. All that this third-rate graduate with a third-rate PhD obsesses over is the money supply. Indeed, everything reminds Harsha of the money supply. Well, everything reminds me of sex, but I keep it out of the paper.

    Mohan Munasinghe is also mediocre. He was the Vice-Chair of the Intergovernmental Panel on Climate Change that shared the 2007 Nobel Peace Prize. His work on sustainomics is a long shot. He is unable to sleep since last week when it was announced that William Nordhaus won the Nobel Prize for integrating climate change into long-run macroeconomic analysis. Mohan thinks he is the one who should have been awarded the prize for sustainomics.

  • 1
    0

    In my last comment explain that USA economy is weak and uncertainties are around Global development impact on Sri lanka and as other developing countries.
    As it turn out of UNP’s set of policies a wide range “open market” since 1977 by UNP-JRJ leaving national production result of that small market, no innovation in technical by road map development was totally in failure.
    We ever-never using industries substitutions an economic strategy has been abandoned, which that we failed to delivered as developing world-class production sectors…policies initiated by UNP mismanaging of developing of nation GDP by neo-Liberalism.
    Since last 40 odd years of we have not created Export-oriented trading and business sectors except Garment industries , bur only ours creation was confined to that low-income and high-price by UNP crony capitalism.
    By and large conititunation of so-called Liberalization of an OPEN Market of that simple commodity-production delivered nothing except black market currency operation. Only option is for UNP leaders to loot public funds belongs in the Central Bank Bonds scam was viable for political operation their survival to become RICH by overnight.
    Since 2015 January 8th that UNP’s leadership of Ranil W…CBK and MS has not change essential pillars of foundation of National Economy. Therefor nation building of Trading of Business, Industrialization and modernization of Agriculture severely restricted by UNP leadership….last 46 moths .
    UNP regime has no sustsnsbility of an intellectual elegance where their political vision of “good governances”

  • 0
    0

    You name it we import every thing. Until we fix it you never ever come out of this problem.

  • 0
    0

    The making of a politically made crisis in an Island that internally unshaped of policies which is that implement by UNP policy makes led by Prime-Minster and his short-sight think-tanks has derived nothing since 2015 January 8th!

    The National interest rate of CB has gone up that 3% to 4% rise due the great Central Bank robbery of UNP hard core right-wing leadership; by joint operation of Central Bank Governor of Singaporean citizen and local Perceptual Treasure company led by son-in-law of CB Govern, clique has loot billions PUBLIC Fund by blessing of UNP party leader of Hon. Ranil Wickrasinghe.

    Therefor result of domestic-oriented crisis that rural poor that more suffered the economic anxiety and without fear of doing by UNP , soon turned into domestically that as millions of Rural-Urban poor lost their jobs and investment an Island-wide—–4 to 5 million in Sri Lankan alone fell into line of POVERT.

    An Economy regain and recovered island has lost which is not be see the near future in coming years.
    The largest fraction of social classes took on enormous DEBT, went to pay unknown fees and exorbitant interest charges, while more the interest on the interest t charges and fees.

    There is Not that fresh chance to start up development of Economy under the current circumstances by regime in power.
    Despite all that MOF and CB policy -oriented that finance, fiscal and monetary that cannot ensure stability and fairness of financial order of UNP set of policies led by RW.
    The laws of land under new changes ruling of governing set of policies that never attempted make any guarantee that all citizens of Sri Lankan PAY their fair share of TAXES.
    Neo-Liberalist policies of since 1977 of 40 years that UNP policies are outdated, which is that compare with current Globe Vale Chain of capililism (GVC) .In fact that leads to New bankruptcy economy .

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