By Hema Senanayake –
I insist that economic governance is an advanced science. Money is at the center of this science. If money fails the country will fail, so will the President. This is not a new phenomenon, but centuries old one. In the Bible it says that “So when the money failed in the land of Egypt and in the land of Canaan, all the Egyptians came to Joseph and said, ‘give us bread for why should we die in your presence? For the money has failed.” Genesis 47:15.
It is true. This happened very recently in Argentina in early 2020s before the Great Recession of 2008 occurred in the U.S. Businesses collapsed, and Argentinian people starved. We the people in Sri Lanka will experience this sooner than later. Our currency, the rupee is about to fail unless we do not change the course of governance drastically.
If the President and his intimidated Central Bank think that they can come out of this crisis without the support of International Monetary Fund (IMF) and the support of the United States at IMF or the bilateral support of the U.S. they are mistaken. This is not a simple mistake. For their mistake businesses and people will suffer immensely.
Our currency the rupee will fail not because the government has printed a lot of money as the opposition claims, instead the rupee will fail due to the problems in Balance of Payment (BOP). In other words, the currency will fail due to the problems arise in the balance of the inflow and outflow of dollars. Having BOP issues in certain periods for certain countries are not abnormal under the current exchange regime. When that happens there is a certain international institutional mechanism established to support such countries to get over with the situation.
Leading economists of the world saw this situation as far back as 1944 when the United Nations Financial Conference convened at Bretton Woods in New Hampshire, in the U.S. and put a mechanism in place, to support a country if a country face temporary balance of payment crisis, when they put the American dollar as the global reserve currency. That mechanism is the setting up of International Monetary Fund IMF) of which Sri Lanka too is a member. What is the primary purpose of the IMF? “The International Monetary Fund is … working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world” (IMF Web site). What is wrong here? I do not see any.
To support the IMF’s mission which is to secure global financial stability The United States has enacted a law to establish a fund call “Exchange Stabilization Fund” through which Mexico and Brazil were helped several times. Other than the United Nations and the U.S. established mechanisms there is no proper international mechanism to support BOP issues faced by countries time to time.
For example, IMF played a pivotal role in Argentinean currency crisis when peso crashed in late 1990s. In brief IMF is running a global financial safety net, for example it has approved non-concessional financing nearly USD 70 billion in 2019, for a few member countries. China, Japan or any other country so far has not established formal mechanism to support BOP issues in their friendly nations.
What is unfortunate for Sri Lanka is that politicians based on their whims and fancies, not facts, have made majority of Sinhala-Buddhists people to believe politically that the IMF and the U.S. are adversaries of the country. However, none of the government came to power so far didn’t think so. Especially Central Bank, the official economic advisor to the government did not think so.
For the first time we observe that the incumbent president and his intimidated Central Bank believe that they can manage the currency’s stability without IMF and the U.S. which country is our main trading partner. Perhaps China might help us, and they can do it lending some money, as China needs to increase outflow of dollars via its Financial Account in order to stabilize their own currency Renminbi (RMB) preventing from appreciation. But the cost we have to pay could be huge in terms of interest, sovereignty and geo-political risks. Sad part is that still after taking this enormous risk, we will have to go to IMF and to seek the bilateral support of the U.S.
We cannot ignore that the U.S. has a great unique power, and that power is its currency, the dollar, of which behavior cannot be explained by economic theory. When a country’s Current Account balance become negative, economic theory predicts that its currency should depreciate but in regard to dollar total opposite takes place, it appreciates. The U.S. share of global output is just 16% in 2019 but exceeding 90 percent international transactions are done by using dollar and over 60% of reserves are held in dollars by central banks around the world. This is the unique power of dollar. Also, it is true that one day China will surpass U.S.’s GDP and its currency will dominate in international transactions after a further lengthy period of time. But one thing is sure. It is that the time Renminbi takes to surpass dollar will be determined not by the China’s output growth but by the time that China takes to become an advanced liberal democracy. Given this understanding and under existing paradigm we should decide how best we can achieve our development goals. Governance is not a joke.