29 September, 2020

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Is Ravi Karunanayake’s Perception Unacceptable?

By Hema Senanayake

Hema Senanayake

Hema Senanayake

Sri Lanka’s rupee … is hovering near a record low after being floated by the central bank last week, (Reuters). Today that is on September 10th Ravi Karunanayake the Minister of Finance has admitted indirectly that rupee has depreciated to an unacceptable level. That is why he told Reuters that, “We will ensure that before too long it will be brought back to an acceptable level.” What should be the acceptable value for rupee? He did not comment for this question. Good, let us leave it there.

But he told parliament on or around June 23rd that, “Sri Lanka will strengthen the rupee to 130 to the US dollar in two weeks from the current 133.90 to the US dollar” (Economynext). Opposite of his prediction proved right by now, not after two weeks from his above comment but nearly after 10 weeks. Instead of strengthening the rupee, it is depreciating. Now, let me quote something published on June 19th.

“… if Arjuna Mahendran thinks that market forces should determine the exchange value of the rupee, then this particular view might transcend into the general thinking of the CBSL staff resulting them allowing the rupee to float freely. If this happens most likely we will see the rupee which depreciates on a continuing basis.” (Hema Senanayake, June 19, 2015)

Ravi KPlease compare what Ravi Karunanayake has uttered and what the above named writer wrote on June 19th. Perhaps, Colombo Telegraph readers might clearly understand now that not only the value of rupee is unacceptable but also the shear perception or knowledge of Ravi on these matters is not acceptable.

My piece appeared on June 19th in Ceylon Today could be an interesting one for unbiased and concerned readers of CT. Hence I submit it below as it was. It was an appeal to all Sri Lankans. Here it is.

DANGEROUS – The ideology behind rupee devaluation is

Before it becomes too late, the whole nation should defeat a certain ideology or dogma. That ideology relates to a person none other than the Governor of the Central Bank of Sri Lanka (CBSL), Arjuna Mahendran. He believes that market forces should determine the exchange rate of the rupee. He said this openly on a TV programme known as Naduwa conducted by ITN. Further, he said that he believes it when the country is in a situation of having over-borrowed.

His views are nonsense. If any other economist believes this nonsense, it won’t affect our economy. But when Arjuna Mahendran believes in this nonsense, it affects the stability of the rupee and would result in devaluing our currency resulting inflation and other bad repercussions in the economy.

Previously he held a personal belief that there was an artificial depression of interest rates from September 2014 up to the presidential election. This artificial depression of interest was not observed by the Monetary Board that met on 23 February 2015; instead the Board considered in lowering the rates further and finally agreed maintaining the rate levels that existed in February. But the CBSL Tender Committee which handled the Treasury Bond issue at the end of February decided to go back to the interest rates that prevailed prior to September 2014, in accordance with Arjuna Mahendran’s personal opinion. That decision pushed the interest rates up. This is how CBSL Governor’s personal economic opinions could affect the interest rates and economy.

Similarly, if Arjuna Mahendran thinks that market forces should determine the exchange value of the rupee, then this particular view might transcend into the general thinking of the CBSL staff resulting them allowing the rupee to float freely. If this happens most likely we will see the rupee which depreciates on a continuing basis. In the event Arjuna Mahendran would come and tell us that the previous regime did not allow the rupee to float and now the value of the rupee is being determined by the market forces. What kind of market forces is he talking about?

In fact, I have no idea about the market forces he was talking about. But all sensible economists know one simple fact. That is, one of the core functions of the Central Bank is to keep the inflation low (or at required level). Arjuna admits to this view when he says that maintaining price stability is one of the key functions of the Central Bank. You can’t achieve this objective with a rupee which devalues on a continuing basis.

Also, what I know is that one of the macroeconomic objectives that countries like ours should have is to have the same inflation rate of the country in whose currency we use as our reserve currency. For example, Sri Lanka uses the United States’ dollar as its main reserve currency. Therefore, Sri Lanka’s objective must be to have the same or closer inflation rate that exists in the United States. If Sri Lanka uses a few reserve currencies the CBSL must arrive at a reasonable rate of inflation that is appropriate in accordance with our economic development objectives. You can’t achieve this goal by allowing the so called market forces to determine the value of a rupee.

In regard to market forces, what I know is that the so-called market forces are mostly the resultant effects of the prior decisions made by the CBSL. For example, Arjuna says that there was a 25% devaluation of the rupee in early 2012 under the previous regime. True, but that was the resultant effect of mainly allowing an unprecedented level of domestic credit growth to take place, by CBSL; prior to that it was reported that credit growth was around 35%. Domestic credit growth is something that the CBSL can regulate. (Please note that there are other few variables that affect sudden devaluations).

However, therefore, if the rupee is devalued more than what was required, Arjuna Mahendran should not come and tell us that devaluation of the rupee has determined by his so-called market forces. I agree that the value of the rupee must reflect the true economic relations of present day, but those economic relations are mostly the resultant effects of prior decisions made by CBSL. Therefore, talking about market forces in determining the value of the rupee by the Governor of CBSL is total nonsense because market forces that affect the value of currency, to a greater extent, are the resultant effects of prior decisions made by the CBSL.

However, there are certain economic situations where a country needs to plan for a higher devaluation of its currency than normal. For example, if a country might need to deflate debt then it might choose to devalue its currency by having wage increased bound moderate inflation; another country might try to achieve the same objective by having austerity programmes. Therefore, if Arjuna Mahendran argues that the Japanese yen devalues 20% against the US dollar in the recent past and try to prove that it is the global trend, then it is a statement made out of context.

Also, if a developing country like ours might plan to increase exports by devaluing the currency, yet it must be a conscious and calculated decision made by CBSL, again it cannot be a devaluation determined by market forces. Depreciation of the rupee can be temporarily good for exports, but surely negative in increasing Foreign Direct Investments (FDI). Having a stable currency and an economy which has the same inflation rate as of the country of reserve currency would be beneficial in increasing FDIs. Therefore, it is clear that the devaluation of the currency might be a calculated decision that should be made by CBSL in order to optimize at least the combined effect of increasing exports and FDIs. This decision cannot be left to determine by market forces.

I never insist that we must peg the value of the rupee to the dollar artificially. Yet, let us assume that we want to peg the rupee to the dollar. It can be done. But, nobody can peg the rupee to the US dollar, if he or she can’t peg the domestic credit growth at the desirable level. And if he or she can peg the credit growth at the desirable level, then he does not need to peg the value of the rupee to the US dollar, artificially. This phenomenon explains that we can maintain the advantageous rate of exchange or even we can peg the rupee to dollar if we want, by regulating domestic credit growth but not by artificial pegging. So, what are the market forces that involve in this case? Nothing, other than the Central Bank’s calculated decision to contain domestic credit growth.

In view of above, what I want to point out is that the ideology held by the Governor of CBSL, Arjuna Mahendran, is not only wrong, but dangerous too. If his beliefs led to a sudden devaluation of the rupee, then CBSL would have no other option than borrowing quickly from the international financial markets. There are chances that interest rates for sudden borrowings would be relatively higher. If the CBSL has to borrow in dollars suddenly at a higher rate, then who should be responsible for it? – Nobody other than CBSL. Borrowing is a big business; sudden borrowings are a bigger business.

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Latest comments

  • 2
    0

    Our Dalits thought the e LKR shot up to 140 because of Yahapalanay..And it is good..

    Things go up usually only when everything is going great…Right.

    Apparently it is not so according to these Yahapalana tutors.

    But our Fin Min Galleon’s promise to pulling it back is interesting.

    I know he is well known for using the brawn.to get things done.

    And he even increased the interest rates on borrowings.

    Can he do the same in international money markets?…

    I mean push it up or down?…

  • 1
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    The rupee is in free fall as are most currencies against the dollar with the crashing Chinese Stock markets and growth rate..farmers who toil hard to make HONEST living are unable to sell their paddy and produce while the corrupt tea party for the clowns in the Diyawenna parliament of uneducated morons and criminals continues..
    But the fact is that farmers all over the world are in difficulty because of the twisted global political economic system that rewards paper money robber barons and financial speculators like Arjuna Mahendran.

    Arjuna Mahendan at the Central bank is Ranil’s corrupt stooge, and he and his son in law must be investigated for insider trading. The losses incurred due to the bond scam must be recovered from them.

    If the corruption and looting of the country by politicians and cronies are not stopped, Sri Lanka will end up like Greece with a massive deficit, a devastated economy with no health care or free education. Lebanon where there are protests on the streets because of massive corruption and lack of garbage collection also should be an example for what is in store for Sri Lanka.

    Sirisena and Ranil’s good governance joke has gone way too far and people must go on the streets and protest against the gigantic cabinet of corrupt clowns and a the giving of bribes to politicians by the stinking President and Prime Minister of Sri Lanka. This is truely a land of Sinhala Modyaas

  • 1
    3

    What do these people have against Arjuna Mahendran ? I wish they would come out and say what has to be said !

  • 2
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    Dear writer,

    however you may forget that a few main export markets for sri lanka have devalued their currencies against the dollar.
    China and the Eu have all had their currencies weakened,
    take into consideration when china started using their reserves of $3.62 Trillion to defend the Yuan from depreciating further, it caused them to use up $100 Bn defending it to no avail.
    The problem is with the global markets, china’s stock market which has risen over 1800% is crashing and a lot of foreign funds have invested there are taking hits.

    The market forces are preparing for a fed increase which was expected much earlier this year but however with the strengthening of the US dollar against all major currencies by at-least 10% the fed have pulled off a rate hike as it would hurt american exports and cause capital flight from a lot of countries.

    Take into consideration sri lanka however, the rupee lets say has depreciated from 131.50 to a current level of 140 lets say.
    this represents a 6.4% devaluation of our currency, but taken into consideration the other major currencies such as the EURO, it has gone from 1.30 to 1.12 which represents a drop of 13.8%.

    I believe Mr Karunanayakes statement was meant with the idea of FDI’s coming into the country, if you take into consideration our country has a GDP of $85 Bn therefore investments into the country of $500-1000 Million would cause our rupee to strengthen significantly.

    Also where were you when the previous CBSL was granting permission for NSB
    to borrow in a dollar demoninated bond at an interest rate of 8.75%? Or was this totally acceptable at the time ? And then take into consideration the CBSL had then lowered interest rates. Therefore NSB had taken 500$ dollars (not sure about the amount) at 8.75 and then the CBSL drop interest rates, then NSB is issuing loans at around 12%? in rupee terms please tell me your thoughts on this cause i havent seen any articles by you on this matter.

    • 2
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      The US has printed and pumped trillions of dollars into their economy and even lowered their rate of interest to near zero levels, no adverse comment from the various international monitoring financial organisations . And now with the global downturn, many countries have depreciated their currencies against the dollar, and have made themselves cheaper. Has capitalism reached its climax?

  • 1
    2

    OH AND BTW

    if you didn’t know, you might want to check up on how the previous govt was calculating inflation, important pricing weren’t taken into consideration.

    i don’t know how you think this govt can match the inflation levels with the US considering the calculations put forward by the previous regime is completely off. our real rate of inflation is much higher than that published. so please do some research before giving advise

    • 5
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      Previous regime.. previous regime.. previous regime.. what nonsense is this ???

      Learn to accept a well written analytical article without looking at it with the previous regime in your head!!

      For heavens sake, yahapalanya has been around for close upon 9 months.. three quarters of the year.. they need to get their act together, whatever errors the previous regime made!!

      9 months is a long, long time in the business world.. Business is low, investor interest is minimal, share market is down

      We need to see these guys deliver..they have the capabilities with the likes of Harsha and Eran amongst them.. but what do they do..??? give them insignificant portfolios.., which I’m sure is what RK wanted to hide all his misdeeds and incompetence.

      This nonsense just cannot go on further..

  • 3
    0

    Earlier he made about Rs. 42.5 Billion loss to the country through bond issue and now he made a record devaluation this will definitely increase the payable amount of debt which are dollar denominated. all importers are making addition payment about Rs. 7-8 over parables this makes them a huge exchange loss and as far as export concerns there will be positive but never be a significant one and if we consider our exports specially other than tea, we all import raw materials which now becomes expensive so what about export the finished production ?

    So called mark forces are driven by policies and prior decisions of CBSL ans some other local and international factors which are out side of control however in large the CBSL decisions are the key here. therefore even you allow to decide based on market forces which is actually because of you. allowing the currency to float freely never be a good sense of decision for our country therefore it should be managed through policies, decisions which ultimately influencse market forces

    If this guy be in there than we will be the next Zimbabe

  • 1
    0

    “We will ensure that before too long it will be brought back to an acceptable level.”

    I would like to know how long the rupee can be defended by the CB with limited reserves. The few billions of USD that the CB has are peanuts.

  • 2
    0

    He is not the [musical] fiddler on the roof, but a fidder inside the bank. The fact that there was an unorthodox move in the bank and which went against the grain of public trust, and what was more disgusting was the political appointment to stymie the process of justice and, by the delay that would be staged managed, to ultimately frustrate justice. The senior officials should hang there head in shame for not having the guts to stand up against this manipulated move, and strongly support the well established principals of management of a central bank, and this goes to prove that all the earlier problems of financial companies were known by them in advance with early warning signs and they chose not to move to stop the rot early but allowed the tidal wave to destroy many investments of people some with hard earned money and a good number to launder their ill gotten wealth. All the pontification from the political pulpit will not endure the burning desire in the souls of those who were rejected by the voters for reasons well known, and perhaps within a short time and due to lack of resolve, burst out in corruptive activity and crime. Moreover the rejection of one of the most dedicated honest public officers, Mr. Mayadunne, by the voters also proves that the politics of our country has progressively succeeded in the criminalisation of a large section of voters. We have had a period where society went through an epidemic of crime of all forms and to re-orient the situation back to a civilised state will be a very arduous task, as there are also other state officials who have been partners in this decadent progress. When will justice ever be done, one year later , five years or next generation.

  • 1
    0

    He is not the [musical] fiddler on the roof, but a fidder inside the bank. The fact that there was an unorthodox move in the bank and which went against the grain of public trust, and what was more disgusting was the political appointment to stymie the process of justice and, by the delay that would be staged managed, to ultimately frustrate justice. The senior officials should hang there head in shame for not having the guts to stand up against this manipulated move, and strongly support the well established principals of management of a central bank, and this goes to prove that all the earlier problems of financial companies were known by them in advance with early warning signs and they chose not to move to stop the rot early but allowed the tidal wave to destroy many investments of people some with hard earned money and a good number to launder their ill gotten wealth. All the pontification from the political pulpit will not endure the burning desire in the souls of those who were rejected by the voters for reasons well known, and perhaps within a short time and due to lack of resolve, burst out in corruptive activity and crime. Moreover the rejection of one of the most dedicated honest public officers, Mr. Mayadunne, by the voters also proves that the politics of our country has progressively succeeded in the criminalisation of a large section of voters. We have had a period where society went through an epidemic of crime of all forms and to re-orient the situation back to a civilised state will be a very arduous task, as there are also other state officials who have been partners in this decadent progress. When will justice ever be done, one year later , five years or next generation. Paradise has been lost, will we ever be able to regain it.

  • 0
    0

    It is not possible to predict or promise regarding the ER due to volatile world economic conditions. What RK should promise is to maintain the GDP, inflation and COL at some reasonable levels and then manipulate exchange rates, interest rates, taxes to achieve these objectives.

    Consumers and vulnerable sections of the community should be given some relief for weakening rupee by reducing taxes, cess etc. Govt should cut down on wasteful expenditure etc. Firstly reduce perks and privileges of MP’s and Ministers. Set an example by leading from the front.

  • 2
    0

    This is all a US experiment to see if local market forces really work from ground up, away from US continual use of fiat money, and loaning anymore of US money to allies (like they did in the past to South Korea and Japan). They have already recently loaned plenty to India, and India needs the Sri Lanka catalyst to jump-start the process of US monetary recovery.

    So, we sell ourselves to India (with the swapping of Indian money of $1.1 billion). All is incumbent upon the Land Bridge and Federalism, where Jaffna Megalopolis will kick start the process in the near future.

    Rajapaksa’s style was extremely sophisticated, and he was creating his own kind of capitalist style with every available opportunity he had(using factors from both China and the West. West would have overlooked, and looked for other avenues to create wealth, if not for the interference of the Troika!).

  • 1
    1

    Impact of corruption by Ravi K and Ranil W…. of UNP regime!

    1 Govt. and Corporate corruptions.

    2 Financial loss by Central Bank scandal sovereignty bonds
    inside trading by UNP

    3 Distractions caused by parliamentary legal regulatory enforced action
    by Ranil W… in UNP leader last Parliament.

    4 An operation disruption by dissolved Parliament by President
    M.Sirisena

    5 Loss of 60 billons of rupes to govt. Treasure and Tax payers money by Central Bank Bond scandal that So-called ‘good governances’ of UNP motto of politics failing to tackle the bribery by RK and RW of UNP.

    We can charge under UNP leaders and President of Sri Lanka- UNODC 2014 United Nations Convention against Corruption.

    This established criminal offences by wide range of acts of corruptions by UNP leaders crime under law of Land of Sri lanka.

    We as nation have every right Asset Recovery, if offence become criminal. That is key part of Democracy of good governances.

    We Sri Lankan that new and old elites has to understand, which the simple fact is Stopping Central Bank Bond scandal will promoting Economic growth go hand in hand.

  • 0
    0

    Interest rates in Sri Lanka can afford to go up by 1-2%. It is not possible to hold both the exchange rate and interest rates at the same time. This happened in the first UNP era resulting in a depreciation over 6% per year and finally 24% interest rates. If you increase interest rates the credit on imports will drop. The limitation of 70% is good as a temporary measure for the quickest possible fix, but is not a permanent solution.

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