1 October, 2020

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Ravi K’s Gimmicks Do Not Work In Economics

By Hema Senanayake

Hema Senanayake

Hema Senanayake

Sri Lanka is an interesting country. Its currency, the rupee has been depreciating for a while. The Minister of Finance Ravi Karunanayake, it seems was convinced that rupee was depreciating due to depleting “foreign reserve levels.” So, the obvious common-sense solution was to boost foreign reserves. He did find an innovative solution. He got a rich Belgian man to deposit U.S. dollars one billion in Sri Lanka – And as a result official foreign reserves were increased by one billion dollars.

Someone told me that there are signs that rupee is getting strengthened. I being macroeconomic analyst was not convinced because I know for sure that this kind of gimmicks do not work in economics. The most unfortunate thing is that economists in Sri Lanka, it seems, are not dare to analyze this kind of gimmicks.

This new government has a habit in finding microeconomic solutions (i.e. business type solutions) for macroeconomic problems or issues. These solutions cannot prevail and would not strengthen the macroeconomic situation in the country. The mega show of “Davos” too went in line with the same approach. Why do I say so?

Ravi KIt is because the prudent macroeconomic management must begin within the country. The government is not doing enough in this regard. It looks like that the subject of macroeconomic management is a devolved subject; it seems that it is being devolved not to provinces but to rich racketeers in the world. The said deposit of dollars one billion would do more harm than good to the macroeconomic situation in very near-term. Let me explain this point a little further.

In the world market, the crude oil prices hit the lowest by now. A few days ago, the price of a barrel of crude oil was 29 dollars. In late January of 2011 the crude oil price was USD 135 per barrel. What does this mean for Sri Lanka in terms of country’s current account and Balance of Payment (BoP)?

Anyway, why the above question is important? It is because that these two accounts posted or maintained by the Central Bank of Sri Lanka (CBSL), directly relates to the value of rupee. Now you might immediately think as follows:

“Oil prices in the world market have come down and as a result there should be positive effect on the current account and BoP. If this is so, then the rupee cannot be depreciated.” If this is what you think, you are right. But the opposite has happened, the rupee had depreciated significantly. This can only happen when the country’s monetary management and macroeconomic management are not proper. This justifies my point.

The government increased salaries and I liked it. Increased salaries can boost private credit growth for which I do not like that much. The increased salaries and private credit growth can be beneficial only if we can increase domestically produced sellable output. This means that without increasing domestic production there will be no usefulness in increasing salaries and wages.

The country should produce more and more. If we do not do that non-oil imports could rise creating a negative pressure on BoP even though the bill of oil import could decrease. As a result the rupee should fall. This is what has happened while the import bill of oil has been decreasing. The decreasing level in foreign reserves is the resultant effect of increased imports. Would this dynamic in the economy change positively due to the deposit made by the Belgian national, which deposit is not an investment?

I do not think so. On the contrary, the rupee could strengthen in short term due to the illusionary increase of foreign reserves resulting in increasing imports. This cannot prevail for a long time. The rupee should begin to depreciate when the illusion faded away.

So, what is the solution if we can’t increase production in short term? Then we do have only one alternative which is to contain private sector credit growth. In this regard CBSL has two policy tools. One is the customary tool known as the rate of interest which is a demand-side tool. When the interest rate is increased the demand for money decreased and as a result imports would be contained. CBSL has determined to keep the rates steady. If possible that is good.

The other policy tool is a money supply-side tool which is known as Statutory Reserve Ratio (SRR). When the reserve ratio is increased the loanable funds available to banks will be reduced so that by increasing SRR the CBSL can reduce the domestic credit growth. A few weeks ago CBSL decided to use SRR to contain credit growth. CBSL increased the ratio to be 7.5% from previous 6%.

Unfortunately this is not a tool that works fast enough. I frequently argued that CBSL should acquire a new policy tool to regulate the creation of monetary substitute known as “credit money” in the system. It works fast and sometimes proactively, and is the key to stabilize rupee until the domestically produced sellable output is boosted.

Hence, prudent macroeconomic management begins within the country and with the local business community.

 

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Latest comments

  • 5
    3

    Govt. seems to think of the elections and tomorrow only. Long term plans need in depth understanding and study. Govt. should declare economic, leisure zones in the island identifying with tax and legal structures. The agricultural livestock and marine zones should remain the rest. The latter should become the producer and the earlier two to be the consumer. Trincomalee zone is ideal to become economic zone which could be leased to a consortium to operate industrial, vehicular manufacturing, marine industry etc. to compete with regional ports. Jaffna to Chilaw could become leisure zone with a consortium managing the development and operation. The consortium could include investors from France, Japan, Germany and India depending on their qualifications.

    This kind of a macro economic planning is what is required to bring the present economy to stability. Adjusting the micro economic variants are a usless exercise. Another important adjustment to cut down all unnecessary expenses.

    Hema your article is posted at the correct time.

  • 4
    0

    Hema Senanayake,

    So very interesting to read about all these economic things. Good solutions to the currency problems.

    3rd policy option to be implemented asap :

    Money to all local industries and institutions

    1) Home renovation industry (but not for the building of new houses on forest lands),

    2) Traditional Organic farming industry,

    3) Traditional medicine industry,

    3) Public university industry (so people won’t take the wealth of Lanka to Western countries),

    4) Public transportation industry,

    5) Lawyer industry so lawyers will actually work for the masses and not use country assets to set up shop for diaspora,

    5) Medical industry,

    6) Beauty industry,

    7) Fishermen relocation industry (due to after-effects of Port-City),

    8) Environmental cleansing industry (to clean the air pollution from Port City),

    9) Street and canal cleaning associations

    Etc.

    • 0
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      Yep! Those are the places Soro’s US$1-billion should go to.

      • 0
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        But! …we hope that Soro’s hasn’t given the US 1-billion with conditions : Speculation on stock market indices (or something)…individualized for each country……and in Sri Lanka’s case, correlated with Tamil Nadu IT firms on Lankan soil to boost up the index.

  • 4
    2

    One year gone and our economy is struggling as before.

    Politicians just will not do what is politically correct !!!

    They are doing the same thing what MARA did by continuing with a welfare society loaded up with hand outs and subsidies. The bottom line is to remain in power at any cost.

    Imagine introducing a super gains tax to pay for salary increases to an ineffficient and bloated public sector!!!

    • 0
      1

      [Edited out]

  • 1
    0

    What we want is new set of policies to cater ongoing development of sustsnibility of capitalism in Sri lanka, after end of WAR against LTTE Terrorism since 2009 may.

    That is vision of political-Economic base on new Era of capitalism progress by New Path Development.

    Peacefully footing in our soli is key factor development, that due credit give MR democratic alliance, who rule country since 2005 to 2014.

    UNP -Ranil is man who has no own reading or he himself muddle with all sorts of Economic schools his vision, well his vision is purely of Western reading of Old School of Market driven economy, which has been in failed since 2oo8 great depression.

    Globe economy run different directions ,where UNP-Ranil’s right-wing school thoughts are far from the ground reality of our nation 2600 years of civilization exist this Island an Independently.

    I have to say Independent grow of civilization want self-educated thinking tanks of Sri Lankan to push her nation economy politics and social affaires. Not that western moribund political-economy of bunch of ill advices from IMF WB and ADB and Tamil terrorist.

    • 2
      0

      N.Wimaladasa

      “I have to say Independent grow of civilization want self-educated thinking tanks of Sri Lankan to push her nation economy politics and social affaires.”

      Very good idea.

      You should seek advice from Gota who has a shark Tank in his house. Would that be okay with you?

  • 7
    1

    You are wasting your time Sir..

    Yahapalana suckers wouldn’t know Macro Economics from Macaroons

    • 2
      1

      K.A Sumanasekera (Dr No)

      “Yahapalana suckers wouldn’t know Macro Economics from Macaroons”

      My Elders tell me Macaroon is a type of cake, is it true?

      What is Macro Economics? Is it also a type of cake or Macaroni a type of pasta?

      What is the difference between Fiscal Multiplier and Physical Activity Multiplier?

      • 0
        0

        Dear Native.

        I seek advice of my Elders only on serious issues like how to protect Buddha Sassana from Batalanda.

        Haven’t you been to Maccas in Wellala gardens.

        Not sure about Fiscal multiplier.

        But Galleon Ravi has surely Multiplied his Family Empire.

        Don’t let your grand kids eat Macaroons without Physical activity unless you want them to get Obesity. like the kids in Mexico City.

        • 2
          0

          KA Sumanasekera (Dr No)

          “I seek advice of my Elders only on serious issues like how to protect Buddha Sassana from Batalanda.”

          My Elders’ advice to you is give Buddha Sasana back to the Buddhists who still believe in and live by Buddha’s teaching rather than expecting the 225 crooks to preserve it.

          Every crook in this island takes turn to hide their sins under Buddha Sasana or smart ass patriotism.

          “Not sure about Fiscal multiplier.”

          Then what will stop you from poking your nose in Economic affairs? Leave economy to the experts.

          And keep on carrying MR’s clanging b***s which I suspect is the best job available to you.

  • 3
    2

    Accountants are poor economists.

    • 3
      4

      Maghribi

      “Accountants are poor economists.”

      Isn’t it obvious?

      On the one hand client’t expect them to cook the books (Tax Planning) to reduce Tax liabilities and on the other economists want more tax levied from the Tax Payers for the treasury.

      By the way, the accountants always laughed at economists.

      • 5
        0

        Ravi is a uk qualified management accountant with zero knowledge of
        sri lanka taxation. Ms Chandrika was nither an accountant nor economist but still held finance portfolio. Similarly Mahinda Rajapaksha was not an economist or accountant but was holding the finance portfolio.

        The government and the cabinet should take full responsibility for the chaotic situation in the economy today.

        Tax free allowance has been increased to Rs 2.4 per annum from Rs 500,000
        For partnerships it is going to be Rs 4.8 Million.

        For private companies the annual licence fee is Rs 60,000/-

        Private companies are thus discouraged

        There will be a proliferation of partnerships in the future to legally avoid income tax.

        This would lead to a drastic drop in revenue from Income tax for the government.

        In future ordinary people will have to bear more taxes in the form of indirect taxes such as NBT VAT etc

        Regional income tax revenue offices will have to be closed for no work.

        Tax base will be substantially reduced

        An economic catastrophe in the waiting

        • 1
          0

          [Edited out] Please write instead of just posting links – CT

          • 1
            0

            [Edited out]

  • 1
    1

    Ask from Colombo University (Sociology PhD holder) Economics Dept joker professors.

    • 5
      0

      The IMF head is a French lawyer (of dubious repute), but advises countries like Sri Lanka on how to run their economies.

  • 3
    1

    Well, historically the Central bank has bought SLs own currency. That is also not really “macro economic” is it?

    The US economy is strengthening. With the increasing interest rates other currencies are struggling against the dollar. There really isn’t anything one can do but export more stuff.

    Also you can encourage expat workforce to deposit their savings in Sri Lankan banks rather than overseas banks. The local interest rates are usually higher than overseas rates anyway. Do the expats know their money will grow faster in Sri Lankan banks? Perhaps they can be educated more.

    • 1
      1

      Vibushana “..Also you can encourage expat workforce …”

      you mean the Sinhala mothers and sisters and daughters;( not the Tamil coolies) who toil in the Middle East as maids/prostitutes/labourers?

      Perhaps they are paid measly wages as cash in hand.

      Vibushana” The local interest rates are usually higher than overseas rates anyway. Do the expats know their money will grow faster in Sri Lankan banks?”

      do they also know that the Sri Lankan rupee is depreciating so fast that putting money in Sri Lankan bank is like buying a new car.

      when you buy a new car as soon as you drive off from the garage; the car has depreciated 10%.

      As soon as you walk away from the bank after depositing the money; your savings take a nose dive.

      Also there is no protection from the Sri Lankan bank if your money is stolen by fraudsters/thugs supported by local politician’s. in the UK for example up to £75K per account holder is protected.

      So before you start advising expats; get your facts right.
      Getting facts right is not for you anyway …..as you trade is twisting facts

      • 2
        0

        Hello Rajesh,

        The thing you are doing is called “racism”. Its frowned upon in other cultures.

        As far as currency goes, the money can be deposited in LK banks in hard currency.

        This is what the purpose of the whole article. Its about maintaining foreign currency reserves.

        • 1
          1

          you bury everything under racism and fail to counter points I raised.

      • 1
        0

        Rajash

        ‘when you buy a new car as soon as you drive off from the garage; the car has depreciated 10%’—- No, No, No. In Sri Lanka, it appreciates. Do not compare Sri Lanka to the UK.

        ‘Also there is no protection from the Sri Lankan bank if your money is stolen by fraudsters/thugs supported by local politician’s. in the UK for example up to £75K per account holder is protected’—————£75 deposit protection guarantee is a protection against a bank going bust. It is not for protection against money stolen by fraudsters/thugs.

        I have told you several times to be careful when you write comments on very serious technical issues. Emotions must not dictate you when you make comments on very serious issues.

        Darling do not get angry with me for pulling you like this. Think this way. You are learning real lessons from me this way.

  • 4
    0

    Whatever happened to the US$18 billion he (RK) confiscated from the Rajapakse clan. ? Let us hope it has not gone up in smoke.

    • 4
      1

      Ramuuuuuu

      Good to hear from you.

      “Whatever happened to the US$18 billion he (RK) confiscated from the Rajapakse clan. ?”

      Please cite your reference.

      It was only an allegation and the “investigation” is still under way. The state never recovered the stolen cash.

      Thank you for being yourself.

  • 0
    0

    The beauty of economics is that nothing works but everything works. there is no proper way to economic success but multiple ways. It’s because economics like other sciences is governed by people and its difficult to predict people. :)

  • 5
    0

    The picture tells it all.

    Ravi K looks completely bamboozled.
    RW looks somewhat puzzled

    Ravi K and RW look uncomfortable and asking the question what are we doing here?

  • 0
    0

    Hi Hema,

    Maybe your not following like the rest of the world is – the action of the FEDERAL RESERVE,
    so to my point, maybe if you follow forex markets you shall see that even though oil prices have dropped
    ALL MAJOR CURRENCIES HAVE WEAKENED AGAINST THE DOLLAR. and im talking 10-20% atleast from the YUAN,YEN,GBP,EURO.
    also on another note since the world is expect the fed to raise interest rates this would then increase demand for dollars which would then ? yes your correct increase the strength of the dollar.

    On another note, even though oil prices have decreased you would need to consider that we have forward contracts on deliveries which would mean we arent paying the current levels of oil prices that yoru speaking of.

    maybe this will help you remember basics

    https://www.youtube.com/watch?v=5OK30EpMiLw

    http://www.investopedia.com/articles/forex/08/interest-rates.asp

  • 0
    0

    Hema Senanayake if your so clever why don’t you go work for the finance ministry on pro-bono?????????????????

  • 0
    0

    Let’s hope that Soro’s hasn’t given the US 1-billion with conditions : Speculation on stock market indices (or something)…individualized for each country……and in Sri Lanka’s case, correlated with Tamil Nadu IT firms on Lankan soil to boost up the index.

  • 0
    0

    The Senanayake is out of touch with current Global economy has been manipulated by Multi-National Corporation of US center which system of governances by Hegemonies Democracy .

    Well, UNP-hard cast leadership-Ranil W…. and their ignorant schools of few hands in power center of state , that virtually of all UNP politicians of past 68 years undermined ours National Path of Economic Development.

    They (UNP) have no guided policies and experiences enterprise driving engine Model of Capitalism since 1948. They misread whole economic while more unheeded and unfolded real world commodity exchange, Financial System, commerce and Trade. UNP leadership has not study that OIL age from its onset has been characterized by US gigantism and centralization of Economy by its monopolies.

    US and European economy that Oil base monopolization of wealth has concentration of all large industries in the Globe.

    Its also enforce by most costly enterprises for colleting, processing and distributing of that US and other European companies, which energy base that ever conceived creation of huge wealth in Global Companies representing every sector and industries in Globe.

    The world four largest companies that was few years back of Oil companies Royal Dutch Shell, Exxon Mobil and BP combined revenue of
    $ 22.5 Trillion Dollars, which is equivalent of ONE-THIRD of the World $ 62 Trillion GDP. That is how world economy manipulated by US Japan and EU headed multi-nations of “Good Governances and Rule of Law” Global unknown democracies.

    Needless to say that poor man, who has Not read of Economics by himself Pundit of UNP of Ranil have not yet address ills of economy of our nation been challenged by current crisis.

    He(Ranil W…) has been not enlighten by his master of Western politics of democracy of people like George Soar and Joshep Stigler of Harvard school of economies.. instead of totally they misled him that during Dovers conferences on CAPITAL AND AN INVESTMENT—-SRI LANKA.

    While we 2015 January 8th election held such circumstance are lauded by UNP for very good reasons as being “free” “equal” “against corruptions” “fair democracy” and “universal values” .

    The UNP-Ranil W… MS and CBK these words are designed to CONCEAL the TRUTH, to conceal the facts that means of US control economy and political power remain the hands of the by Western and Indian powers.

    • 0
      0

      N.Wimaladasa,

      A small country like ours shouldn’t have ever played the global manipulation game. Especially as a Buddhist nation, we should have first done what was right and honorable for the country – building ground up, – before ever dreaming of jumping in with the super-power monopolies.

      It was money from created from nothingness, merely for the sake of taking sides in the China-West imbroglio. It was a daring stunt against Western repercussion. It was bubble that would have bust harshly on the Lankan masses, whilst the Elite who promulgated such deals remained smug in Western lands.

      Unfortunately, Rajapaksas’ were advised by unscrupulous persons to do just that. We are in a rut now, not knowing where to turn.

  • 0
    0

    It does matter country is big or small, we -Sri Lankan are wheel of Global Economy rotation by system of ongoing world order.

    Yes we want address key issues by issues sooner or later.
    Hence Ranil.W.. and his political junta far from reality of ground reality of our economy base and its development.

    We have be vigilant of development path of economy of sustsnibility in every sphere of life line of Politics with far reaching vision.

    UNP and their political gang of Ranil W.. are seems be poor performs of politics, economic and social in past 12 months since 2015 January 9th.

    Under the leadership of Ranil W… of that Christin Democracy of UNP cannot escape from accountability, what he has undertaken after 2015 January.

    The Failure of ongoing Capitalism-operation is the failure of UNP-Leader of Ranil W… set of whole mismanagement of Economics.

    • 0
      0

      Yes, yes,….at some point we have to join that wheel of rotation too. But first and foremost, we have to fix our own economic structural problems. We joined in with that wheel when we were not yet ready.

      Especially, there is no adequate taxation in Sri Lanka, that should belong to a functioning capitalistic country (or even a socialist country). The ratio of rich to poor in Sri Lanka is about 1:4. In a place like the USA, the ratio to rich and poor is 11:1. It all boils down to Elite sucking up the recourses of Sri Lanka and taking it out to the West, for their own personal gain.(West will encourage of course).

      Short of a land bridge and/or separatism, UNP government can do much for the country. But if those are in the works, Rajapaksas will be much preferred- caboodle of Buddhist monks and all. Whoever is in power does not matter- what is required is for them to develop the country from bottom-up ; inside-out.

      All Ranil/Sirisena has to do is declare that there will never be separatism and/or a land bridge. But if a few Tamil Nadu IT firms are allowed to come into Sri Lanka to set up shop (even for the N&E), then that should be a good thing also.

      Yes, as long as it first and foremost, benefits the masses, and not a cut and dried situation to benefit the Global Western stock exchange, then it will be a good thing.

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