By W A Wijewardena –
Seeking to find a scapegoat to blame for one’s follies
It has been the habit of politicians throughout the globe to find a scapegoat to blame for the follies they have committed. President Donald Trump found such a scapegoat in illegal migrants to USA and cheap Chinese goods for lack of job opportunities for Americans. Prime Minister Boris Johnson rode his pro-Brexit campaign on the wave of the inflow of workers from Eastern European countries to the UK under EU concessions for rising unemployment in the country.
In Sri Lanka, throughout its post-independence history, there is evidence of Ministers of Agriculture blaming rice mafias for shortages and rising prices of this staple food of Sri Lankans and Ministers of Trade blaming traders for causing inflation in the economy. This is an infection, and it now appears that that infection has infected the Central Bank too.
This was evident from a statement released by the Central Bank recently blaming exporters for the shortage of foreign exchange in the market. Their sin? They have not repatriated to the country and surrendered the foreign exchange they have earned to the banking system to facilitate it to release the same to those who need foreign exchange.
Central Bank: Discriminatory treatment of exporters
This is what the press statement has argued. An export is complete only when an exporter has brought back to the country everything he has earned through that export. He should not only bring it back, known as repatriation of export proceeds, but also convert it into local currency, known as surrendering the forex to banks. It will enable the market to redistribute that forex among those who are desirous of using for payments purposes. Therefore, the press statement has implied that both repatriation and surrendering are acts done by exporters in national interest.
On average, says the press statement, during the last three months, goods worth of $ 985 million have left Sri Lanka’s borders, according to Customs data. However, the banking data have indicated that only $ 640 million has been repatriated on average. This has revealed a significant gap of $ 345 million per month. Had this been fully repatriated, Sri Lanka could have met a significant portion of its monthly demand for imports.
The balance could have been safely met out of the other flows that had been received by the country. Hence, the press statement has implied that the shortage of forex in the market and the consequential pressure for the rupee to depreciate had been due to the irresponsible behaviour of exporters.
There are two fundamental flaws in this argument. One relates to numbers. The other relates to ideology.
Central Bank: Comparing apples with oranges
The flaw relating to numbers arises from the following. When compiling the balance of payments, the Central Bank collects information from diverse sources. Two such leading sources are the merchandise imports and exports which it collects from the Customs, and the forex flows from the balance sheets of commercial banks and the Central Bank.
The first flow is a physical goods flow, while the latter is a financial flow. What is noteworthy is that the Customs record these physical flows when an import is received at the ports or airports and an export leaves the country. However, the financial flows are not simultaneous because trade is done not on an advance payment basis but on credit. As such, an exporter will have to extend credit to his buyer at the other end ranging from one month to six months or sometimes longer. Hence, these two flows cannot be equated. Even to reconcile them later is a laborious task and the data are available subject to a time lag.
Hence, what has been compared by the Central Bank today would have been the receipts in respect of exports done many months ago when they were lower than the present levels. Another point relating to these numbers is that exporters cannot bring in all the export proceeds because some of them must be used for importing raw materials. If they bring in and use the same for paying for imports, they lose in the conversion of the currency. In the present case, this is about Rs. 5 per dollar or about 2.5%. Hence, they use a part of those earnings for paying for imports. As such, though the Central Bank’s press statement has desired it, a hundred percent repatriation and surrendering is highly costly.
Random behaviour of errors and omissions
If the exporters are keeping money out systematically, there is a system built into the balance of payments to self-reveal it. The balance of payments is an accounting system like all other macro systems – namely, national accounts, budgets, and monetary data – recorded by using the double entry bookkeeping system. Hence, the debit side of the balance of payments should be equal to its credit side. However, due to the above differences, it does not happen.
Here, the compilers of the balance of payments put the difference to a suspense account called the errors and omissions. If the exporters do not bring in money continuously, the errors and omissions should always be a debit balance. But if it is not so and if it is random, there is no self-revealing evidence that the exporters have been up to this game.
In the past seven-year period from 2014, this balance has alternatively moved from debit to credit in a random pattern. In four years, they were credit balances and in the balance three years, they were debit balances. Hence, the charge made by the Central Bank in its press statement has not been substantiated by the macro data.
Exporters fight back
The export trade was highly agitated by the allegation made by the Central Bank against them. At least three export bodies have issued statements refuting the Central Bank’s claim. One by the rubber exporters, another by apparel exporters, and a third by an exporters’ chamber. What they have said is that the Central Bank has accused the exporters without a valid reason. Their claim has a validity because the numbers used by the Central Bank cannot be used to allege that exporters are not repatriating the proceeds as required.
Repatriation is needed if macro stability is at stake
Ideologically too, there is a flaw in Central Bank’s argument. Because it is asymmetric, national-oriented, and biased toward its own follies. The base of the argument is that if you are an exporter, have spent resources from the economy – no matter whether you have paid for it – and earned an income from your enterprise, that earning is not yours, but the nation’s. And therefore, you have no freedom to use it and the nation has the right to tell you how it should be spent. In other words, the nation can force you to sell it in the market.
But the same treatment is not made when people make similar sacrifices and earn in the local currency. Those earnings you can choose to spend in whatever the way you like, and the nation does not impose restrictions on the goods and services that you can consume out of it. Hence, the treatment relating to exporters is asymmetrical and national-oriented.
The worse is that it seeks to cover up the follies which the Central Bank has made. This can be gauged by examining why an exporter wants to keep his earnings in forex rather than in local currency. That is because he has no faith that the Central Bank would keep the value of the local currency stable by adopting a consistent and continuous package involving prudential macroeconomic management. If the central bank is printing money like a printing press adhering to ideologies like the Modern Monetary Theory or MMT, functioning overtly like a branch of the Ministry of Finance, or pronouncing unsubstantiated claims like there is no impact of money printing on inflation or currency depreciation, the public becomes nervous and suspicious of the motive and intention of the central bank.
In such a situation, no central bank or a government can prevent people from making choices to protect themselves from the adverse repercussions of the central bank actions. This is speculation and it is the Central Bank which has spawned the seeds of speculation. However, in the press statement mentioned above, the Central Bank has castigated exporters for being speculators. This speculative exercise has been facilitated by the low interest policy adopted by the Central Bank.
The exporters can afford to keep the export proceeds away from Sri Lanka for some time because they can borrow at low interest rates, maintained by the Central Bank, to meet the local expenses. Ironically, the press statement issued by the Central Bank has observed this, but there is no mention that the ground situation conducive for this has been created by its own low interest rate policy.
Sri Lanka’s macro track record is not credible
Hence, in any country where there is a credible macroeconomic policy in action, there is no necessity for either the repatriation requirement or surrender requirement or both. The countries quoted by the Central Bank as practitioners of these two requirements are those that do not have credible macroeconomic policies.
In the case of Sri Lanka in the recent past, the Central Bank had kept the exchange rate fixed despite the ground realities, maintained a low interest rate regime in the name of stimulating the economy but intended for making government borrowings cheaper, and kept on printing money – as high as Rs. 2.7 trillion or 35% during the 19-month period from January 2020 – by accommodating the voracious demand for funds by the Government.
These are tell-tale signs that the economy will be hit by inflation and currency depreciation in the months to come. These fears were further fuelled by the introduction of price, import, and exchange controls. As such, it would have been better had the Central Bank revisited its own policy stance and made the necessary correction without resorting to blaming others for the forex fiasco.
Resisting the pressure for reintroduction of repatriation requirements
Sri Lanka had both the repatriation and surrender requirements before 1977 when it had a closed economy. With the opening of the economy in that year, the two requirements were still in the book of regulations but Governors like Warnasena Rasaputra, Neville Karunathilaka, and H.B. Dissanayake did not want to enforce them. When the country went for the Article VIII status of the International Monetary Fund in 1993 under which it liberalised all its current payments, these two requirements too were removed.
Since then, there was pressure from time to time from politicians and civil society activists for the reintroduction of the two requirements. I recall that Governors A.S. Jayawardena, Sunil Mendis, and even the present Governor Ajith Nivard Cabraal continued to resist the pressure for their reintroduction. During the time of Governor Sunil Mendis, a special study was undertaken to assess whether the exporters were keeping forex unduly out of Sri Lanka. The study that followed the above procedure relating to the behaviour of the errors and omissions found that there was no evidence to suggest the claim made by critics.
Reintroduction of repatriation requirement by Minister Ravi Karunanayake
In this background, the repatriation requirement was reintroduced by Finance Minister Ravi Karunanayake in April 2016 during the time of the previous Yahapalana Government. The appropriateness of this measure was questioned by me in one of the articles in this series in May 2016 (available at: https://www.ft.lk/columns/reintroducing-repatriation-requirement-have-the-finance-ministry-and-central-bank-gone-back-on-their/4-540585). I argued that exchange control was introduced to old Ceylon during World War II by the British rulers to prevent the country’s foreign exchange resources from falling into the hands of the enemies, namely, the Germans and the Japanese.
Hence, it was intended to be a temporary measure but brought into the permanent law book by its architect, the late N.U. Jayawardena, who had joined the Central Bank from the Exchange Control Department of the colonial administration. It was a draconian law and the Yahapalana Government had promised to replace it with a moderate foreign exchange management law. However, Minister Karunanayake had stepped in and reintroduced the repatriation requirement. This is what he had done.
This has been announced by the Central Bank in a press release issued in late April, 2016 which reads as follows: “As part of current policy measures taken to improve the foreign exchange inflows to the country, the Hon. Minister of Finance has issued the Gazette Notification (Extraordinary) No: 1960/66 dated 01 April 2016 containing the following.
i) Repealing the exemption granted in respect of payment for goods exported from Sri Lanka in the Extraordinary Gazette Notification No. 759/15 dated 26 March 1993.
ii) Requiring repatriation of any such payment retained abroad as at 01 April 2016 to Sri Lanka not later than 01 May 2016.
iii) Requiring any such payment received on or after 1 April 2016 to be repatriated to Sri Lanka within 90 days from the date of exportation of goods”.
“These proceeds may be credited to any Foreign Currency Account maintained in the name of the exporter in the Domestic Banking Unit of a Licensed Commercial Bank (LCB) or sold to a LCB.”
Should the Central Bank disinfect itself?
Ironically, Governor Cabraal who resisted the pressure coming from outside for the reintroduction of the repatriation and surrender requirements when he was the Governor during 2006-15 has vowed to strengthen it further in his Six-Month Road Map announced last week. The longer he will keep himself to this theory, farther away the Central Bank be from attaining the macroeconomic stability thereby foiling his attempt to realise the goals of the Road Map.
In these circumstances, should the Bank now disinfect itself or continue to play the blame game to cover up its own follies?
*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com