Colombo Telegraph

Rupee Crisis: An Open Letter To The Minister Of Finance

By Hema Senanayake

Hema Senanayake

Dear Mr. Minister,

This was written before Mahinda Rajapaksa sworn in as Prime Minister. Perhaps new PM will have a new Minister of Finance n his cabinet. Whatever the case is, what I have written in this open letter is equally valid for any Finance Minister. 

Economies collapse suddenly due to unstable domestic currencies. This has happened many times under the watch of IMF. This has also happened within months after the stability of particular economies were hailed by economists who had won Nobel Prize for economics. If you need an example, Argentina was such a country which collapsed big time suddenly, a couple of decades ago. The same thing is happening right now in Venezuela. Sri Lanka is nearing for currency crisis with significant magnitude.

What Sri Lanka is facing today with depreciating rupee is a national crisis. It is a technical crisis. Technical crises cannot be resolved by politics even if we have a new Prime Minister. That is why people should not trust Bandula Gunawardene when he says that they have a solution. The only solution they knew when they were in previous government was to borrow loans in dollars. Their childish and reckless foreign borrowing game was exemplified when they pushed the National Savings Bank (NSB) to take a dollar loan as I remember amounting to one billion or a little less than that. Still nobody knows as to why the NSB needed dollars to issue rupee loans.

Also, if officials of your ministry or the central bank including economists, says that they can resolve the crisis with available policy tools and with some import controls, I would say that they will fail and in fact they have failed previously, and the resultant effect is the current mess.

Now you may think, what alternate proposals are there. I would say that no expert could change the present dynamics of the economy by maneuvering the existing monetary policy tools. If some one says that he or she might propose to acquire certain new policy tools for central banking to regulate liquidity in the commercial banking system more effectively, and to acquire tools for the limited use of the principles of full reserve banking and to establish prudent policies and procedures to change the ownership of the system’s holdings of foreign currencies and to use many other administrative measures associated with the said proposals, then he or she must be proposing a truly technical solution. Now, what you ought to do? Just, open an open dialogue.

Still you may think, how these new proposals would bring in dollars to meet the present debt obligations. No doubt, the immediate solution is to borrow in foreign currencies, assuming that you do not want to sell national assets to foreign investors but borrowing in dollars is not justified if you do not put the macroeconomic fundamentals correct and the above said new proposals are just to do that. This will change the public debt levels resulting to reduce business taxes, increase government’s foreign reserves without increasing rupee liquidity in the system and build up the business confidence among local entrepreneurs and foreign investors which ultimately change the county’s current account for better stabilizing the rupee. 

Mr. Minister, this system of economy is so complex. The greatest paradox is that the country gets more indebted as the Gross Domestic Product increases. This is true for all countries which do not post an excessively positive surplus in the current account and true for mature economies even if they post a positive current account balance, like Japan. It is because, due to a fundamental systemic arrangement, credit (debt) must grow faster than GDP and when debt grow faster than GDP, or national income the result would be accumulating heavy debt. This complex behavior cannot change positively with existing policy prescriptions. 

I do not suggest you believe me or take my propositions unless I prove the applicability of them. I once did prove them at a seminar held for all executives at the Treasury. At the end what they suggest was to bring the message to decision making political authority which is you. 

Thank you.

Hema Senanayake

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