2 July, 2020

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Rupee’s Sad Destiny Of One-Way Journey To Depreciation

By W A Wijewardena –

Dr. W.A Wijewardena

The recent media reports have been abuzz with a sudden fall in the value of the Sri Lanka rupee against the US dollar, the benchmark currency used by Sri Lanka to quote the external value of its currency.

The Central Bank does not publish its own exchange rate now – a practice which it started to follow since 2000 when it allowed the foreign exchange market to decide on the exchange rate under what it called a ‘freely floating exchange rate system’. Hence, the market guide today are two exchange rates, both applicable to commercial banks.

The Central Bank publishes both these rates in its website subject to a time lag of one day.

Panic in the market

One is the indicative spot rate – a transaction in which the delivery of dollars would be made within two working days – against the US dollar used by commercial banks in transactions among themselves, known as the interbank foreign exchange market. This rate which amounted to Rs. 155.75 per US dollar two weeks ago fell to Rs. 157.65 per US dollar as at 27 April, indicating a depreciation of the rupee by Rs. 1.90.

The other rate which is normally used by media and analysts to measure the fate of the rupee refers to the buying and selling rates of dollars by commercial banks when they receive or send money by telegraphic transfers. Two weeks ago on 16 April, the buying rate amounted to Rs. 153.76, while the selling rate to Rs. 157.53 yielding the middle rate of Rs. 155.64. On 27 April, they were Rs. 155.40 and Rs. 159.01, respectively, with the middle rate of Rs. 157.21. According to this reference rate, the rupee has depreciated by Rs. 1.57 within a space of two weeks. It is this depreciation which has caused panic among the media personnel and the critics.

A fixed exchange system reinforced by import and exchange controls

This is not unusual and it is something that has been happening ever since Sri Lanka started adopting a flexible exchange rate system in late 1977. Before that Sri Lanka had a fixed exchange rate system in which the rupee-dollar rate was changed by the government by deliberate policy decisions.

With a perennial deficit in the country’s foreign exchange receipts and payments, there was no possibility to maintain this fixed rate system for long. Hence, imports were restricted by implementing a draconian import and exchange control system.

Cutting the coat according to the cloth

It was like cutting the coat according to the cloth, rather than enlarging the cloth to stitch a coat that would fit the body size. It, therefore, imprisoned Sri Lankans in an ever tightening coat. Thus, people did not pay in rupees but in time, hardships and labour to buy dollars from banks. Hence, this system which allocated the limited availability of dollars to citizens by rationing by quotas was dismantled in 1977 and permitted people to acquire dollars by paying a higher rupee price that was determined in the market.

Thus, the rupee-dollar rate which had been fixed at Rs. 4.76 per dollar in 1950 remained at that level till 1968 when it was devalued by the government by 20%. Since then, there were several devaluations and one revaluation of the rupee-dollar rate by the government. When the new exchange rate policy was introduced, officially the exchange rate stood at Rs. 8.81 per US dollar.

But this official rate was misleading since almost all of the import transactions and a fraction of export transactions were conducted by a special levy of 65% over the official rate under a system called Foreign Exchange Entitlement Certificate or FEEC system. Thus, the effective exchange rate was Rs. 14.54 per US dollar. During the decade prior to this, an important source of revenue for the government was the income from this FEEC levy.

A unified rupee in 1977

These systems with different exchange rates for different types of transactions are known as multiple currency systems. In 1977, all these multiple exchange rates were abolished and the rupee-dollar rate was unified at Rs. 15.56 per dollar introducing an element of depreciation of about 7% over the effective rate. It is from this rate that the rupee has started a one-way journey toward depreciation and has ended up at about Rs. 157 per US dollar by the end of the last week.

It is a disappointing fate for the Sri Lanka rupee, but there is a cause for this one-way journey.

Avoiding a deficit in the current account

If a country is interested in stabilising the value of its currency, there is only one recipe for it. That is, it has to earn sufficient amount of foreign currency to meet the demand for foreign currencies from its own citizens.

Foreign currencies are earned by countries by selling goods, known as exports, selling services and selling factor services to foreigners. These are being topped up by a non-selling foreign exchange flow, called inward transfers, which a country gets by way of gifts. In banking parlance, they are known as remittances by Sri Lankan workers abroad.

On the other side, Sri Lankans demand for foreign currencies to import goods, buy services from outside and pay for factor services like paying interest on loans and profits for investments. To these payments are added the gifts which Sri Lankans extend to foreigners, known as outward transfers.

These transactions could be amalgamated into an account called the current account of the balance of payments by recording the first category on the credit side and the latter on the debit side. The essential requirement for a currency to be stable is that this current account should be balanced or if it has deficits, those deficits should be offset by similar surpluses in other years. If there are continuous surpluses, the country earns more foreign currency than it needs.

Unless those surpluses are lent to other countries, the country may experience a continuous appreciation of its currency. If there are continuous deficits, it has a shortage of foreign currencies. These shortages have to be filled by borrowing from other countries and it would help the country to temporarily stabilise its currency. But it would add to its foreign debt driving it to a malady known as debt trap. It makes the matters worse and the country is, therefore, destined to experience a one-way journey toward depreciation of its currency.

Sri Lanka’s dismal track record in the current account

This latter situation is the one which Sri Lanka has experienced during the entirety of the period since 1977. Its current account has been in deficit and, when measured as a percent of the size of the economy or GDP, the deficit has been as high as 16% in some years.

When it goes up, the country has been worried and when it goes down even by a small magnitude, it has fallen to a state of complacency, ignoring the risk and danger it is facing.

During the period from 2012 to 2017, the current account deficit has been on average at 3% of GDP a year. Therefore, there has been pressure for Sri Lanka rupee to depreciate. What the previous administration did was to borrow abroad and use the proceeds to release the pressure in the market. It is like giving some pain killer to a cancer patient to relieve of his pain. It is not a cure. Hence, the wound begins to fester within the body without proper medication. One day when the cancer becomes acute and it is too late to administer any medication, the patient would succumb to his illness.

The inactivity of the new Government 

This was known at the time when the new Government took power in January 2015. But the Central Bank’s Monetary Board as well as the Minister of Finance behaved as if there was no economic crisis.

The Central Bank Annual Report for 2014, released in April 2015 under the stewardship of the new Government, talked complacently about the stability of the rupee during 2014. That was against the US dollar. It had been more complacent when it had reported that the rupee has appreciated on average against the currencies of its major trading partners during 2014.

To assess this average change in the value of rupee against its trading partner currencies, the Central Bank calculates two effective exchange rate indices, one for rupee’s nominal value and the other for its real value. The fact that both these indices have appreciated in 2014 means that Sri Lanka has lost its competitiveness against exports and gained a preferential advantage for its imports. This is an ailment because it suppresses exports and encourages imports, the main cause for the rupee to come under pressure for depreciation in the long run.

The Central Bank should have given a warning to the Government in this regard, but it had chosen not to do so. Emboldened by this rosy picture painted by the Central Bank, Finance Minister Ravi Karunanayake started making miraculous promises to the country. He said that he would bring the exchange rate down from Rs. 131 per dollar to Rs. 105 per dollar.

After he failed to deliver his promise, he made other promises like that he would bring $ 3 billion to the country through a well-wishing Belgian investor. When that was also not delivered, he started blaming the senior officers of the Central Bank for causing the rupee to fall in the market. In that manner, the Government continued to play cheap politics without taking effective measures to address the issue.

Taking action too late

What are those effective measures? They would have been at least two-pronged. In the short run, it would have temporarily stabilised the rupee by intervening in the foreign exchange market. But, that would have led to the loss of the country’s foreign exchange reserves. Hence, the more appropriate course would have been to get IMF support to address the immediate issue and adopt a long-term policy strategy to promote export of goods and services so that the country’s current account would end up in a surplus.

Belatedly, it went for IMF support in June 2016 but implemented only partially the needed reform programme to boost country’s export of goods and services. The result has been a continuous depreciation of the rupee in the market. Accordingly, from Rs. 131 at the beginning of 2015, it has now weakened to Rs. 159 per dollar. In the next few weeks, the Central Bank will intervene and stabilise the rupee at the current level. But in the absence of a long term policy programme, it would be just like watering a sinking well.

Increase in the cost of living 

Normally, when the rupee falls, the whole country gets into a panic mode. That is because it affects the cost of living of people directly. The consumption basket of Sri Lankans contains a large component of imported goods and when the rupee falls, the cost of those imported goods would increase. At the same time, the depreciation affects the transport services and electricity generation which uses imported fuel heavily.

Those institutions will begin to incur losses unless they are permitted to revise their tariff upward. Either way, it affects the people. The losses of these institutions, if not permitted to go for a price revision, have to be borne by people as taxpayers. If they are allowed to revise their prices upward, it will increase the cost of living of people directly. But simply to support people, a country cannot allow its currency to be strengthened artificially.

Thailand’s sad experience

That is because sooner or later the currency would collapse. Along with that collapse, the economy would also collapse. This happened to Thailand in the East Asian financial crisis of 1997. For decades prior to 1997, Thai Baht had been kept artificially stronger at Baht 25 per dollar by using the foreign reserves held by the Bank of Thailand. But it could not rescue the Baht even after it had spent $ 25 billion from its reserves. It had to give up the battle and overnight, the Baht fell to 50 Baht per dollar sending shock waves throughout the economy. The next stage was the collapse of the Thai economy which had to be rescued by adopting very painful measures. Thus, unless the rupee is allowed to depreciate in the market, Sri Lanka will also face a similar situation.

Change in the nominal debt stock

An often presented argument has been that when the rupee depreciates, Sri Lanka has to spend more rupees to service its foreign debt. That is because the Government has to spend more rupees to repay foreign debt and pay interest on it. Very often critics point to the increase in the rupee value of the debt stock which is denominated in foreign currency.

For instance, Sri Lanka Government’s foreign debt stock as at end of 2017 amounts to $ 31 billion and if the rupee depreciates by one rupee, it would increase the rupee value of the foreign debt by about Rs. 31 billion. But this is only an increase in the nominal value of the debt stock and it has no bearing on the Government’s current operations since only a fraction of this is repaid in the current period.

Government is a net beneficiary

But in the present circumstances, the Government has been a net beneficiary of rupee depreciation.

According to Budget 2018, the Government has to spend on a net basis some $ 1.7 billion to service its debt during the year. If the rupee depreciates by one rupee, it would increase the Government’s debt servicing commitments by Rs. 1.7 billion and the Government will have to generate this amount to buy dollars from the Central Bank. Hence, it is a material cost to the Government.

However, the Government gets foreign currency also during the year and it gets one rupee more for that foreign currency at the new exchange rate. One such source is the revenue from import duties which amounts to about $ 1 billion at present per annum. In addition, it plans to generate some $ 2.4 billion as new borrowings during the year. Altogether it would have an inflow of Rs. 3.4 billion through these sources. Hence, the Government will end up as a net beneficiary of Rs. 1.7 billion if the rupee depreciates just by one rupee.

Secret of managing exchange rate by Singapore

But this is not a reason to allow the rupee to depreciate in the market. Sri Lanka should go for long-term measures to improve its current account in the balance of payments until it becomes a surplus. Such a measure will help Sri Lanka to stabilise the value of the rupee at the current level.

Then, what about allowing the rupee to appreciate as desired by the former Minister Ravi Karunanayake?

But it would be disastrous unless the country is able to improve its productivity to offset the loss of competitiveness. This was exactly what Singapore did over the last 60 years or so. Comparatively, in 1950, Singapore dollar had been fixed at S$ 3.06 against the US dollar when the Sri Lanka rupee had been fixed at Rs 4.76 per dollar. But due to the continued surplus in the current account, Singapore dollar continued to appreciate in the market reaching a level of S$ 1.30 per US dollar today. But it did not affect its competitiveness since Singapore was successful in improving its productivity to offset the loss in competitiveness. Hence, Sri Lanka with its low productivity growth should not seek to appreciate its currency.

Thus, what Sri Lanka should do is to adopt a suitable policy package to convert its current account to a surplus to relieve the pressure on the rupee to depreciate.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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  • 2
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    An economist has tried to explain the disaster in purely economic terms, but this won’t convince anybody. He cannot be blamed because embedded in all this are these two key sentences:
    .
    Finance Minister Ravi Karunanayake started making miraculous promises to the country. He said that he would bring the exchange rate down from Rs. 131 per dollar to Rs. 105 per dollar.
    .
    And now Ravi Karunanayake is back in business, instead of being in jail.
    .
    But of course, I have also been “cheating”. Those were not two full sentences. The first was preceded by this phrase:
    .
    “Emboldened by this rosy picture painted by the Central Bank. . .”
    .
    See also the previous sentence. What’s happening cannot be explained purely in Economic Terms. Politics took precedence. These economists are trying to explain without explicitly facing up to this fact. Although I don’t know anything of economics, that much is clear to me.
    .
    And that is what the country will say. Having said so much, I shall shut up, since I know nothing of Economics. The time is 9.33 a.m. on the 1st of May 2018, before the cabinet reshuffle.
    .
    That cabinet reshuffle is going to be a farce. So blame both the President and the Prime Minister. Nobody from the Central Bank will explicitly say so; it is not for them to interfere in Politics. At least this lot have not been stealing money. It is up to the people to protest.
    .
    Not one word more from me on this subject since I don’t know anything of Economics.

  • 2
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    This is a good balanced and unbiased analysis. Even, the “appu singo’ or juwanis appu in my village can understand this essay, if it was written in his own Sinhala language.

    I also saw and read the erudite, PhD pandithaya’s (who holds a PhD in Economics from the University of Missouri) analysis from the government side. His analysis was in news papers and social media (FaceBook). Now, when I compare, Mr. Wijewardana’s analysis of this exchange and economic crisis, it seems to me that Government (UNP) side Pandithaya’s analysis is like that he was trying to cover up his and his yahapalanaya masters’ nakedness in his hands. Government Pandithaya does not have any integrity and honesty (as a PhD in Economics) to tell the truth to the general public. He was selling his PhD in Economics to cover up the mis-management of economy and every thing,

  • 0
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    Collapse of Edirisinghe Trust Investment is another failure of Central Bank. According to a reliable source, the Monitoring Committee on Non-Banking Financial Institutions had brought the crisis brewing in ETI to the attention of Arjun Mahendran but apparently he had not taken any action which could have prevented the crisis. JVP leader asked the PM to make a statement about ETI in the Parliament but he has not responded. According to rumors, a local investor had made a higher offer to buy ETI but some politicians seems to be interested in selling it to a shady character (Tamil) from Malaysia who is linked to money laundering. Did Arjuna Mahendran deliberately allowed ETI to collapse? Did Ranil also had a role in this?

  • 2
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    As expected, the Master has explained as best as possible, the vagaries of forex. But of course there are some gaps that need examining.

    When he writes ‘Normally, when the rupee falls, the whole country gets into a panic mode.’ he cannot say that NO, not everyone does. Only those who are poor or ignorant of the options for circumventing. To the knowledgeable there are many. Ask our smart operators who dabble in export and import, including the lucrative field of tourist services. Too many get away with too much. Alas, The Central Bank is impotent and unable to block the many loopholes. So the leakage goes on and on, as it has for the last 50 years. The rich get richer, and the poor and ignorant sweat it out at the checkout tills. The world is an unfair place, but nowhere is as unfair as in our sun drenched paradise!

    • 3
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      As long as our people vote for charlatans who promise the most free handouts, and for megalomaniacs who build monuments to themselves with borrowed money, this will continue.
      As long as our people rush to buy hybrids and BMW’s only to be stuck in traffic jams, this will continue.
      As long as our men sit idle in three-wheelers while their wives slave in the Gulf, this will continue.

      Zimbabwe had a different solution. It adopted the US Dollar as its currency. If we don’t want to do that, we could adopt the Indian Rupee, which itself is hitting 2.50 nowadays.

  • 0
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    I think Dr. Wijewardane knows that there is another side to this rupee depreciation story. IF you browse the web. Geor Zorro is known as a economic hitman who could bankrupt small countreis. Ranil wickramsinghe met Georze Zorroes in an economic summit in Indonesia. After that he came to Sri lanka. Ranil met him again in Belgium. He came to Sri lanka recently too. there was a talk that the govt borrowed money from him via Belgium – a private loan. some say, Bond scam may be to pay that money. He is also operating thorough MCC. ITi sknown that there are secret methods to introduce printed money economies and send those to bankruptcy. there was some research project to destroy centgral banks. There was a plan to introduce BITCOINS once the central bank is gone. Mangala Samraweera also got a Grant for $ 7.5 million I suppose for Lands, Politics and Ports. Some how if you search there are countries hit by those people. Another Article says that some countries want Sri lanka to be Debt trapped which sri lanka is doing. NOw they are doing the same plan to Zambia and they identified it as Sri lanka in Africa. Ranil, Ravi K, Mangala and Arjun Mahedran – Economic Team was discussing with some private Consultants worked near HArward (I think they are agents who used the name) and Ranil implemented this economic destruction with the help of others. Even the bond scam was preplanned even before the January 15th Protest vote win.

  • 0
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    IF you read, they Tried it on Thailand, Sri lanka. IT looks Thailand is recovering or some say they escaped. but, Sri lanka is still going through it because of the political turmoil. India also had some Money problems which MODI had to go through. People were discussing that Modi was gong to introduce BITCOINS there too. I remember Hema Senanayake wrote an article about Bitcoins here in CT.

  • 0
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    those countries which were dewsteoyed becuase if this debt trap, economic destruction had their stocke markets desroyed. and assets – lands, profitable businesses sold. I think Sri lankan govt also changed Money exchange control act or money laundering act, PRepared a land registry when we had a Land reform commision or what ever. Stock market, interest rate or currency manipulations are also for making easy the businesses of foreign investors life easy. but, Rice, paddy market, vegetable, Spices even Tea are suffering. So, what is the development of this so called Economic hub. for whom. Sri lanka is behind in Tea trade. Indonesia, Kenya and India are in the fore front. But, Sri lanka has the best Tea in the world. Other than these, the govt wants and they asking I heard that Namunukula, Hunnasgiriya like mountains to be free for development which will be covered with real estate development. Eventually Sri lanka will be a California which has floods, Erosions, Droughts and revier catchment area loses and rivers will be dry. High intererst rates make poor pay more money to the banks which are in the Stick market. I think private banks are gaining while state banks are losing. JEwellery pawn market is with the private sector too, I think.

  • 0
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    Even the previous govt because of commis had done so many stupid things. I think the fixing of that scanning devices for containers is stupid. Because, they by pass that when they have drug or even Weapons inside the container. I think weapons transfer is in the plans via colombo. We sell them $ 2 bilion. Whe we get one item of those high value that 2 billion is gone. and we have to comply with GSP too. IT is the same with Europe. We sell $ 1 billion of stuff. We import Luxury cars to that value, I think. I think there was a plan to make the Sri lankan colombo port the hub for wepons and drug transport. Probably, Ravi Karunanayake’s logistic company wouuld have handled those. They also sold (?) the Credit card business to a Tamil /Chetti or Bhora man known to RaviK. What I say, Srilanka will be like HAVANA, People will be struggling. Another bad thing ios Politicians continue to control govt businesses with their friends and relatives and they continue to bankrupt those.

  • 0
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    MAhinda Rajapakse said that he increased the GDP or PEr capita income to Some $ 3000 or $ 4000 and their target would be $ 7000. Yet, there was a recent report that Srilanka’s Poverty level is ABOUT RS 4500 level ($ 400) . I hope that is per month and in that case the GDP per capita is very low. Even the stock market, central bank money handling, State or Private banks the SOE do not support the Economy of the poor or even the middle class. there should not be middle class as that is a western word which their their way of capitalism. They make middle class suffer for ever. Poor class is provided with welfare because the manufacturing sector can not find jobs for them. but in Sri lanka if they not given any social welfare, they have to go and work at lest in the paddy field, rubber plantation or even Tea etc., Govt also can stop fertilizer and pesticide impoorts. Instead they can support old varieties cultivation. the loss of harvest they can subsidize instead of the fertilizer subsidy. I heard right now the Wheat flour consumption is tripled while Rice and everything else needed on the table are being imported

  • 0
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    IF the rupee is depending on the stock market influenced currency manipualtion, how can we expect a strong rupee when we do not have a valuable stock market. Out stocks are penny stocks. How can an importing economy ask for a strong stock market. So, everything is politicians fooling the whole country. Beaurucrats and professional are silent and waiting for the next govt until they get the opportunity. I cannot understand. ARe people frogs in the well, just see everything is fine.

  • 0
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    What I read is that so many factors affect the value of the rupee. In the case of Sri lanka, Sri lanka does not have and the govt is not interested as politicians run the whole system, I mean bureaucrats are pawns of the system. Besides, after the war both govts mis managed the economy for their political advantage and used if for personal needs. So, the eocnomy is highly screwed up. Sri lanka doe snot have any basis to keep a strong economy. Itis only importing. We have a trade deficit always. So, the ruppe is losing value. I think one way is increasing the foreign reserves, Gold stocks. etc., but, the govt likes to borrow and then foreign agencies do not allow that. Another problem is govt is not taking money for cheaper reates. They alwqys go for higher rate. I do no know, I am not an Economist.

  • 0
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    This comment was removed by a moderator because it didn’t abide by our Comment policy.For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2/

    • 3
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      CT, why don’t you offer Jimmy a separate page for his wise writings? Then we poor souls wouldn’t have to scroll through miles of Jimmy’s scribblings.
      Imagine the savings in wear and tear on our PC’s!

      • 2
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        old codger

        “CT, why don’t you offer Jimmy a separate page for his wise writings?”

        Are you suggesting he should type for http://www.sinhalanet.net/, https://www.spur.asn.au/

        I am sorry you are trying to deny us immense free fun we derive from his typing. Please don’t deny him the opportunity to make fool of himself. He is another scatter brain Sinhala/Buddhist stupid.

      • 0
        1

        OLD CODGER and the NAtive Vedda: why there is web page. Is it for writing or for you EVangelists to dominate Sri lanka. grow up Bozos.

        • 1
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          Jimbo,
          Web page is for writing what’s on your mind. But what’s in your mind is “goma”.

  • 0
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    Right now the so-called ‘floating exchange rate ‘ is dominating the monetary system of the world.
    Dr WA W points ~ ” This rate which amounted to Rs. 155.75 per US dollar two weeks ago fell to Rs. 157.65 per US dollar as at 27 April,………”.
    This is about 1.2%. Major currencies experience such fluctuation in as little as one hour!
    Compare this with ‘disappearances’ down the corruption black-hole!
    The former Governor Dr Cabral using the same figures said that the this will lead to an increase in debt by about 50%. Laypersons cannot understand this!
    Of course the Media, importers and the Colombo elites will grumble. The obvious beneficiaries are the Lankans slaving in the MidEast.
    .
    We must try to use the depreciation to our benefit. Why not try the Sirima, which is, encourage local food production and REDUCE imports? Pulses and chillie farmers were the nouveau riche.
    .
    Lateral thinking is needed to live with the exchange fluctuations. No point thinking of the days when the 13.333 rupee was one GBP.

  • 0
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    This comment was removed by a moderator because it didn’t abide by our Comment policy.For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2/

  • 5
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    Dr. Wijewardena is one of those few useful men produced by our public life who can still provide solutions to our sliding economy – despite the declining depths of economic trouble we find ourselves in. But the political system is so venal, corrupt and sick it has place only to salivating Yes Men – not to honourable able men who love their country and who possess the intellectual wherewithal to serve the Motherland. He has consistently kept the public informed
    of not only the hard truth of the state of the economy but also provided options to address them.

    A regular nitwit in these columns tries to ignorantly demonise George Soros. It is men like Dr. W
    who can advise the Govt how influential men like Soros could be brought in to help us in enterprises where both sides can benefit. Soros knows our economic terrain and our players.
    It is up to us to match his wits.

    R. Varathan

  • 0
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    UNP range of Economic policies adopted by Ranil…W of aim at seeking impending catastrophe in Island wide .Aim has fully successful within three and half years since 2015 January by RW.
    Needless to say GDP growth has declined to 7.8% to 3.1%, Rupees devalued against US Dollars 132 to 158, nation cultivation paddy land has been abandoned hundred thousand acres as well as totally cut fertilizer subsidiary for farms since 2015 January . Result of the overnight millions of Farms back to the base of below poverty level by UNP new Economy package an introduce by Ranil Wicks.
    By sudden increased of Rural poverty been hindrances to growth of GDP?
    The UNP think-tank ,its current regime has lost of whole eye on theory of development of US $ 85 Billon of tiny GDP of Sri lanka?

    Meanwhile Central Back trillions rupees of Bonds scandal operated by UNP leadership has increased CB interest rate since 2015 February 27, over 3% percent. Nation inflation has gone up?

    Unsounded and weak of fundamental economy-Sri Lankan has no way to survive in on going Globalization of capitalism which is that we are moving towards opposites directions of growth and development trend of national Economy.
    In my point of view that UNP set of advice of IMF, WB and ADB has misdirected and mismanage of an uncertainties of development of economy by last 40 months.
    These type of set – UNP Economies policies leads to impending catastrophe in our soil?
    The crux of matter is that UNP do having any combat policies to resist to ongoing challenges to national crisis of economy ?

  • 0
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    . However, the Government gets foreign currency also during the year and it gets one rupee more for that foreign currency at the new exchange rate. One such source is the revenue from import duties which amounts to about $ 1 billion at present per annum. In addition, it plans to generate some $ 2.4 billion as new borrowings during the year. Altogether it would have an inflow of Rs. 3.4 billion through these sources. Hence, the Government will end up as a net beneficiary of Rs. 1.7 billion if the rupee depreciates just by one rupee.

    Analysis went good. Best part is actual history of Lankawe Exchange Control. But I don’t like the above part. It just increases government income only in rupee and leaving a feeling to reader, temporarily it is good for country. Import duty paid by local guy. While he pays higher price for his things, Appe Aanduwa too, sucks him more.
    Until late 1960s return of Tea, rubber et al was moving forward. So Anduwas able to use fixed rate and balance the current account. In fact it was not balanced but we had favorable balance. Once the mess-up in the Estate Industry started to show, its effect forced Aanduwa keep changing the currency valuing system and when JR had his accelerated Manavati, Project, he had to open and let it to float.
    April 2015’s Ravi’s Central Bank number was real fraud. Other one Old Royals loan borrowing kept the rupee looked good. But they both are bad and they all are now showing as aggravated fall. By April 2015, they have had the CB looting money in their hands. They cheated the people with wrong numbers to hide it.

  • 0
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    This week Central Bank attempted to counter the media abuzz with a false explanation that their loan is in $, not in rupee. Lender always selects a better currency because borrower always a hanky panky so their currency can’t be depended. That itself is suggesting that the loan burden increasing on the people. Let us use the word Loan Burden, instead of loan so we can see how the Central Bank cheated in its this week report. People feel the burden depending on their income. So loan has to be reported to people in rupee. That is currency they know the value that is currency they receive income. Lankawe CB cheating them by reporting in Dollar. They feel the burden by the highness of the loan amount comparing with the lowness of the income. Certainly, if CB reports in Rupee, they are going to feel the burden heavier. We need to introduce another imaginary word called “Inefficiency Index” to understand this further. Let’s see how to apply it on the outstanding loan. If this year $30B is the loan, and say our index is 0 then next year we again have the loan amount as $30B. If our index is 1 then next year our loan is $30.3B. Though we had quoted in Dollar, it has nothing to do with dollar appreciation. It is the defect of the productivity inefficiency makes us to feel we have this year more loan than last year. So if this year index is 2 then the loan $30.6B. We know the loan is increasing in Rupee, but Central Banks says the entire mount is nominal, no real increase. The index tells us that how much is the real increase of the loan, ignoring the nominal part. Then we have to see how is this index is calculated. Because it is not a real index, we don’t calculate. But we will look at the other things and understand what could be this index is. Lower the production, lower the income, heavier becomes the same amount of loan to settle.

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    One country cannot overstimulate one factor and grow. That is not sustainable and will collapse and reverse all developments. So, artificially lowering exchange rate or simply sitting and watch, but saying this is going to help export also will not help. A mild inflation is need to growth, always. It is like a mother teaching a child to walk. She gives one of her finger to the baby to hold and she makes very mild movements. This will force the baby to sway with her and learn to walk. If she stays still baby will not move. If move fast, baby will be dragged and its legs don’t pick up the needed rhythm. This is how developed nations fine tune their inflation. If the country’s total wealth is Rs1000B and country’s currencies totaled to that amount, then no inflation will set in. But as per price schedules, the wealth is Rs 1000B and the total currencies added up to Rs 10100B there will 10% excess cash. Most of our devaluation of the currency is from internal inflation and country needs to import more. Irrelevant of income, if country’s population grows, needs grow, and then demand for consumption grows. Any part of peoples’ need let be behind not satisfied by production will bring down their standard of living.
    Let’s look at it too. Say you make $1000 but your monthly bills are $1100. Every month you borrow $100 to live. So, sooner or later you are going to collapse by loan burden. Now just forget about the entire world and think only Lankawe is the only one exists. So there is no currency exchange. Last year entire population made goods of $1000B. But their wages amounted $ 1,200B. Now somebody not is going to get what want. But this $200B is not going as saving and turned as investment. Because demand is there for $1,200 though the supply is only $1,000 so the entire $1,200 will be paid for the $1,000 worth of goods and services. That is the inflation Lankawe has now.

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    We are not going to see deep how the disposable income can differ from the earned income. One reason is Central Bank printing paper currency. So we will assume it’s the whole reason. It then creates inflation. We would think Central Bank should have limited the currency at $1,000. What happens is previous year employees could not buy all what they wanted, so they demanded more salary and got it, but did not make more so the disposable income is more than produced. This parity sets up wards the wage pushed inflation. We all remember how Chitanta government came out at end 2014 mirage low price consumer good Budget and there after Ranil increased 10% salary. They both only create inflation no betterment in standard of living. What the Central Bank Rogues does is they switch over to dollar and say this year country produced $1,000B and consumes $1,000B and hide the damage caused by the internal inflation. What has happened in the Rupee for the private citizen is I earned Rs1, 200 and consumed only Rs1, 000. This Rs200 lost is, in our standard of living. I had paid all my Rs 1,000 to only for Rs 1,000 worth of goods. For Example if I had bought last year three pants, this year I can buy only two. If had bought last year 1000 measures of rice, this year I will buy only 800 measures. The inflation is consuming my standard of living. This is pretty same like the guy who earned $1,000 but borrowed additionally and spent $1,100. They both at the end collapse without any money to go with day to day life. This inflation attempts to buy the investment and consume that too. It is like a farmer without reserving some amount paddy for sowing next year, sold all, thinking he is getting attractive price, but the inflated currency and consuming the entire last year output. So the inflation little by little eat the county’s infrastructure & hurt the further the future income.

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    From Ajith Nivard’ s time, CB numbers are concocted and the people don’t come to know the reality. Now, let us see what will happen while we have inflation and for example, we trade with India under normal trade laws, not specialize something like ETCA. So now I have Rs1, 200 cash; I have only Rs1, 000 worth of goods allocated to buy. Three things are going to happen. 1). I am not getting all what I have been getting and so your standard of living falls down. Let’s say we lost Rs75 on that. 2), We dismantled our investments and consumed. Another Rs 75 lost there. 3), Now India has excess rice and potato. We still have $ 50 to lose. (75+75+50=200). We import from India for the Rs50 money we still need to lose. Here we are not able to trade with India in equal terms (No big-Small status). We are not selling anything to India because we are already consuming more than what we make. So you only get involved in Central Bank’s nominal currency exchange and get the things you need. We have left the SL Rs to fall freely and keep buying from India. We did not sell anything to India, but gave only Lankan rupee and bought them. One of those days, India is going to send back a ship load of Lankawe rupees and going to ask for to pay it in Indian rupee or Dollar. Remember, in the actual world, about four or five years ago Indian rupee was 1:2 with Lankan Rupee, but now it’s about 1:3? Without a clear stagey to trade with India, showing China and demanding GSP+ will only aggravate the situation.

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    Let’s now assume this. Last year Lankawe’s income was $100B spending $120B dollars. Lankawe loan was another $150B dollar. Lankawe loan to earnings ratio is 120/100= 1.5. This year, because of Lankawe inflation our rupee income falls down to $800 Dollar. Lankawe additionally borrowed $20 last year to balance bills. So loan to income in US dollar is (150+20)/80 =2.125. Our loan burden increase by our rupee falling between these two years in (2.125-1.5) = .625. So, don’t be taken by the Central Bank’s cheating of by rupee’s continuous falling, the loan burden is not increased. That is an open lie. Lankawe live with Rupees. Lankawe need to think Lankawe life in Rupee. Dollar is US currency. That tells only how US is doing. So now we know that there something exists as inefficiency index that is correlated to Inflation adjusted Loan to Real Income ratio.
    These are not the real calculations. But the reality is much worse than that. The other fact is floating exchange adjust itself for both countries inflation. But the weaker country’s real income never adjusts to the inflation. If your currency is out of control, private investors will not feel comfortable to invest or trade. But China will be ready to give more loan, fixing them on US $. So it doesn’t loose. The Loss part affects only the borrower. If the rupee keeps falling and it seen as adverse trading condition, then all the investment will go out. Temporarily you can increase the interest rate to delay the outflow, but when interest come down again, it will re-start to flow out. So politically, administratively, lawfully, economically and strategically running the country and increase the production is the way to go. It did not happen from 1948. If efficiency is not there and only inefficiency there then, the loan burden increase though the nominal value on stronger currency is remaining same.

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