20 May, 2022

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Why The Delayed Devaluation Is Insufficient To Avert The Forex Crisis

By Harsha de Silva –

Dr. Harsha de Silva MP

In the past year, we repeatedly urged the Government and Central Bank against holding the dollar at Rs. 200, as it benefitted neither the Government nor the people of this country. Excessive money printing undermined the credibility of the US dollar peg at Rs. 200, as a result vital foreign exchange began to flow through unofficial channels. Inward remittances particularly witnessed a drop of 62% in January 2021 compared to the year before. In the last 7 months alone, remittances have reduced by approximately $2.5 billion. Dollar peg and laws such as 25% forced conversions of profits pushed exporters, of both goods and services, to keep their profits overseas. Consequently, the Central Bank has ‘burned’ at least $1.5 billion to defend the peg at 200, thus we can deduce that the Government has made a staggering loss of $4 billion due to detrimental political decision making on the economy.

Last night, the out-of-options Central Bank Governor Nivard Cabraal decided to increase interest rates by 1% and devalue the dollar to Rs. 230. However, it should be noted that this is not a depreciation of the rupee, instead a devaluation to a rate decided by political forces. Thus, we immediately warned that this is not sustainable, as it is not the rate determined by the market. Nonetheless, this morning we learned that the Cabinet has decided to give an additional Rs. 38 to each dollar for remittances, but it is not clear if this additional Rs. 38 is to the previous pegged rate of Rs. 202 or the rate fixed last night for Rs. 230 by the Central Bank. In the case that it is for the previous pegged rate of Rs. 202, it means that they would be offering Rs. 240 to the dollar. It is a complete muddle, as no one knows whether the rate is Rs. 230 as stated by the Central Bank or Rs. 240 decided by the Finance Minister, as a result foreign exchange markets have all frozen today. All government policy directives have been blunders thus far, when will they listen to expert advice? Either they float the currency and let the market decide the rate or they initiate a consistent and sustainable policy direction.

Moreover, the Government ought to understand that increasing the interest rate by only 1% is purely insufficient to defend the rupee at Rs. 230 or Rs. 240. Economic theory demonstrates that it is impossible to implement a stabilization program with a mere 1% increase. Both the devaluation and increase of interest rates have to go hand in hand. Take for example; the 1% increase of policy interest rates to 7.5%, while the inflation stands at 17% is insufficient because there is still a massive 9.5% difference. It is impossible to stabilize the economy with a negative 10% interest rate, one change without the other is actually impeding sustainable change. Additionally, it should be noted that others individuals have tried implementing a dual rate but it has not worked, thus I urge the Government to devalue the rupee to a rate much closer to the black market rate. We as a responsible Opposition have repeatedly stated our views and suggestions to the Government over the past two years, however they went unheard. These policy blunders have cost the Sri Lankan taxpayers dearly approximately $4 billion!

The Central Bank Governor reiterated his firm stance, the day before yesterday, that he will not devalue the rupee, it was nevertheless decided to devalue the rupee last night following a phone conversation between Jaikshanar and Basil Rajapaksa. Furthermore, the current devaluation is solely to please the Indian’s in order for the Finance Minister Basil Rajapaksa to secure a visit, as devaluation was a precondition for the meeting. We would not be in this current crisis if we had devalued the rupee sooner consequently, we are in the midst of the biggest forex crisis that independent Sri Lanka has ever faced due to egotistic, uncoordinated and short-term policy making by the incompetent Rajapaksa Government.

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Latest comments

  • 15
    4

    The fact is that not a single Minister or President in this government to understand the economy or economic policies. All are corrupted Criminals only worry about how they can make money.

    • 3
      3

      Harsha: Sri Lanka needs to look East and forget about the imploding West that that has colonized and turned it into a Banana Republic and dependent Service economy for massaging tourists White folk and making their GSP plus underwear, ruled by US citizens Goat and Basil Rajapaksas.
      Sri Lanka needs to INDUSTRIALIZE and TRANSFER TECHNOLOGY and LEVERAGE its Ocean and Mineral Resources and IOR strategic location and Tax Submarine Data Cable operators that use our sea-bed for their Big Data profits.Tourism and Garments are a Colonial dependency strategy to earn some crashing US dollars and EUROs -successive govts since independence have failed and JRJ’s “economic reforms” only accelerated the rot and mega corruption…
      The tourism and garment industry dependent Sri Lankan Business community is completely Colonized and Servile to the imploding West whose Economy is crashing that has created a tourism and underwear Economy in the island, rather than enable Lanka to industrialize its Economy utilizing its valuable Marine (FIsheries and Sea bed resources) and Rare Earth Minerals and Elements including Graphite important in the manufacture of batteries and Solar panels…

  • 10
    3

    you can write …. you can talk ….. you can dance ……. you can sing …….

    Now that Prabakaran is dead …….. there are only two proven entities in Lanka: Ranil and Fonseka

    Bring forth Ranil to rescue the economy …….. task Fonseka to catch the crooks and get back the stolen loot ……..

    What is easier to bear …….. Ranil’s character flaws and Fonseka’s bad language ………. or hunger, misery and endless queues to Nirvana and the elusive “Sinhala-Buddhism?”

    “Sinhala-Buddhism” and a well functioning economy are mutually exclusive ……… wanna continue with the status quo to find out the hard way?


    Do ye realize what a brilliant trick tricky Ranil played with the Hambanthota Harbour; leasing it out to the Chinese for 99 years? ……….. China saddled Lanka with an unproductive white elephant …….. now China is holding the white elephant after paying a billion bucks for the privilege!

    What are a few character flaws? After all, Ranil is a Thomian! ………. They say the Greeks invented it ………. and the Thomians perfected it ………… he is just sticking to well established longstanding traditions ……. :))

    • 6
      2

      Quote
      Do ye realize what a brilliant trick tricky Ranil played with the Hambanthota Harbour; leasing it out to the Chinese for 99 years? ……….. China saddled Lanka with an unproductive white elephant …….. now China is holding the white elephant after paying a billion bucks for the privilege!
      Unquote

      Why is that srilanken media dont yet say, if RANIL s govt did not agree with that lease, what other options they had to pay off the debt ?
      .
      Yet today, many including PINGUTHTHARAYA community keep on criticising former govt s lease of HAMBANTOTA PORT to china, however, they dont yet mention about any alternatives that former govt had before them.
      :
      SRILANKEN media is fully biased and totally handled by RAJAPAKSHE family.
      :
      When this would be changed, it will be the day of a new begining to SRILANKENs for better future.

    • 3
      0

      nimal fernando

      “you can write …. you can talk ….. you can dance ……. you can sing …….”

      Your above observation reminds me of

      “I can think, I can wait, I can fast.”

      Please watch this clip from Herman Hesse’s Siddhartha
      https://www.youtube.com/watch?v=MLySVbEL5VM

      • 3
        0

        Thanks, Native.


        “Herman Hesse”

        It’s interesting you brought up Hesse ………. some of my favourite ……. his poems set to music by Richard Strauss …… https://en.wikipedia.org/wiki/Four_Last_Songs

        https://www.youtube.com/watch?v=uEX4D5xZwbc ………. https://www.youtube.com/watch?v=Ihl1hXYXMp4&list=RDIhl1hXYXMp4&start_radio=1&t=76s

        Every soprano worth her salt has recorded them …….. Lisa Della Casa’s is understated, delicate and sublime …….. although most others impress on the first listen ………..

        Check out Elisabeth Schwarzkopf’s second recording with Szell ……… I think Germans (or sopranos from that region) are better at the pronunciation/nuances/interpretation than others ……… it’s like us Lankans speaking English: although damn good something is still missing …… It’s not ours ……

        You have to have some decent audio gear to get the full spine tingling effect …….. single-ended tube amps (with large 805, 211, 845 tubes) and electrostatic or ribbon speakers will do the trick. …… another good alternative is (if you can grab a well looked after pair in decent condition) vintage Yamaha NS-1000 (not NS-100 or their other crap) …….. M or its various iterations/variants. Expensive beryllium domes for tweeters and mid-range ………. properly set up, very few modern speakers can even come close ……..


        Another guy who was influenced by Buddha, other than EE …………… https://www.the-tls.co.uk/articles/arthur-schopenhauer-footnotes-to-plato/

    • 2
      6

      NF,
      “Sinhala-Buddhism”

      Dumbo, there is no such thing called “Sinhala-Buddhism” .

      • 8
        2

        So it hit where it hurts, uh? :))

        That’s what you call a sucker punch …….. you guys are too easy ……… like taking candy from a baby! :))

        If you had an ounce of intelligence, you would’ve kept your mouth shut like the rest. :)))

        Man, this forum is fun!

      • 6
        0

        EE,
        .
        as usual should be sitting on his little head/brain.
        .
        Else – entire world knows about the danger making by SINHALA BUDDHISM in our Rajapakshe punished land… but you the kind of BP to deny it ?
        .
        I imagine you are sitting on your head, but wearing a sarong- nothing is covered to your genitals… if theyare not taken away by the mlechcha, barbaric family ..
        .
        We perfectly know if FORMER govt and its good efforts worked, no today s like DOLLAR crisis or the like would have ever formed… however, who stood on the way, …… criminals born and produced by DA Rajapakshes. No doubt, their monuments will be bombed down by the hatreds of the very same people in the days to come. Wait and see. ……. I have no doubt, MAHINDA Rajapakshe deserves to be rotten in a cell.
        .

  • 7
    1

    Harsha de Silva is right; the alarm bell is ringing. The Central Bank is not a controller of rates. It is an Agency that controls the the factors that affect exchange rates.
    .
    CB should be handled by an Economist. An accountant will be a misfit as a Governor.
    .
    The present Governor is in his seat because he knows the secret of making a fast buck!

    • 4
      0

      Nathan,
      .
      But what if leadership would not leave a space for the experts but to a record breaking man of Ajith Cabral nature ?
      .
      Present CBG would have been hung if this country respected proper law and order.
      :
      Not Arjuna Mahindran but AJITH CABRAL to be brought before the courts. What a stupid country we were born to ?

  • 3
    0

    One can infer that with the controlled $$$ value, GoSL can continue importing foreign goods and cars for the 1% (fashion shows and exclusive parties), at the expense of the Rupee value for the suffering Masses. Alas!

  • 7
    1

    Everything this govt. did has been a disaster. Apart from GL, although educated, a gutless man with no integrity, there is no other educated person in the cabinet, the whole bunch being a set of self serving corrupt bum suckers, so the current plight of the country is no wonder. Ignorance & stupidity are not crimes but whether it is stubbornness or sheer cussedness, the governor of the CB is not fit for purpose. It is said that the Finance Minister was even expelled from school & his level of education certainly does not qualify him for such an important role. They maybe jokers but, seriously, I believe the President should be held responsible for the country’s desperate economic situation & even convicted for crimes against the country & its people, which nothing short of treason & the buck stops with him.

    • 1
      1

      Dear Raj-UK,
      .
      Gamini Lakshman has been performing well during the past few months; let’s be grateful for that.
      .
      He was outstanding from childhood on. What went wrong?
      .
      https://en.wikipedia.org/wiki/G._L._Peiris
      .
      That’s to make it easy for readers. Upto 1994, he was respected by all who knew him. The general public did not really know him till then. Why did he fall out with CBK in 2001? From that point on he lost our respect.
      .
      I can only think of this. He was conscious of his gifts, and from a “political family” himself. Caste! He could not aspire to the highest office. I know that this is not mentioned in polite circles.
      .
      Until we start facing up to some aspects of our society I fear that we will be stuck in this morass.
      .
      Panini Edirisinhe

      • 5
        1

        What went wrong ?
        .
        GLP or the like too were tamed by RAJAPAKSHES CRIMINALS for their political surivival.

        Here naive but oxford educated GLP was caught, but he has pay it all before he sheds his last breath one day soon. I wonder how these men and women would be feeling whenever they site down and look back since Nov 2019.
        .
        Hirunika, the fearless young politician set an example and revealed a lot about Gotabaya s hidden background. All what she droped down are no different to what I heard from my circles in the US. So, at least tooday, PRESS should reveal, that ” we the nation is deceived by Hambantota looters” for the exoneration of their court cases. Not just few, but real high crimes that could put the criminal siblings forever behind the bars.

        All these should be felt to GLP or the like diehard supporters of brutal family, but to behave as if their five senses are permamently inhibited ?
        .
        GLP would be hated by the very same people no difference to the manner People hate RAJAPAKSHES today.

      • 1
        0

        Dear Sinhala_Man

        GL & prof. Lakshman may have been respected academics but it seems their education did not stretch to understanding about integrity. I believe GL is a Thomian but he has failed to live up to the standards of old school Thomians. Anyway, we can’t talk about standards now that the Rajapakse brats & even Vermin Silva brat are all Thomians.

  • 4
    0

    So Jaishankar had to force Kaput who then in turn had to force the accountant at the CB to devalue the rupee. First of all this imbecile and crook with no soul an accountant heading the CB should be hung drawn and quatered for what he has done to this country. The professional boards of the institutions from which he got his qualifications should void them in shame. He needs to be sacked and sent straight to jail for the many frauds he committed. As for Kaput he has no brain and only a grade nine education just chase him back to where he came from. Let the Indian government run Sri Lanka we don’t need the local one. The economy just from sacking the entire SLG will get a tremendous boost. The SLG is actually run by Gnanakka in Anu. Her devale was built by our troops and out of public funds. This shows how useless the SLG is. Old Gotler makes regular visits on bogus pretexes. So does Shavendra and many Gov politicians. No. media dare expose these facts. Anyway expect the giant jump in fuel and gas prices. The current prices are totally unsustainable. Jaishankar will have to give orders to the brainless Kaput on this next.

  • 2
    0

    Don’t people get furious at this tragedy? The rupee is in free-fall and the State is to spend millions of rupees (those can be printed, of course) on stuffing this poor elephant who could not live the life that he wanted to.
    .
    https://www.theguardian.com/world/2022/mar/08/sri-lanka-to-hold-state-funeral-for-beloved-sacred-elephant-raja
    .
    I must acknowledge that I didn’t know that Nadungamuwa Vijaya Raja was born in India, but that makes little difference. Poor Gautama! His Dharma is neglected but all respect the vanity of Sinhala-Buddhists.
    .
    I sense sarcasm in the writing. I by now suspect that many readers don’t read carefully; in too much of a hurry to dash off a “clever” comment. Some may miss the link to the earlier article:
    .
    https://www.theguardian.com/world/2022/jan/14/two-more-elephants-die-after-eating-plastic-waste-in-sri-lankan-dump
    .
    Yes, fewer elephants now. Since this is a British newspaper let it be noted that when they were ruling us, many a Brit wantonly hunted down elephants as trophies.
    .
    But let’s stick to the point. This elephant-funeral also is irresponsible, but many fools may be taken in by it. What hope for us?

  • 1
    0

    At last the dollar has been floated and is selling at rs.260 by the banks.This was long overdue.Better late than never.If basil had not ignored cabraals position as central bank governor and got on with the job of rescuing sri lanka this would not have happenned.Cabraal has to go just like wimal and that other saboteur gammanpila.two gone and one more togo if sri laanka is to get out of this crisis.

    Floatng the currency is the first step to put the foundation.The next step is to see how to get more foreign exchange through exports,tourism,foregn remittances and the list that dhammika perera provided to to stop hemorrhaging dollars example when we can set up internaational unis here without 30000 students goingto foreign unis every year etc.

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