- Federal reserves have been increased to 20% but it was at 0% during crisis time
- One usual thing is that the CB has to use foreign reserves
During last September, Sri Lanka experienced a rapid depreciation of the rupee (LKR) against the US Dollar (USD). Since June, the value stood at Rs. 161.17 but it kept falling during the last week of September and the value now stands at Rs. 170.56. Several factors such as the strengthening of the USD and the China-US trade war contributed to this phenomenon. Amid speculations that this would negatively impact a middle income country like Sri Lanka, the matter isn’t as bad as for currencies in India and Pakistan which have seen depreciation in currency above 10% against the USD. While suggestions are being made to be socially conscious and cut down on expenses, the Yahapalana Government also suspended vehicle permits to MPs, ministers, state sector employees and others in a move to ease the pressure on the LKR.
In this backdrop, the Dailymirror sheds light on what exactly happened and how the islanders could recover from this fall.
A call to be socially conscious
According to National Policies and Economic Affairs Deputy Minister Dr. Harsha De Silva, the dollar rate increased with the increase in federal reserves in the US. “Many emerging markets had capital flowing in from the US. But with the increase in federal reserves a lot of capital started flowing back to the US from these emerging markets. Therefore Current Account Deficit countries such as Sri Lanka felt its impact more than Current Account Surplus countries. These include countries such as Australia, India, Pakistan, Turkey and even China.
According to observations made by Amarasekere, if not for such foreign exchange leakage during the above period of over USD 30,000 million Sri Lanka would have been having more than adequate foreign exchange reserves today
“As a result prices of goods will increase,” he continued. “Now what we do is we try to hold imports. The fuel price formula is working well and we can control the consumption of fuel. In addition to that we need to be socially conscious and try to save energy. If your air conditioners were at 190C turn them to 260C, save electricity etc. We import USD 20 billion every year and we need to cut down around USD 5 billion by cutting down foreign travel and buying luxury items etc. I have to credit the Central Bank for not panicking and burning reserves. Next year we need to pay USD 4 billion for the bonds obtained by the country, but the CB has more tools,” he said.
He further said that during the Mahinda Rajapaksa regime exports were at 27% but after the period of this regime exports have dropped to 12.5%. “If we need to develop as a country we need to export more products,” Dr. Silva added. “Exports have a positive impact on the Gross Domestic Product (GDP). We also need to secure international ties such as the Singapore Free Trade Agreement and joining the ASEAN Plus Six. By integrating we can diversify our inputs. This is what we need to do in the medium term.” he added.
Rupee already a weak currency
In his comments Sirimal Abeyratne, Professor in Economics, University of Colombo said that the rupee is already a weak currency. “Therefore it has a higher vulnerability to external shocks. It is weaker because it has been depreciated over the past 40 years. Federal reserves have been increased to 20% but it was at 0% during crisis time. This year they want to increase it by 2.5% which will happen in two more occasions and in 2019/2020 they are trying to increase it to 3.5% as per the monetary policy plan. This is the basic interest rate which will influence all other countries,” Prof. Abeyratne said.
He further said that in terms of a short term measure, we are left with limited options. “One usual thing is that the CB has to use foreign reserves,” Dr. Abeyratne continued. When there is an excess demand for dollars in the market, the CB can release reserves, but it will be a waste of resources for a limited time. We also need to pay our maturing debts. Import controls are another crucial aspect. To my understanding Sri Lanka doesn’t have an open market economy and therefore more imports will make matters worse. We need to get ready for long-term policy measures. Sri Lanka has managed its debts and has a good track record of paying debts,” he said.
What Amarasekere’s book tells us
According to Nihal Amarasekere’s book titled ‘Fiscal Management, Lack of Public Accountability’at 15% leakage, the exports proceeds leakage from the country from 1993/94 to 2016/17 could be estimated to be well over USD 30,000 Mn. He further states that there is no purpose in promoting exports if the exports proceeds are not fully repatriated to the country. In his book Amarasekere refers to a voluntary survey carried out in 2004. According to the survey, 50% of the exporters both registered at BOI and non-BOI responded and reported that 81% of their exports proceeds are repatriated by the end of the next quarter. It also revealed that 10.5% of their exports proceeds have been utilized abroad for the purchase of assets etc.
Sri Lanka already has higher nominal and real interest rates compared to some of the countries who had raised interest rates at least a couple of times during this year.
“Now what we do is we try to hold imports. The fuel price formula is working well and we can control the consumption of fuel. In addition to that we need to be socially conscious and try to save energy.
To my understanding Sri Lanka doesn’t have an open market economy and therefore more imports will make matters worse. We need to get ready for long-term policy measures
PROFESSOR SIRIMAL ABEYRATNE
The survey has also revealed that there had been ‘ghost, non-existent exporters’ as per the voluntary questionnaire returned undelivered. He observes that these are the parties who had created such ‘ghost export companies’ and claimed bogus VAT refunds perpetrating the colossal VAT frauds discovered in 2003/04. According to observations made by Amarasekere, if not for such foreign exchange leakage during the above period of over USD 30,000 million Sri Lanka would have been having more than adequate foreign exchange reserves today.
Chances attracting new money low
The Central Bank in its 6th monetary policy review for this year kept the policy interest rates unchanged, much to the surprise of many analysts who bet that the monetary authority would increase rates in line with other Asian region economies such as India, Malaysia, Indonesia and Philippines.
The Monetary Board of the Central Bank kept the Standing Lending Facility Rate (SLFR) at 8.50 percent and Standing Deposit Facility Rate (SDFR) at 7.25 per cent. The market had expected hikes for both. Speaking at a recently held press conference, CB Governor Indrajit Coomaraswamy said that Sri Lanka already has higher nominal and real interest rates compared to some of the countries who had raised interest rates at least a couple of times during this year.
Relatively slower growth, moderating money supply and credit growth, contained inflation and tight liquidity conditions were cited as the key reasons behind the policy decision.
Governor Coomaraswamy further said at this juncture a rate increase would not have either brought in new money into the country or encourage investors, who are already here, to stay.
“In the current conditions, where there is money moving out of the emerging markets, given that Sri Lanka is a twin deficit country, chances of Sri Lanka attracting new money are very low. Then you have to ask whether we can keep the people who are already here by increasing rates? We have US $ 1.5 billion worth of institutional investments in rupee securities at the moment. By increasing interest rates will we encourage those people to stay here? The answer to that is also no,” he said.