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Postpone luxury spending by couple of months to stabilize LKR: Dr. Harsha

2018-09-26 11:10:01
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State Minister of National Policies and Economic Affairs Dr Harsha de Silva asked the high-income earners of the country to be socially conscious to help cut the demand at the margin in the face of the rapid rupee depreciation.

“Social consciousness of our high income people is also important now; perhaps postpone by just a couple of months that new luxury car or that trip to Alaska. These will all help to cut the demand at the margin,” Dr. Silva said in a Facebook post.

The full post;

I feel that the LKR has overshot (depreciated more than) its fair value; it should strengthen somewhat in the coming weeks. But, the fundamental issue is lack of exports.

The LKR is again under pressure. The reasons for the current episode are primarily exogenous; driven mainly by outflows of US dollars from emerging markets due to a robust US economy, gradual tightening (of interest rates) by the Federal Reserve and investors taking refuge in the US with escalating trade tensions with China. While the impact of this shock is being felt across the world, current account deficit emerging countries, like Sri Lanka, are getting battered more than those with healthy trade balances.

However, whether the slide we saw was fully warranted is a question I have in my mind. I feel the LKR at 170 has overshot its market-determined fair value. It could be partly disruptive speculation and partly genuine lack of confidence in the Central Bank to have the situation under control. However, I think both these issues have now been addressed and the LKR will find its equilibrium once the dust settles. Some appreciation of the currency is warranted.

The Central Bank must be credited for being responsible and not burning reserves to defend the LKR at levels earlier not feasible. We saw how during the 2011-12 home made crisis (having held the currency artificially at 110 levels for months) ended up; losing almost USD 4 billion or close to half of the reserves in just a few months and yet the LKR depreciating by close to 13 percent. (Look at the graph)

My view is that the Central Bank could maintain the LKR at a level adjusted slightly upwards to correct for the overshooting.

A criticism, however, is that they should not sterilize the interventions; in other words, the loss of LKR in the market to purchase USD sold by the CBSL should not be replaced with new LKR by the CBSL. The unsterilized defence will lead to some tightening of rates but that is an okay price to pay for a short while to stabilize the markets and build confidence around the new equilibrium exchange rate.

The (brave) decision of our government to introduce the fuel price formula is certainly a huge boost to limit demand and the temporary measure like 100 percent margin on LC for import of cars for personal use will help stem import demand. The social consciousness of our high income people are also important now; perhaps postpone by just a couple of months that new luxury car or that trip to Alaska. These will all help to cut the demand at the margin.

I am not planning on explaining the more fundamental reason for the continuous pressure on the LKR today, but those who follow my writing are fully aware of how strongly I have been arguing for even stronger policy measure to increase the exports to GDP share of Sri Lanka including FTAs and unilateral liberalization of trade to increase investments and more conducive immigration policy to bring in technical expertise to move from producing low value simple products to high value complex products. That is the only sustainable solution to the continuous pressure on the LKR and to create high wage jobs.

When our exports to GDP share started to decline steadily year after year; from around 27 percent in 2005 to around 12.5 percent in 2015 with the Rajapaksa regime dismissing it with talk of ‘economic nationalism’ the writing was on the wall. What we see today is clearly and absolutely the outcome of that purely short-term populist economic policy of 10 plus years. I shudder to think what could happen if God forbid those who continue to advocate inward-looking policies grab 'power'; where will the LKR stop? 500?

We are doing our best to turn the declining export ratios. I am happy to note it has finally turned around. WE have succeeded in getting duty free access to the EU via GSP plus and exports are increasing. We have successfully signed the first FTA in decades with Singapore and others are in the offing. We have liberalized trade further and will do so with immigration.


  Comments - 20

  • Mm Wednesday, 26 September 2018 11:17

    Please tell that to your president, priminisrer, ministers and members of parliament. They are the high income travelers

    Reply : 5       218

    Sanath Wednesday, 26 September 2018 11:18

    These fellows are the people to set the example. They go to the extent of importing luxury duty free vehicles, super chairs, high expensive doors etc etc and the list goes on. In addition undue expenditure and wasting hard earned money on useless tamashas are also making a heavy impact on cash strapped economy.

    Reply : 1       177

    senaratne Wednesday, 26 September 2018 11:30

    Harsha must tell this to his own colleagues in the parliament and not to the public who is undergoing immense hardships ever since the new tax reforms by Finance Ministry. I was a voter who voted for Harsha in the last parliamentary election..will never vote for this senseless guy in the future.

    Reply : 8       158

    Unchikun Wednesday, 26 September 2018 11:31

    When I see the cars Ministers and MP drive for meeting at Temple Tress and Sri Kotha I get disgusted. Sell them off and fill the government coffers and use the TATA Nano or take a bus or train like to do and did in Japan (where I worked).

    Reply : 4       149

    Saman Wednesday, 26 September 2018 11:33

    After Yahaplanaya came everyone having luxury cars and going trips to Alaska day by day..lol

    Reply : 9       120

    ravin Wednesday, 26 September 2018 11:44

    well first tell all politic asses to cut down their luxurious spending. Guy who ordered 844,000.00 chairs to keep his brain had gone to japan to learn waste management.

    Reply : 1       121

    Dallas Wednesday, 26 September 2018 11:45

    Get ready to go home, writing is on the wall for you guys.What have you done with in last 3 years , basically nothing.

    Reply : 17       109

    Nimal Wednesday, 26 September 2018 11:46

    Why dont you limit imports and services? To minimize Dollar pumping out of the country? What actions or advise has been issued to state institutions ? Banks purchase software from other countries, when we have expertise to do it ,($ 9 mn by one Bank in near future, like chairs of Western Provincial Council) Why no policy ? or regulator to oversee this unnecessary imports?

    Reply : 4       71

    Ceylon Wednesday, 26 September 2018 11:48

    This is a phd ****.wastings in billions by the government,corruptions in billions by the government.he can't see these real lossess but see at few cars and few travels of others personel wealth.why you don't tell sirisena to don't make now on going new york luxury holiday with family by spending millions of dollers from peoples money?.

    Reply : 3       79

    Lankan Wednesday, 26 September 2018 11:55

    Let's start from our own home before advising others

    Reply : 1       66

    ravin Wednesday, 26 September 2018 11:58

    You want general public to cut down their spending? Well first tell all political-**** to cut down spending public money. All their luxurious spending has to be bear by public funds. Each and every citizen of this country is paying for all politic unnecessary spending.

    Reply : 1       80

    sdso1651 Wednesday, 26 September 2018 12:08

    Politicians should set the example by banning the import of vehicles for themselves; stopping all tamashas; unwanted expenses on celebrations and of course fruitless foreign travel. The public cannot tighten their belts any more. The belt has gone twice or thrice around their waists! Shame on you to ask the public to help!!!!!!

    Reply : 1       59

    Samson Wednesday, 26 September 2018 12:17

    Surprised to hear from a person like you. Problem is that politicians who had nothing earlier want to spend poor peoples money to show off. What is the harm in the rich people spending on what they can afford. You tell the politicians to reject luxuries.

    Reply : 3       66

    Miracle of asia Wednesday, 26 September 2018 12:18

    Ask the custom officers in the gray line and ird officials to cut their private family trips which they enjoy with bribes

    Reply : 3       64

    Soma Wednesday, 26 September 2018 14:34

    Cut down. Give only for us and other government officers.

    Reply : 1       30

    talagala Wednesday, 26 September 2018 14:36

    I just cancelled the BMW order and Europe trip.

    Reply : 3       59

    Arnold Wednesday, 26 September 2018 14:38

    You are telling it to the wrong people. I am sure the 225 fat cats import more luxury goods than all of Sri Lankan population combined!!!

    Reply : 0       78

    dulan Thursday, 27 September 2018 08:43

    Stop all car permits, give up on pensions for MPs after a mere 5 years, give up hefty travel allowances and subsidized meals in parliament then tell us to follow

    Reply : 1       17

    Ali Hu Kai Friday, 28 September 2018 10:40

    Was Bandula sir your Economics teacher at any point in your life? Just curios to know :)Starting from your message "i feel". You dont have to feel. Its obvious!

    Reply : 0       1

    LivingInGlassHouses Friday, 5 October 2018 21:44

    @Harsha ... Why don't you first cancel all the duty free that were issued recently, cancel all foreign trips and trainings for parliamentarian, reduce the number of vehicles used by each palimentarian, stop all lavishly celebrated events and concessions given to your fellow parlimentarians. The general public have already tightened their belts enough and have had enough of funding our politicians lavish lifestyles while they do next to nothing in return for those who pay all their bills. Enough is enough is where it will back fire on you if you don't change things from inside your own house.

    Reply : 0       0

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