by C.A.Chandraprema Courtesy The Island

September 22, 2018, 7:53 pm
Central Bank records show that in 1950, the average Rupee value of a US Dolllar was Rs. 4.76 and that it was retained at that rate for over one and a half decades till 1966. With the foreign exchange crunch that hit Sri Lanka in the decade of the 1960s, the average price of a US Dollar rose by ten cents to Rs. 4.86 in 1967 and a decade later by 1977, it had risen to Rs. 8.87. With the opening up of the economy, the exchange rate nearly doubled overnight as free market forces came into operation and in 1978 it was Rs.15.61. By the time the UNP government was defeated in 1994, the exchange rate had risen threefold to Rs.49.42. When the first Chandrika Kumaratunga government came to an end in 2001, the USD had gone up to Rs. 89.36. Between 2002 and 2005 during the Ranil Wickremasinghe and CBK years it rose to Rs. 100.50. When Mahinda Rajapksa ended his tenure in 2014, the price of the USD was Rs. 130.56. Today less than four years into the Sirisena-Wickremasinghe government the value of the USD is over Rs. 170 and rising on a daily basis. The Sunday Island spoke to former Central Bank Governor Ajith Nivaard Cabraal about the free fall of the Rupee that was experienced during the whole of the last week – a phenomenon never before seen in this country.

Q. The free fall of the Rupee that we are experiencing now is something that we have never faced earlier even when we were in the middle of wars and insurrections in the past. Why is this happening now?

A. This is due to a combination of several factors. If it was due to just one cause the remedy would have been to fix that problem and things would have been OK. But what this government has failed to realize is that an economy is interconnected. The exchange rate, inflation rate, interest rate, the reserve situation, imports and exports the national debt, the repayment of debt, the borrowings, all these things have to be looked at in an integrated manner. This government has let the economy slip on many fronts. All the macro fundamentals are today aligned in an adverse manner. The phenomenon of the Rupee falling is a reflection of the bigger problem. The people have lost faith in the economy – that is why you see it happening every day. Otherwise it should stabilize. We have a situation where the finance minister is saying there’s nothing we can do because we have no reserves. He has nothing to defend it with. The Central Bank is helpless, the government is helpless and nothing will work till things take their full course.

Q. We have heard government Ministers saying that the depreciation of the Rupee is due to the strengthening of the US Dollar and that it is not just Sri Lanka that is experiencing this stress and that India is even worse off. How justified is that claim?

A. The fact that the US Dollar has strengthened is true. There is an upturn in the US economy and the Dollar has strengthened. But this did not take place overnight. People knew that the US economy was going to become stronger for the past two years. When you know that a certain event is going to take place, you have to prepare for it. The Rajapaksa government prepared for the withdrawal of the GSP+ concession intelligently. When it came, the stakeholders did not feel its impact. To have neglected to prepare for a stronger Dollar and to now complain that they are stuck is not the response of a responsible government. To point out that other countries too have been affected is not an excuse. You have to ensure that you take the necessary steps to look after your economy. Look at the countries that have NOT failed to maintain the values of their currencies against the US Dollar. Bangladesh is one example. Ethiopia is another. Each country is different. You have to look after your own situation and take the necessary steps well in advance. Certain official authorities have taken a lot of pains to ‘cherry-pick’ a few countries whose currencies have depreciated against the US Dollar, like the Indian Rupee and the Pakistan Rupee.   In that regard, I think it would be good to point out to them that in 2018 the appreciation against the Sri Lankan Rupee by the Bangladeshi Taka has been 7.5%: Thai Baht – 9.7%: the Ethiopian ETB – 9.2%: and Zimbabwe Dollar – 11.1%. The authorities should concentrate on improving Sri Lanka’s macro-fundamentals to make the economy stronger, instead of trotting out lame excuses.

Q. During the world economic crisis of 2007-2008 which is deemed to be the worst global recession since the Great depression of the 1930s, Sri Lanka remained largely untouched even though the currencies of many other Asian countries collapsed. The worst hit was South Korea. Thailand, the Philippines, Malaysia were all affected one way or the other. At that time our currency should have depreciated even more rapidly than the Korean currency because we were fighting a war that nobody thought we could win. Why didn’t that happen here at the time?

A. In good times, you have to accumulate and build up your reserves and spaces. You have to assume that the bad times will come. There is no question about it. Unfortunately, our present rulers don’t have the brains of an ant. They squandered and wasted all the spaces that the previous government had built up. We had reserves, our currency was stable. In the year 2014 the fluctuation of the Rupee against the Dollar was just 0.2% for the whole year. Interest rates were all in single digits so that even if it went up a little bit, we could manage. Inflation was down to 3 to 4 percent so that even if it goes up to 5% we could still manage. Our reserves were 8.2 billon USD so that even if we had to reduce it a little bit, it did not matter. So we were ready for any shocks that may come along. All those were squandered by this government. Deliberate actions like the bond scam which cost us enormous amounts by increasing the interest rates, the resulting loss of confidence, foreign investors taking away their money are all factors that have today put us in this position. During the period that you mentioned, banks in the US and elsewhere were collapsing. Oil went up to over 140 USD per barrel, there was the world food crisis with food prices skyrocketing, and we had our war. But we were able to manage the economy even with all those challenges because we were cautious, and were not taking undue risks.

Q. With regard to the countries that collapsed in the 2008 global economic meltdown, the very depreciation of the currency helped them to bounce back because their goods became cheaper on the international market. Will the depreciation of the Rupee help our economy in the same manner?

A. We are country with a fair amount of debt in foreign currency. At the end of 2014, the total debt that we had in foreign currency was about 30% of the GDP or 23 billion USD. Today it has gone up to 35 billion USD – a 50% increase which comes to about 43% of GDP. If you have foreign currency debt increasing, you have to ensure that foreign reserves are available. If you don’t have that and there is a tendency for your currency to go down in value, then you will end up with a huge debt burden. In our case, we kept the Rupee stable against the US Dollar. Some say that we kept it stable by artificial means. If the currency can be kept stable by artificial means for nine years, we should do it. We were able to do that because we were sensible. Because of the debt we have to be ultra cautious about our currency. You have to buy the dollars to pay back those loans in Rupees. To get the Rupees, you have to either borrow or tax the people. There is also the myth that exports will increase when the currency depreciates.  In 2014, the total exports from this country was 11.1 billion USD. The next year our Rupee depreciated by 9%. After the depreciation exports went down to 10.5 billion USD. If there was any truth in the theory, exports should have increased. The next year, they depreciated the currency by another 3.8%. Then exports went down from 10.5 billion to 10.3 billion. The following year the currency depreciated by 2%. That year the exports went up to 11.3 billion – which was about 200 million more than the 2014 figure after depreciating the currency by about 15%. That was the time that Ranil Wickremesinghe was gloating that they had done very well in exports. So this theory does not work in the manner it is said to. Exports will increase if you have stable conditions and people have the confidence to come to our country. It is not only the export of merchandise that has to be taken into account. Tourism is a service that is exported, transport, banking, IT services and insurance services all showed a remarkable increase because of the policies that we had. That enabled us to have a surplus in the balance of payments very comfortably.  That is why this government spoke only about the exports of merchandise. Even people like Harsha de Silva and Eran Wickremaratne say that our exports as a percentage of the GDP have gone down. They are talking only about the exports of goods and have dropped the export of services. If the whole thing is taken into account, there is an increase.

They said our tax income must increase. People didn’t realize that when the government says that tax income must increase, it means that they have to take more from the people – which they did. Our GDP was 79 billion USD in 2014. The total taxes taken from the people was one trillion rupees. Now the economy has gone up to 85 billion USD and the tax income is two trillion. With an increase of just six billion USD in the GDP an additional Rs. one trillion has been grabbed from the people by the government. Earlier I could hear some Chambers of Commerce saying that it was a wonderful thing to be taxed. Today with their backs to the wall I don’t hear them saying that. As far as our country is concerned, the depreciation of the currency must be avoided if it can be. If there is major turbulence in the world economy we may have to go with the flow but what we have now is a Sri Lankan made depreciation and it has not increased our exports as is touted by the government. It has hurt us very badly with regard to our debt. And we now have a situation where nobody has confidence in our economy and nobody knows where we are heading. Nobody knows where the Rupee will be in another three weeks time. That itself discourages people from coming into our country.

Q. In the year 2000 a parliamentary election came up and I remember a Minister in the Chandrika Kumaratunga government telling the people: Look, the UNP gave you only Rs. 50 for a Dollar. We are giving you Rs. 75, so vote for us! We heard Minister Eran Wickremaratne saying something very similar when the depreciation of the Rupee was discussed in parliament where he spoke of the benefits of depreciation for our expatriate workers. What have you to say about that argument?

A. If such statements were made by uneducated people, you can dismiss it as a political statement or one made in ignorance. When a banker and economist says it, you know that it is a deliberate lie and that they are only saying that to hoodwink the people. That is despicable. You must maintain some element of respect for yourself.

Q. With this depreciation, the theory is that our goods will become cheaper in the outside world. But internally prices are going up. The cost of production is going up. So how will this dynamic finally work out?

A. Empirical studies have shown that when there is a substantial change in the exchange rate, there is some benefit that businesses get but this is very short term. They have inventories which cost them less than their present value. But that is a very temporary gain that they would have. Within a few months, that impact is gone. If you compromise your entire economy for a short term benefit, that would be very foolish. During the nine years in which we held office, we never followed that policy. Every single economic decision we took was a long term one. Today I think there are a lot more people who appreciate the economic management of President Mahinda Rajapaksa than there were at the end of 2014. By the end of 2014, there had been an economic transformation that occurred in Sri Lanka which from an economy of 24 billion USD in 2005, moved to an economy of 79 billion USD. That was an amazing transformation but people did not realize it because they were living through it and they thought things could have been better. People didn’t have a chance of comparing economic performances. In that sense, I am very glad that the last three and a half years, has given people an opportunity to compare the Sirisena-Wickremesinghe government with that of Mahinda Rajapaksa. We managed the economy without allowing the shocks of the outside world to be transmitted to the people of the country. We bought fertilizer at Rs.6,900 and sold it to the people at Rs.350. During the war that raged throughout those years, there was nothing that was denied to the armed forces when they wanted it. When the number of recruits into the armed forces was increased exponentially, no one from the finance ministry objected. Now there is no war, no global crisis, oil is not 145 USD per barrel, yet these people cannot manage the economy.  People now know what the situation would have been if the present government had to face the challenges that Mahinda Rajapaksa faced. That’s why I am happy that there has been a change which gives people an opportunity to see the difference between what took place then and now.

Q. There was this allegation that China kept its currency devalued deliberately. They seem to have benefitted from that policy. If we keep our currency devalued, will that also benefit us?

A. I think every country has the right to pitch their currency at the value that they think is best for their economy. That is the fundamental position of economic management. Each country must look after their own interests. That is where the present government has got things wrong. They say the Sri Lanka – Singapore free trade is good for the world. We don’t want it to be good for the world, we want it to be good for Sri Lanka. The world will look after itself. So if China has maintained their currency at a certain level, that is up to them. Today the US is doing the same. The Japanese government deliberately weakened the Yen. Who are we to say that they have done wrong? But if our government thinks that having the Rupee at 170 or 180 to the US Dollar is good, they must get their heads examined.

Q. One of the standard recommendations given by the IMF is to allow the currency to float so that water can find its own level. Does it really work like that in practice?

Q. Nowhere in the world is anything really free. Even in the US where there is supposed to be free trade, they give Billions of Dollars in support of their agricultural industry. Of course they are wise enough not to call it a subsidy. They call it policy support or something like that.  It’s only the third world countries that are stupid enough to refer to the support given to their own industries as subsidies. If we have to support our people or our industries, we must do it. The support may be given in the form of tax holidays, providing land at concessionary prices, loans can be provided at a concessionary rate of interest. If any country has a government that has no interest in its own industries, and businesses, that country is not going to progress. One of the most positive aspects of the Rajapaksa government between 2006 to 2014, was the active support given to Sri Lankan businesses and industries. We have to look after our own. That has to be a policy initiative of an incoming government – not just lip service, but proper action on the ground.