At what value of rupee would CB think it needs to stop depreciation? At 200 or 250 or 300?
Posted on October 11th, 2018

A Response from Ajith Nivard Cabraal, former Governor of the Central Bank Courtesy The Island

In Aesop’s Fables’ “The Fox and the Grapes”, the fox, when it finds that it is unable to reach the grapes it is seeking, claims that the “grapes are sour”, and hence it’s not worthwhile reaching for them.

In Sri Lanka today, the Central Bank, when it finds that it does not have sufficient Forex reserves to defend the rupee and maintain the international stability of the country’s currency, claims that intervention in the Forex market is not advisable.

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In response to my article on the government and the Central Bank abdicating their duty to support the rupee, the Central Bank, by its statement of 10th October 2018, has gone to embarrassing lengths to downplay their current inability to defend the Rupee. The Bank has also indirectly suggested that the depreciating rupee is not detrimental to the economy or the country. In fact, the Bank seems eager to project the view that a drastically weak rupee would help achieve the government’s single-most important mission of improving the “percentage of Merchandise Exports to GDP”, even if the attempt to achieve that goal could lead to the crash of all other macro-fundamentals.

All knowledgeable analysts know that the real reason for the Central Bank’s “sour grapes” claim is because it has exhausted its “free” reserves, and does not now have any “spare” Forex that could be supplied to the Forex market to stabilize the currency. That is simply because the Central Bank has not built up sufficient Reserves in order to be ready to meet with such situations, as was done during the period 2006 to 2014, when Reserves were increased by 3 times from USD 2,735m to USD 8,208m.

In the 8 months up to August 2018, the Central Bank absorbed Forex amounting to USD 547m from the Forex market, while supplying USD 434m to stabilize the exchange rate. Thereafter, in September 2018, the Bank supplied a further USD 298 million out of its official international reserves to the Forex market in a desperate attempt to stabilize the exchange rate. The External Sector Performance Report of the Central Bank issued on 8th October 2018 also confirmed that the Central Bank “intervened” in the Foreign Exchange Market to curtail “volatility in the exchange rate”. Against that background, it is simply amazing that the Central Bank has now claimed on 10th October 2018 (2 days later), that “the Central Bank has increasingly realized that efforts to artificially stabilize the exchange rate extensively by supplying foreign exchange out of its official international reserves have only worsened Sri Lanka’s macro-economic conditions and medium term prospects”. A truly remarkable about-turn in Central Bank Exchange-Rate Policy, based on a sudden “realization”, after intervening in the Forex Market continuously for 22 years from 1996 to September 2018!

If the Bank truly subscribes to what it says in its October 10th statement, such policy stance suggests that it would now be willing to allow the rupee to slide towards any value against the USD. Needless to say the implementation of such an ill-advised policy would cause serious panic amongst investors which could be highly damaging to the economy as it would soon cause the cost of living to rise, public debt to balloon, businesses to collapse, unemployment to escalate, business confidence to plunge, bank and finance company NPL’s to sky-rocket, as well as lead to a host of other disastrous outcomes.

As is already known, a State Minister who is regarded as the key Economic Guru of this Government is already on record as having said that the rupee depreciation is “beneficial”. The Finance Minister has said he does not want the rupee defended. Now, judging by the enthusiasm of the Central Bank to justify the recent massive depreciation of the rupee, the Central Bank has firmly confirmed that its policy stance is now not to intervene in the Forex market in order to stabilize the rupee, which further suggests that it is quite comfortable to leave the Rupee value to be decided by other forces.

In such a scenario, stakeholders of the Sri Lankan economy cannot surely be faulted if they were to expect the current rampant depreciation of the Rupee to continue unabated, as well as harbour anxieties that the rupee could soon reach Rs.200 per USD or Rs.250 or who knows, even Rs.300! The government and the Central Bank certainly does not seem to care or have any answers!

6 Responses to “At what value of rupee would CB think it needs to stop depreciation? At 200 or 250 or 300?”

  1. Dilrook Says:

    Allowing the rupee to slide down to any value is the right thing to do.

    We are in this mess because of massive borrowings since 2010. Grace period has come to an end on large loans. We have to repay them. Since 2012 over 95% of state revenue went on to repay loans and pay interest and we are in a debt trap. Depreciating rupee is the inevitable outcome.

    Making the most of a bad situation, the depreciating rupee should be used to expand exports, cut down imports, give a better deal to housemaids and other expatriate workers, cut down on luxury and limit borrowings at least now.

    Politicians and politically connected people must be kept out of the Central Bank.

  2. Ananda-USA Says:

    Dilrook, if the Rupee is allowed to free fall, it would destroy the lives of many of our citizens who live in the Rupee economy with fixed incomes derived from relatively fixed salaries and interest earnings. Only shopkeepers who can pass on costs to end users can survive in the short term until their customers run out of cash.

    It is a very narrow view to urge a Rupee free fall to benefit those Sri Lankans who live abroad. They are not the great majority of Sri Lankan citizens. I know, because I support many children and destitute families in Sri Lanka.

    No, we need a STABLE CURRENCY that inflates no more than the US dollar.

  3. Dilrook Says:

    @Ananda

    It is a choice between bad and worse.

    Rupee depreciation at these rates is bad but sustaining it with more borrowings is far worse. You may recall I predicted this in 2013 when we borrowed an enormous amount of money that was wasted in the north knowing (or foolishly not knowing) they will not produce a return sufficient to repay those loans (including oversubscribed development bonds at 6.75% interest in USD). Along with them, grace period of other loans came to an end and repayment times approached. Now we have very little choice.

    If our foreign reserves do down too much, we will be unable to import. If rupee depreciates, our imports will be restricted. It also promotes import substitution industries. Remember we are a country that imports fruits, vegetables, rice, etc. too. Our farmers get a bad price and importers make a killing.

  4. Ananda-USA Says:

    Dilrook,

    You and I have debated this issue before. MR’s govt borrowed from abroad for infrastructure development that is generating now, or will generate in the future, substantial revenue to payoff the loans taken. MR’s govt never took a debt burden that could not be serviced through available income until those facilities would generate the income to become self supporting on their own. Borrowing for such national infrastructure development investments is the best kind of borrowing just like ordinary homeowners do when they takeon home loans to replace rental costs with home purchase costs. At the end of the mortgage they own the home free and clear.

    In contrast, the Yamapalana Govt has gone on a spending spree, looting national banks, and selling/leasing those very same national infrastructure assets that MR’s govt built and we were depending onto payoff the loans.

    These IDIOTS have destroyed us.

    Nevertheless, we cannot throw the most vulnerable Le among us to the wolves to rectify the situation. If import of luxury goods, of non-essential consumption goods, and staples that can be grown at home need to be curtailed, so be it. If taxes need to be raised on the well-off, fine. But keep those goods necessary for indigenous industries to keep producing going, and above all keep the currency and the prices stable. If we don’t do that a spiral of price increases and wage demands will overwhelm the most vulnerable people and businesses and bring on economic chaos.

    That is a PERFECT RECIPE for JVP-like revolutionaries to drum up support and resume their program of murder-and-mayhem pushing our country BACK by several more decades!
    I
    As I have said elsewhere, we need a NEW CARETAKER GOVT NOW until the General Elections can be held to usher-in a PERMANENT PATRIOTIC GOVT!

  5. Dilrook Says:

    @Ananda

    Whatever investments are made using loans, they must generate a return for the government more than the investment and interest. That was not the case with billions wasted in the north and east.

    Now this government is planning to do the same near the election.

    All development work must be economically, etc. sustainable.

  6. Dilrook Says:

    On Ananda’s other point, I rarely agree with Basil. But on this instance, I agree and I disagree with Wimal.

    Going to an “ambalama” with Sirisena is not going to save the nation.

    Quoted from lankacnews.

    බැසිල්ට එරෙහිව විමල් කට අරී.. බැසිල්ගේ අම්බලම් කතාවට පලුයන්න බනී..
    October 13, 2018 at 10:00 am | lanka C news

    “ජාතික නිදහස් පෙරමුණේ නායක පාර්ලිමේන්තු මන්ත‍්‍රී විමල් වීරවංශ මහතා විසින් ශ‍්‍රී ංලකා පොදුජන පෙරමුණේ නිර්මාතෘ හිටපු ඇමති බැසිල් රාජපක්ෂ මහතා සම්බන්ධයෙන් විවේචනාත්මක අදහස් ඉරිදා ලංකාදීප පුවත්පත සමග දක්වා ඇත.

    දේශපාලනයේදී අතරමඟ අම්බලම් නැති බවට බැසිල් රාජපක්‍ෂ මහතා විසින් ලංකාදීපයට කරන ලද ප‍්‍රතාශයක් ගැන මාධ්‍යවේදී ප‍්‍රසන්න සංජීව විසින් කල විමසීමට මන්ත‍්‍රීවරයා දී ඇති පිලිතුර මෙසේය.

    ‘තාවකාලික අම්බලම් නෑ. මෙහෙමයි සමහරුන්ට තාවකාලික අම්බලම් හැටියට පේන්නේ වැරදි දේවල්. මේක තාවකාලික අම්බලමක් නොවෙයි. මේක තාවකාලික අම්බලමක් හැටියට හඳුන්වන්න බෑ.

    මහින්ද රාජපක්ෂ මැතිතුමා අපි අගමැති හැටියට පත් කිරීම අම්බලමක්ද. එතුමාගේ අදහසට අනුව ඇමැති මණ්ඩලයක් පත් කර ගෙන රට පාලනය කිරීම අම්බලමක් ද. ඒ ආණ්ඩු බලය තියාගෙන ජනාධිපතිවරණයකට එකට යන එක මෝඩ වැඩක්ද. මේ රට වෙන්න තියෙන විපත් වලක්වන එක අනුවණකමක්ද. රටට වෙන්න තියෙන විනාශ ඔක්කොම වෙන්න ඉඩ ඇරල අන්තිමට රට ගන්න එකද නුවනක්කාරකම.

    ඒක නිසා කාට හරි පේනවනම් පාර්ලිමේන්තුවේ 113 හදාගෙන බලය ගන්න එක අම්බලමට යාමක් හැටියට ඒක වැරදි චින්තනයක්. වැරදි දැක්මක්. අම්බලමක නෙවෙයි එක එක්කෙනාට එක එක විදිහට ඒක පේන්න පුළුවන්.

    නමුත් මොන විදියහට හරි රනිල් වික‍්‍රමසිංහගේ පරගැති බලය බිඳින්න ඔ්නෑ. ඒකට විරුද්ධව මොනවා හරි තර්ක ගොඩදානවා නම් එහෙම කරන්නෙ තනිව බේරා ගන්න මිසක් වෙන දේකට නෙවෙයි’”

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