SRI LANKA NEEDS TO CHANGE ITS MONETARY UNIT
Posted on May 25th, 2020

BY EDWARD THEOPHILUS

Historical evidence of Sri Lanka unambiguously indicates that she had been used monetary units in assorted names in the past before the current monetary unit, Rupee introduced into the country.  The fascinating coins triumphal arch installed in Bank of Ceylon Head Quarters in Colombo displays the models of different monetary units had been administered in Sri Lanka in history.  A controversial view on currency printing in Sri Lanka has already expressed by a Sri Lankan academic that counterfeit coins of foreign currencies were printed in Sri Lanka before 2000 years ago and many so-called archaeologists have not expressed an opinion on this matter. 

Before the rupee has introduced to Sri Lanka as the legally valid monetary unit for exchange purposes in 1872, several monetary units were used during the European rules, and Protégées used their currency unit, and Dutch administration used monetary units imported to Sri Lanka from Indonesia. Robert Knox, who was a moving prisoner in the country during the regime of King Senkadagala Rajasinghe had recorded that Portuguese and Dutch monetary units were used as valid exchange units in the Kandyan Kingdom too and King Rajasinghe also accepted such foreign monetary units as valid currencies for exchange purposes.

After taking over the power by British rulers, Sri Lanka was introduced British pound as the valid monetary unit and historical evidence denotes that first batch of treasury notes for exchanging purpose was issued in 1927 canceling the Rix Dollar unit, which had been widely using in Sri Lanka before the introduction of the British pound.  How Rix Dollar came to use in Sri Lanka is formidable to trace in history without clear evidence, but it can be assumed that from the later part of Dutch rule in Sri Lanka to 1827, this particular Rix dollar had been used in the country for exchange purposes. The writer of this article has never seen this currency note so it is difficult to explain the style of it.

The word RUPEE is assumed to be a term of Bhasha Indonesia (Originated from Sanscrit) and the Rupee or Rupiah monetary unit is being used as an exchange unit in Indonesia, Maldives Islands, Sri Lanka, and India.  The procedure adopted by British Rulers when they were canceling the Rix Dollar unit in the country was the parity of 10 Rix Dollars to a British pound.  When British rulers introduced Rupee into the exchange system of Sri Lanka, the exchange rate was one British pound equal to 10 Ceylon rupees.  That exchange rate was higher than the foreign value of current USD or AUD.  The most horrible story and the serious question of many Sri Lankans at present are why the foreign value of Sri Lanka rupee badly depreciated despite the abundant thrust of economic development and measures to maintain foreign exchange reserves. It is agreed with the economic theory that foreign value to currency would not automatically attract, but it should fulfill certain favorable economic conditions in the country to freely appreciate the foreign value of a currency unit. The conditions are vulnerable to sudden changes and past information might not relevant to the present or future.

After the introduction of Rupee into Sri Lanka’s economy, paper currency was issued by the Treasury but that authority was transferred to the Currency Board System, which established by  No 32 Currency Ordinance of 1884.  There is no argument that Currency Board System was an authority of a dependent economy, however, the system was able to maintain the stability of the external value of Sri Lanka rupee to a certain extent compared to the weak independent central banking, which is powerless when the foreign value of the currency is subject to a sharp decline in the open market. Although it is the prime objective of the monetary authority of the country as indicates in the original central bank act the central has failed to achieve the prime objective. 

Another weak central bank policy of Sri Lanka is it has no strict policy focus on short term market intervention to secure the value of the currency as it has a lower level of reserves to make quick buying and selling activities to adjust the rate and the International Monetary Fund may not agree with a short-term play to maintain the value of Sri Lanka’s rupee when there is a small quantum of foreign reserves.

It is also an issue that if the central bank goes such practice, can the economy respond to bank actions bearing losses or gains might be created.  The strategic plan to stabilize the foreign value of Ceylon rupee under the Currency Board System was the linking of Sri Lanka rupee operations with the British pound and the influence of a strong economy supported to stabilize exchange value at the money market.  The strong economic conditions not in one or two sectors but the favorable conditions in the entire economy are the secrets of strong currency value in any country. We can see that many problems in Sri Lanka’s economy despite the favorable reflections after 2010 especially to the government budget and the balance of payment.

Although certain socialist economists in Sri Lanka (Gunesekera, H.Ade S, From Dependent Currency to Central Banking in Sri Lanka) criticized the linking Sri Lanka rupee with the British pound under the Currency Board System pointing to certain fluctuations, which had been occurred in line with the British pound. It is proud to note that the exchange parity of Sri Lanka rupee with the British pound remained higher, when Sri Lanka gained political independence in 1948, one British pound was equal to 13 Sri Lanka rupees.  The history of European monetary units demonstrates that they were badly depreciated due to wartime economic depressions or recessions but they always recovered as soon as possible by the use of appropriate economic policy actions.  Therefore, the fluctuation of rupee value under the Currency Board System was not too bad to make extravagant criticism. 

After independence in 1948, Currency Board System in Sri Lanka was canceled in terms of the recommendation made by John Exter and established the Central Bank of Sri Lanka with several fundamental objectives about to foreign and domestic value of Sri Lanka rupee.  Although these authoritative changes have not been effective for radical changes in linkages of Sri Lanka rupee with British Sterling Pound as the major export companies of Sri Lanka were listed in London Stock Exchange and the price of export commodities was tagged in British pound.

When contemplating other countries where are used rupee as the monetary unit, Sri Lanka uses cents as a single subunit, and other countries use deviated named subunits. For example, India could be given.  We can imagine that the reason for a single named cents” for the subunit is that Sri Lanka had been used Rix Dollar and Cents before the introduction of rupee in 1872.  Therefore, the Rix Dollar name for the currency unit of Sri Lanka is unique and has a significant historical value and the country can rethink to replace the Rix dollar and cents under the current modernization process. After winning the terrorist war in 2010, Sri Lanka has become a new country with different attitudes and people of Sri Lanka committed to modernizations and the application of new technology and greater cooperation with other countries irrespective of the political ideologies.

While Sri Lanka rupee had been linked with the British pound sterling foreign value remained in a stable parity until the official depreciation of the British sterling pound in 1967. The devaluation of Sri Lanka’s currency was subject to over-value the Rupee at the foreign exchange market, and had potentials to disadvantages to the export economy.  The government of Mr. Dudley Senanayaka officially depreciated Sri Lanka rupee by 20%, which was advised by the International Monetary Fund despite criticism made by left political parties on the rising the cost of living and giving a fairly higher pay rise to Sri Lanka’s workforce.  Although left political parties promised to revalue Sri Lanka’s Rupee when they will come to power in 1970, the elected collision government did not revalue Sri Lanka rupee and the cry of left political parties on the revaluing of foreign-value of Sri Lanka’s rupee was rhetoric to attract political supports at the election rather than implementing policy actions.  The policy action to officially depreciate Sri Lanka rupee by 20% in 1967 was an accurate decision for securing the export market. 

In addition to official devaluation, Foreign Exchange Entitlement System which was an unofficial devaluation strategy introduced in 1968 had been subjected to devalue Sri Lanka rupee by 30%, and since then Sri Lanka rupee was gradually distancing from the British pound and aligned to USD.  However, unexpected market shocks in 1972 to USD, and gold parity, and Oil crisis in 1973 laid a foundation to further depreciate the foreign value of Sri Lanka rupee but adjustable peg system and manage currency policy of Central Bank were able to maintain artificial foreign value for Sri Lanka rupee despite international advice for depreciation or floating the currency.  In 1974 one USD was approximate with 6 Sri Lanka rupees, which was a favorable condition without sufficient foreign currency or gold reserves but invited tight exchange controls for international capital movements.

When Sri Lanka’s economy was opened to the world in 1978, Sri Lanka rupee hasn’t had economically strength environment for facing domestic and international economic trends, and the pressure mounted from the terrorist war situation since the early 1980s to 2010, the foreign value of Sri Lanka rupee dramatically eroded despite the positive objectives of the Central Bank to maintain the domestic and foreign value of Sri Lanka rupee, which currently values one USD equal to more than 180 rupees.  There is no doubt that the floating of rupee is appeared to be beyond reality. 

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