How our Central Bank sidetracked their real duty of safeguarding our foreign exchange
Posted on June 20th, 2020

By Garvin Karunaratne

It is sad to note that ever since the International Monetary Fund(IMF) took over running our country at the end of 1977, the Central Bank has been playing a dubious role.

Let us take the devaluation of our Rupee. I quote from my book: How the IMF Sabotaged Third World Development:

In 1977 with the Structural Adjustment Programme being enforced on Sri Lanka  the control of our foreign exchange went out of the control of the Central Bank to the foreign banks and to the private sector.

President Jayawardena meekly submitted and the Rupee was devalued from Rs 15.00 to Rs. 32.00 to a pound sterling in a few months at the end of 1977. That was a devaluation of over a 100%! Thereafter the IMF repeatedly tried to get the two State banks privatized but the Government resisted. In many countries the State banks are no more  and the foreign banks really control the foreign exchange of the country.

Let us go into detail because no one will believe this. It is really the height of absurdity to even think that the foreign exchange of Sri Lanka is controlled by the foreign banks and the private companies.  But this is the hard truth.  Even our celebrated economists fail to get out of the clutches of their text books to understand how  the IMF has commenced controlling our economies.

The IMF itself has said:

In a free floating regime the exchange rate is determined by the market forces. The Central Bank does not intervene in the process.. The Central Bank has control over the domestic money supply”

Let us look at what happened in reality when Sri Lanka  free floated the Rupee in 2001.

The incoming foreign exchange itself was manipulated by the foreign banks to earn profits. When the two State banks had to pay a large bill in foreign currency and the two public sector banks did not have sufficient foreign funds to meet the bill, they had to buy foreign currency from the foreign banks that had collected  foreign currency and were hoarding it,  The foreign banks then increased  the price of the foreign exchange they held. This did happen in Sri Lanka on 25/1/2001 when the US $ that was trading around Rs 82.00 was increased to Rs. 100.00 and Rs. 106.00. The profit in this increase goes to the foreign bank. The State banks had to buy the  dollars at the high price quoted by the foreign bank. The Central Bank of Sri Lanka was helpless. The Central Bank said: ’In a free floating regime the market forces determine the exchange rate.. The Central Bank does not intervene in the process.. The Central Bank has control only over the domestic money supply.’(The 17/2/2001)

This is the policy even today(2020) Thus even the foreign exchange earnings of a sovereign country  is a commodity exploited to make a profit.

The manipulation of currencies is quite a common occurrence”.(From How the IMF Sabotaged Third World Development(2017, pg 44)

My opinion is that we do not require a vast Central Bank to handle the domestic Rupee. A senior administrator from the Administrative Service can easily handle that task with a few Accountants and clerical officers

This detail of what did really happen in Sri Lanka on 25/1/2001 illustrates the predicament in which our country is faced. We do not even get the foreign exchange that comes in. The foreign exchange that is collected by each bank is treated as the property of that bank and they can manipulate an increase in the sale price by hoarding the currency they have collected. Each bank fixes its own buying and selling rates. Let me tell my own experience of how the foreign banks hoard our foreign currency. – In around 2000 I instructed my Bank, the Bank Of Scotland to remit a thousand pounds to my NRFC Account at the Bank of Ceylon. I was due to go on a holiday to Myanmar and I needed dollars. Strangely this money came to my NRFC in Rupees and the Bank of Ceylon Foreign Branch told ,me that this happens very often. They told me that the Rupees were sent by Standard Chartered Bank and directed me to them. Standard Chartered refused to credit the money in pounds to my NRFC account and I had to have a bitter fight with them for two full days, even throwing my weight about to get the money in dollars. At that times there were around four SLAS officers who had worked directly under me who were Secretaries of important Ministries and I had to quote their names.  With that the bank caved in. This proves the fact that the local foreign banks fight to get hold of the dollars that come in.” (From: How the IMF Ruined Sri Lanka & Alternative Programmes of Success.

This happened in 2000 and imagine the hoarding of our foreign exchange the foreign banks have been doing upto now.

Going further into our foreign exchange- what happens to the foreign exchange that is collected by private registered money changers- and they do collect far more than all the banks put together. The fact is that the foreign exchange collected by money changers is sold immediately to customers with a profit. There too the Money Changer fixes the  rate. It is important to note that this money does not come into thde

This collection does not come into the coffers of our Government. 

What is the possible remedy. This is simple. Have a currency board and the Government has to collect the total foreign exchange that  comes in, The Government has to fix the buying and sales price and all banks and dealers have to buy and sell at the rates fixed by the Government. Professor Steve Hanke of the USA  is perhaps the only world authority on this aspect. He came in when similar foreign exchange  problems cropped up in Turkey and in Indonesia. There he recommended that the only way is to abandon floating and install an orthodox currency board with a fixed exchange rate.”

It is the height of absurdity to allow our hard earned foreign exchange to be manipulated by foreign banks- to make a profit.

To my thinking  . Every dollar that comes in has to be the guarded property of the Government.

There are further developments that have come about which deserves immediate attention  by our Central Bank.

In the past few decades money transfers are made without reference to banks. Dollars are paid in a foreign country to  dealers and telephone instructions are made to hand ovcr  rupees in Sri Lanka. No dollars get sent to Sri Lanka.  Ways and means have to be developed to get this money sent to Sri Lanka in dollars.

There are many investors that bring in a small investment, get down to trade in the local rupee and take away the profit in dollars from our reserves for ever.  This is I think not allowed by the recent decision of the Government not to allow the  repatriation of  profits. However investors would have entered into agreements to enable them to take the profit in dollars. These go from our reserves. Our country is the net loser.

Another recent development is for Uber eats and Uber Cars to trade in local rupees and take away profits in dollars. This is not a small amount when one notes that Uber Eats delivered 3 million orders within 3 months( AdaDerana:17/10/2018) Here too it is our foreign exchange reserves that gets depleted when profits are repatriated. Hope this is covered by the recent decision to stop repatriation of profits.

Another development is in hotel bookings. Advertising hotel availability is today, totally handled by foreign companies based overseas. They take the bookings but the condition is that the payment is to be collected by the hotel in local Rupees. However the hotelier gets an invoice from the international booking agency to pay 15% of the collection. The hotelier takes this invoice to a bank and the bank pays it in dollars. Here too our reserves suffer. Not a dollar has come in but out goes the payment in dollars again from our reserves. In fact it is important to note that tourism as happens today does not bring in foreign earnings.  The answer lies in out tourist authority running a business to market hotel bookings  using the internet and charge in foreign currency. There is no other way. An immediate decision is to stop paying the 15% to the foreign booking agency in dollars unless the hotelier gets paid in dollars and the dollars are banked by the hotelier in a bank. . 

It is time that our Central  Bank sleuths come out of their slumber and get down to  real hard thinking as to what happens to our foreign exchange. It is the Central Bank and no one else that can look into this.

Garvin Karunaratne, Ph.D. Michigan State University

Author of  How the IMF Ruined Sri Lanka and Alternative Programmes of Success, Godages, 2006 How the IMF Sabotaged Third World Development, Kindle/Godages: 2017


One Response to “How our Central Bank sidetracked their real duty of safeguarding our foreign exchange”

  1. aloy Says:

    ” The hotelier takes this invoice to a bank and the bank pays it in dollars. Here too our reserves suffer. Not a dollar has come in but out goes the payment in dollars again from our reserves.”

    This cannot happen without the knowledge of the CB officials; they are not babes.

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