Posted on February 28th, 2022

Sugath Kulatunga

The question before policy makers today is whether to seek a bail out from IMF and face a certain devaluation of the rupee. It is like the proverbial curate’s egg. Sri Lanka has had several devaluations of the rupee. I am not aware whether a proper evaluation of the impact of devaluation on exports and the economy has been done. Critics of the IMF claim that their mandate is to make imports from the developing countries cheaper to Western buyers and make poor countries to pay more for their exports. If developing countries try to restrict imports with tariff controls, there is the WTO to prevent that.

An export consignment of 10$ million dollars from Sri Lanka during 1982 when exchange rate was Rs 21 to the dollar, due to devaluation, in today’s exchange rate will cost the foreign buyer only $1million. A tenfold advantage. Many IMF and WB experts used to visit the EDB during the 1980s.

Justification of devaluation is based on that it makes the domestic currency cheaper relative to other currencies. … First, devaluation makes the country’s exports relatively less expensive for foreigners. Second,  devaluation makes foreign products relatively more expensive for domestic consumers.      

Certainly, the buyer interest of developed countries are well looked after by the IMF. But has devaluation discouraged imports? Despite the Dollar crisis and restrictions on imports, volume and value of imports have continued to soar. Even exporters have to pay higher prices for the import of raw material used in production for export.

Old timers will remember how with an annual salary of Rs 4080 how staff grades lived a semi luxury lives and even saved some money. Now they are in debt.

This is what a reputed economist Nicholas Kaldor had to say on devaluation—

The prescription, generally recommended by the Fund, to improve the current account in such cases is a program of phased financial retrenchment, the liberalization of foreign trade, and, to make all this possible, substantial devaluation.

The main objection to this approach is that it assumes devaluation is capable of changing critical price and wage relationships that are the outcome of complex political forces and that could not be changed by domestic fiscal and monetary policies. But it is more likely that a large-scale devaluation will end up reproducing much the same initial price relationships at the cost of a great deal of additional inflation. This outcome is, of course, particularly likely in developing countries, where the gap in the standard of living between the urban and rural population is large and where modern industry or the so-called organized” sector of the economy) extends to only a segment of the population.”

There is some truth that devaluation makes an economy instantly more competitive in the international markets. But it has not always worked as was the experience of–the U.K.’s 25% devaluation during 2007 and 2008 when it failed to spur the anticipated boom in demand for British goods.

For exports to increase depends on elasticity of supply. At the time of devaluation in 1977 our exports were mainly Tea, rubber and coconut products which made up of around 70 percent of the export value. There was hardly elasticity of supply in these plantation commodities. On the other hand, there was a pent-up demand for imports. Imports increased from Rs 6 million in 1977 to Rs 14.6 million in 1978. Even today the pent-up demand continues, and imports are bound to increase despite higher prices.

Wages do not keep pace with devaluation. For instance, in November 1977, Sri Lanka devalued the currency from about Rs. 5.95 = US $ 1 to Rs. 16 = US$ 1. But there was no commensurate wage increase.

Value of exports even today is around US$ 20 billion whereas the GDP is US$ 80 billion, four times the value of exports. Therefore, rupee depreciation will benefit a small section of the country and will not be the best option for the majority of the people and will leave consumers worse off.

One is made to believe that the west has merely graduated from exploitation of developing countries (DCs) with the use of arms and occupation, which had a cost, has now resorted to use sophisticated policy instruments to exploit the developing countries at no cost to them. An instrument they have used effectively is the devaluation of the currency of the DCs which makes the products of DCs cheaper for them. If a developing country tries to restrict imports then they invoke the WTO rules to prevent it. You would remember how the EU Ambassadors ganged up against the recent import restrictions imposed by the present government. The system is highly loaded against developing countries. Some countries resist but others like us accept them and even defend them.

Evidence on the ground shows that devaluation is not a solution. Singapore has the strongest currency in Asia. It is not the exchange rate but the products and productivity that matter. We need skills, capital, and technology. We need to change our education policy to be attuned to a high technology policy. In order to commercialize what comes out of technology we need to have an investment policy which is not averse to risk. In other words we need venture capital. Look at what happened to one of the best technical breakthroughs we had in nano technology. We did not commercialize the nano urea project and sold it off to India. The NDB was established to meet challenges like this. We privatized it.  

Let us look at the exchange rates of a few Asian countries.

 Bhutan N 74.67, Indian Rupee 74.67, Malaysian Ringgit 4.187,Nepalese Rupee 120.3, Singapore Dollar  1.3467,Pakistan Rupee 177,Sri Lanka Rupee 202.97Philippine Peso 51.385, Maldive Rufiyaa. 15.38, Bangladeshi Taka 86.4514.

They have devalued gradually and retained the strength of their currency. Every single country in this list, including Bhutan and Nepal, boasts of exchange rates better than ours. Bangladesh is one of our competitors in the apparel market. Bangladesh has increased their exports in leaps and bounds. Maldives is a competitor in tourism. They have increased their tourist earnings despite a strong currency which is less than 16 rupiah to a dollar. A US Dollar has more than 16 times buying power in Sri Lanka than in Maldives.

The strategy is not to stick to a fixed rate of exchange but adjust it gradually as a marketing strategy and not on IMF theories. That is what a village trader or a Super Marker would do to retain and expand their markets. They do not cut their price in half to meet competition but make a small adjustment but add value to the product.

What is the evidence on the ground that we have gained through devaluation? Let us look at the results in price increase in dollars in our two main commodities from the time of first devaluation to the present time. In November 1977, Sri Lanka devalued the currency from about Rs. 5.95 = US $ 1 to Rs. 16 = US$ 1.

$ to LKR             1978.  at   16     Now at 250   % increase from 78                                                                  US$                  US$                    US$                                  

Tea                          2.07                  2.56.                  19.1

Rubber   RSS          0.95                  1.88.                    49.4

 One can work out what should have been the price increase at 1% compound interest for the last forty years.

The American Business-Higher Education Forum said in 2005 that ; Increased global competition, lackluster performance in mathematics and science education, and a lack of national focus on renewing its science and technology infrastructure have created a new economic and technological vulnerability as serious as any military or terrorist threat.” This is more relevant to Sri Lanka.

One might argue that we do not have the resources. Was Singapore resource rich? One of the most sophisticated iron and steel industries, POSCO is in South Korea which does not have iron or Coal. Korea invested in POSCO despite strong advice against it from the World Bank & IMF.

We have not exploited our minerals and marine resources. There can be value addition to our coconut products and spices. The immense potential of the Services sector has not been fully tapped.

What is lacking is not resources but imagination. Devaluation can be done with the stroke of a pen but for sustainable development we need imagination, innovation and application.

The article in the website quoted below on – The Korean Steel Industry in Retrospect : Lessons for Developing Countries” should be a compulsory manual for policy makers. of Form

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