Decision to float the dollar, not a wise thing to do at this moment
Posted on March 12th, 2022

Chanaka Bandrage

Since September last year the government kept the Rs/US Dollar rate static (Rs 203 = US$1).  Sri Lanka being imports driven country, this artificial arrangement served the country well – it kept the inflation under watch. 

It was a very clever achievement by the government (solely due to the efforts of the Central Bank Governor Mr Cabral).

But, on 10 March 2022 the government decided float the dollar. This means that the government would no longer fix the exchange rate for the dollar, it will be determined by the forex market based on supply and demand.

At the time of writing this article (13 March 2022) the dollar has fetched Rs 260 (in the black market it is about Rs 270). 

Inevitably this rate will rise.  Many speculate that before the April New Year the dollar will pass the Rs 300 mark. How much will it be by Wesak?  By Christmas?

Thanks to this latest move, Sri Lanka’s inflation will rise at breakneck speed (before it was a slow-paced rise).

Sri Lanka is now definitely heading the Zimbabwe, Venezuelan ways.  In these countries, a wheelbarrow of cash is needed to buy a loaf of bread. These countries too have long fuel, gas queues and long power cuts.

We are soon going to be not just Asia’s but World’s ‘basket case’.

The decision to float the dollar will hit the banks very badly.  When buying a dollar, the banks will find it extremely difficult to pay an additional Rs 60 – Rs100. Small banks do not have huge money reserves; historically they have made small profits (Sri Lanka has too many banks in the first place).

It will be almost impossible for the banks to earn money in selling dollars as they simply do not have dollars to sell. This is the reason why importers are stuck – banks do not have dollars to open L/Cs.  Thousands of shipping containers are lying in the port unable to be cleared due to this reason.

If we do not safeguard our banks (like our two eyes), they could collapse one after another.  People will lose all their  life savings. Similar things have happened in Argentina and Greece.  Many innocent people committed suicide in those countries.

Those who have citizenships in other countries like in the US, Canada, Australia may flee to those lands. Some may flee secretly in private jets. These jets can take off from Rathmalana airport. It is the poor Sri Lankans who will always be here and suffer.

Once the horse has bolted there is no pointing in closing the stable door.

So, let’s act now; fast.

True, due to the Central Bank’s fixing of an upper limit for the dollar (Rs 203), the expatriates stopped sending dollars (and other currencies) to Sri Lanka through local banks. Almost everyone resorted to the Undiyal system. Undiyal paid about Rs 240 for a dollar (as opposed to the banks Rs 203).

After the Central Bank’s move last week, it is difficult to believe that the expatriates would revert back to the conventional way of sending money here – via local banks. According to pundits, the expatriates are now used to sending money through the Undiyal system and they will not give that up (unless very good incentives are offered to them). The problem that the government failed to foresee is that Undiyal will always give a higher exchange rate than the banks.

The Finance Minister seems to be saying he did the change due to the Opposition’s demands. He further states ‘we need to listen to the Opposition also’.

This is a most ridiculous statement on the part of a Finance Minister.  Does he run the economy according to the whim and fancy of others? Does he not have his own fiscal policy?

Clearly, the government is doing experiments with the country’s economy.  They do not know what they are doing.

The Opposition must also take responsibility for the current mess/crisis.  When the dollar was fixed (which was the right thing to do), they exerted enormous pressure on the government that it should be floated. Even in their meeting with the Central Bank Governor on 9 March 2022, they espoused that floating of the dollar is the only and best solution available for the country to find dollars.  The government heeded to them.

But, after realizing that this has caused the rupee to devalue drastically and inflation to skyrocket, the Opposition now blames the government.

Even previously they have made irresponsible statements such as that loans must not be re-adjusted/re-financed, the government must not seek loan moratoriums etc.  Surely, the Opposition wants to capitalize from the situation, but they should not send the government wrong pathway, especially when they know that the country is currently run by incompetent people.  Ultimately it is the people who suffer.

The Finance Minister blames the hyperinflation on external factors such as Covid 19 and the Ukrainian war.  There is some justification in this.  Due to the Ukrainian war the prices of all imported items will tremendously increase. The country may not be able to sell tea directly to Russia; and also to Ukraine. But, the foolish idea to float the dollar at this moment was taken by him.

The Opposition has responded to the Finance Minister’s analysis well. They say these external factors apply to all the countries in the world. In South Asia only Sri Lanka and Afghanistan have deep foreign exchange problems. Bangladesh, Pakistan and Maldives – all have positive dollar deposits. 

As stated before, there is no doubt that with time to come Sri Lanka’s economic problems will further worsen. The problems will become unbearable to people.

The government is faced with an unprecedented situation.  Though the Corona pandemic is less now, Omicron curve has not yet flattened.  Still about 20 people die a day. A massive US$ 1 billion loan is required to be paid by May/June this year. Various strikes/demonstrations are propping up in various parts of the country.

It is very tough for the government.  No one would like to manage a finance that is in such dire strait.

Finding dollars is the solution to all the present problems.  This has become an essential issue in everyone’s lives.

Sadly, the government has no idea as how to tackle the problem.  Every day the economy goes into deeper red.

Bribery, corruption, maladministration and bureaucratic inefficiency are rampant.  They are significantly contributing to the decline.

At a time when vehicles cannot be run due to lack of fuel, the government is still hell bent on building new expressways.  Everybody knows expressways are a good source for the politicians to earn huge illegal incomes. Millions of dollars are continued to be borrowed for these projects. This is Sri Lanka’s example of ‘Nero playing violin when Rome burned’.

The government still foolishly thinks that mega projects is the only way to achieve development.  Very little is done to introduce micro loan schemes to improve the lives of the down trodden. 

In regards to solving the dollar crisis, the government believes that obtaining currency swap assistance is the best solution forward.  True, in crisis situations they are helpful; but they are only stopgap measures. We cannot go on doing them forever.

Currently none of the foreign assistance comes free of charge. They are all loans.  As it is obvious that we do not have the means to pay off these loans, we will end up selling our valuable assets to foreigners, especially the real estate. Already we have given away precious lands to China (Colombo and Hambanthota), Trincomalee Oil Tanks to India, Kerawalapitiya LNG Electricity plant to USA and thousands of fertile Wellassa lands to Singapore.

JR Jayawardane was very clever in obtaining foreign aid. During his first term (1977 – 1984) the country received many grants from Western countries (including Japan).  The loans received were soft loans. Instead of helping us, the Western countries today are gearing up to impose sanctions on us. TNA and other Tamil parties travel to Geneva and lobby against Sri Lanka. The country was foolish in listening to the leftists and saying No to the MCC grant. MCC funds were to fix the country’s traffic problem (we have bumper-to-bumper traffic in many major cities) and streamline the (corrupt) land transfer deed system.

The government has not done anything substantial to increase exports.  Expanding the garment industry is a good way to earn extra dollars. This is how Bangladesh somewhat prospered.  We have the niche in the world’s lucrative tea market, but we have failed to capitalize.  The world’s tea auctions are not held in Colombo but in Dubai (where no tea is grown).  We produce the world’s best cinnamon, but we do not know how best to market them. Are we getting the correct price for our fish exports? The list of our failures is endless.

It is doubtful that the government has skilled, capable people to undertake its tasks. The cabinet is full of lethargic persons.

Why the government is not seeking or reluctant to obtain IMF assistance is a million dollar question.

Lebanon has sought active IMF assistance, and it is gradually coming out of its grave economic crisis. France is helping Lebanon immensely. Argentina was also rescued by the IMF. Greece was rescued by the EU. Zimbabwe is coming out of its economic mess due to own efforts and South Africa’s assistance.  Like Venezuela, there is no one to rescue us. If things continue this way, we may not be able to survive.

If the government is refusing IMF assistance due to any reasons, it has a duty to tell those reasons to the people.

The government fears that the IMF will imposes strict conditions.  If they do so that will be in order to streamline the country’s economy. The IMF generally acts in good faith.

Currently this is exactly what we need (strict conditions).  Of course we could negotiate the conditions with them.

The IMF may ask the government to reintroduce the corporate taxes that it scrapped soon after coming to power in 2019. The government’s ‘best friends’ will resist the reintroduction of the high-end taxes. The IMF will definitely ask the government to cut costs and reduce the public service (we have one of the Asia’s largest, on a per capita basis). Under an IMF assistance package, the perks and privileges enjoyed by the politicians and top government officials will be drastically reduced.

How to raise new dollars, using our own resources – 10 suggestions

The writer outlines the following suggestions hoping that they would be implemented. They are all simple and easy to implement:

  • We have an abundance of men and women working overseas. They number at least two million (includes the Sinhala and Tamil Diaspora in the West, and workers in the Middle East, South Korea, Japan etc). Lots of them are good patriots.  The government must tap into them in this moment of grave economic calamity – to secure dollars from them.  Surely, if they are approached correctly, these patriots will reciprocate kindly.

Most of our overseas brethren are smart, hardworking and intelligent. In the past they have remitted to the country large amounts of foreign exchange, say up to US$7 billion per year. Now they are not sending money here. As stated before, since recently they have resorted to sending money to their loved ones here through the Undiyal system. Thus, the country has missed out on receiving much needed dollars. Now that the dollar is floated, the government must request the expatriates to send money directly to our banks, and that they must abandon the Undiyal system. They must be told by the government that it is their solemn duty to come forward to help Sri Lanka at its grave financial risk. Our overseas missions can do a lot in this regard.

  • A sound idea is to allow them (long term expatriates who have regularly sent remittance to Sri Lanka) to send a vehicle (car, van. motorbike, three wheeler) to Sri Lanka (without opening L/Cs here), and to pay their customs duty in dollars.  As Sri Lanka’s vehicle import duties are very high, this will be a good source of dollar revenue for the country. This will also ease the current vehicle shortage in Sri Lanka that has arisen due to the prevailing vehicle import ban. The ban has existed for 2 years.

The government is not doing this as the motor car dealers strenuously oppose the scheme. The government must look at the benefit of the scheme to the country and the public at large. It should not be biased towards a small group of people.

  • Apart from vehicles, customs duty for all other imports should be allowed to be paid in foreign currency, and such payees should be afforded incentives/discounts.
  • Expatriates used to send lots of monies to Sri Lanka through the NRFC scheme. Local banks offered them good interest rates. Now our banks are again offering promising rates. Thus, our overseas citizens must re-start sending money here. People were scared that they will lose their hard earned money (dollars and other currency), the government must alley these fears.
  • The government is doing a fine job in promoting tourism.  Despite the worldwide Omicron advance, the government has done well to attract large numbers of foreign tourists.  Are they bringing in valuable foreign exchange?  This is doubtful. The tourists (and Sri Lankans living here who have dollars and other foreign currencies) must be encouraged to pay for their goods and services in foreign currency. For example, those who patronize reputed hotels (3 – 5 star range), holiday destinations should be allowed to pay their bills in dollars. Foreign tourists must be encouraged to pay various entrance fees (Temple of the Tooth, Sigiriya, Dambulla, various botanical gardens etc) in foreign currency. Fees should be slightly lowered to those who pay in dollars.
  • Sri Lankans who are buying electrical appliances like TVs, refrigerators, washing machines etc from leading stores should be given the option to pay in dollars. Then, Incentives must be afforded to them such as tax concessions.
  • A Duty Free shopping complex must be opened in Colombo where trading must be done in foreign currency. After judging its success, two more such complexes must be established in Kandy and Jaffna. The duty free shops in the two airports must be modernized.

(The government must ensure that the Central Bank will buy dollars from the respective businesses promptly after paying the dollar collectors a reasonable commission in addition to the actual item price that they have sold).

  • Sri Lankan Airlines tickets should be sold locally in dollars and other reputed currencies to all those who have dollars and those reputed currencies. (With immediate effect the government must scrap the air routes that the Sri Lankan Airlines is making long term losses).
  • The Central Bank must have a scheme to buy dollars from the private money exchange market.  There are large scale dollar deals occurring in the private market each day.
  • The government can set up a ‘Support Sri Lanka’ dollar account with the Public Trustee and the Government Auditor as Joint Trustees to manage it.  If it is honestly managed, expatriate Sri Lankans and Sri Lanka’s overseas friends will contribute. Ukraine has established such a fund.

What we need to realise is that all these new dollar revenues would collectively add to a sizable amount.  Today, every dollar is valuable to the country.

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