Who benefit from devaluation
Posted on October 16th, 2022

Sugath Kulatunga

The two-fold objective of a devaluation exercise is to stimulate exports and reduce imports. For exports to increase it depends on elasticity of supply and demand. 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. Critics of the IMF claim that the mandate of the IMF is to make imports from the developing countries cheaper to Western buyers and make poor countries to pay more for their imports.

Sri Lanka has had a series of devaluations and IMF interventions from 1948 onwards, which has been a futile exercise. When at the time of independence in 1948, the US dollar was only 3 rupees and now it is over 360 rupees. We continue to chase the dollar without focusing on the real problem of poor export performance.

The direct beneficiaries of devaluation are the exporters but for some exports like apparel the local value addition is limited to labour. Where the value of imported raw materials are high the the devaluation gain is offset by the increase in the cost of imported raw mterials.

Total value of exports even today is around US$ 20 billion whereas the GDP is US$ 80 billion, which is four times the value of exports. Therefore, rupee depreciation will benefit only a small section of the country.  The exporter deserves encouragement, but it is better given on increased investment and exports and not for doing nothing.

Devaluation is in one sense is robbing the fixed income earner and the saver and offer the benefit to the trader and the exporter. The recent devaluation has devalued the very existence of the fixed income earner. His hard-earned savings are worth only half the original value. He is not able to cope with the galloping cost of living. Poverty has increased and child malnutrition is rising. On the other hand, the trader is making unconscionable profits. Some time back the Minister of Health announced in Parliament that the pharmaceutical trade was holding four months stock of drugs. Within a few days the industry was allowed a 27 % increase in drugs. The traders increased their prices to over 200% with immediate effect and now there is no price control at all.

From  March this year up to May the LRK has depreciated by 44 %. http://bizenglish.adaderana.lk/sri-lankan-rupee-depreciated-by-44-against-dollar-so-far-this-year/. Even with CBSL interventions and tight import control there is no light visible at the end of the tunnel.

Rather than export led development and aim at a healthy balance of trade and payments and provide productive employment, all governments resorted to devaluation and prolific borrowing as the remedy.

The outcome of many devaluations and IMF prescriptions has been negative as far as the trade balance is concerned. The LKR which was 8.83 in 1976 declined 15.56 to a US dollar after the 1977 devaluation and slumped to 100 per $ in 2005 and was 135 to a $ in 2015 and today it is frozen at 365 per one USD.

What have we done to stimulate exports? Have we diversified our supply base other than in low technology apparel industry which came to us to take advantage of the US garment quotas? Have we introduced new technology? Have we made full use of our human resources and physical resources .

The following graph compare export growth, import reduction and trade balance with each episode of devaluation. https://www.sundaytimes.lk/110417/BusinessTimes/bt09.html  17/4/2011

The top half of Figure 1 shows the annual effective LKR devaluation rates since 1950. The bottom half shows the variation in imports, exports and current account balance, taken as percentages of GDP of the respective year, to maintain uniformity. Please see the highlighted five years periods after three significant devaluations. No significant improvement is seen in exports or current account balances.

Were our policy makers idiots or criminals or both.


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