BY EDWARD THEOPHILUS

When Sri Lanka ended the ethnic war fourteen years ago, many analysts expected that the declining trend of additional military expenses, combined with the reducing of many public expenditures, improving productivity, would be positively accomplished the economic potential of the country and the external value of Sri Lanka rupee will increase. Addition to the above gains, the increasing of economic performance and the growth of merchandise exports and the development of export related services would be supported to an increase in external value of the Sri Lanka rupee. Despite such expected progress, rupee value has not been improved during the past fourteen years and it is a question for many. When critically evaluating the problem, the significant reason was foreign debt service that demands a large volume of foreign reserves to make debt service during the one and a half decade and political influence by corruption also contributed to the problem.    

While giving major reasons for not improving rupee value, another vital factor to consider is whether the proceeds of foreign loans have actually been used for the purpose and did political leaders in the country have misused the proceeds of foreign loans.  If foreign loans have been used for productive purposes, a positive impact on the economy would have incurred an increase in foreign exchange earnings. People don’t know how spent the earned foreign exchange, but responsible persons who were in the monetary authority have an accurate picture about it and the members of the authority were back scratchers of powerful politicians and the truth was camouflaged.       

The outcomes generated from the economy are not encouraging and shown as an opposite direction than expectation. The external value of the Sri Lanka rupee during the past 10 years has in a declining trend with a slight improvement in certain situations, and some experts express that the external value of Sri Lanka rupee would be improved by the worldwide de-dollarization process. How far this idea would become practical could not exactly express, however, the size of economic transactions of the country might not provide supportive evidence for the positive outcome of exchange reserves. The trade between India and Sri Lanka for a reasonable volume has supported for a barter system and if this situation expands to transaction between China and Sri Lanka, the de-dollarization might support to improve Sri Lanka rupee. However, such changes would not be positive as long as an enormous volume of foreign reserves needs for debt service.

The official statistics published by the government and the annual report of the Central Bank evidence that the external value of the currency unit has been declined rather than an improvement during the past ten years. It is an actual result despite the expectation, and when many considered the foreign value of rupee, the debt servicing related exchange costs have not taken into consideration and the holding of debt service would not be a positive policy action for the external value of Sri Lanka rupee. Although the president of Sri Lanka states that the economy will recover in September, it is just estimation and if the president could make the way to write-off, the foreign debt it might positively support.

Import costs have been increased during the past 10 years, supporting the upward inflation and declining the foreign value of the currency unit. It was a significant reason for the decline in foreign value, despite expected improvement? The other factors were growing foreign debt and spending earned foreign exchange for foreign debt service than the cost of imports. The importing goods and services and gaining foreign loans had resulted in the corruption and misuse of exchange earnings.

Policymakers introduced various rules and regulation however, they were not working in the economy, and corruption that was supported by the political authority allow to misuse of foreign exchange earned. They were major contributing factors for not improving the external value as expected. Compared to many countries in the world, ruling political parties unreasonably being worked against the value determination of the currency unit and the market operation of the currency unit gained a declining trend.

The administration of foreign exchange earned by the country was par with the regulation issued by the Central Bank. Regulation was flexible to break them by politicians and many evidence recorded that earned exchange was misappropriated by politicians and their associates.

The practice of Sri Lanka regarding the foreign asset management has not been accustomed to generate benefits to the country despite the public talks. The other nature that negatively affected on the foreign value of rupee was increasing foreign debt, which increased to above 35% of GDP. Increasing foreign debt was caused the increase in payment (expenditure) of foreign exchange, it has been affecting the external value of the currency unit. The authority knew this situation and did not advise the politicians to stop misuse of foreign reserves. And the monetary authority made a blind eye and allowed politicians to decide what they want.

Many politicians and their henchmen used foreign exchanges earned by the country for personal using purposes, violating regulation and the monetary authority directed the blind eye to these corruptions.     

However, now the authority attempts to explain that the external value of Sri Lanka rupee has been improved after the agreement with IMF since this year, and such analysts have not given detailed reasons for the sudden improvement of the external value, they are reluctant to openly talk about the influence of a de-dollarization campaign in the world for the improvement of rupee value. A considerable reason is changing the economic environment of the world after the COVID-19 downturn, resulting the new environment for international business.  Influence of the de-dollarization is negligible to the external value of the Sri Lanka rupee because the quantum related to international transaction of Sri Lanka is diminutive and it is not comparable to oil transactions of Pakistan and Bangladesh.  

Demand and supply of foreign exchange will be the fundamental factor for the foreign value of Sri Lanka’s rupee and when it considers the power of Sri Lanka’s economy, the possibility of influencing the Sri Lanka Rupee is negligible. However, the quantum of foreign exchange earned and carefully spending such earned exchange would be influenced the determination of external value.

The factors which are influencing the improvement of external value of Sri Lanka rupee are macroeconomic in nature, and the reviving the economy after the downturn of COVID-19 is the major reason, and if the Sri Lankan analysts consider the impact of the de-dollarization is misleading. Mathematically, the price elasticity as a factor of export demand and supply may be calculated and my opinion is it would be tiny that would the imperceptible portion. Many analysts in Sri Lanka are stuck with micro economic factors, because they are in a difficult situation to identify them or nothing in a position to count them. Therefore, many analyses are not realistic analysis.

Although the campaign of de-dollarization appeared like a dream by the supporters of the US Dollar at the beginning, now it shows de-dollarization will be a reality. Many countries have used other currencies, such as Indian rupees, Chinese currency for large bill settlement in international trade. There were various factors concerning with the campaign of de-dollarization and, for instance, Sri Lanka uses Indian rupees for the settlement of bills with India. It reduces the stress of Sri Lanka’s economy.

The currency authority in the world must understand that the US Dollar based settlement system procreated many problems to developing countries and making small credit supports is not give a successful solution to stick in US Dollar base payment system. The US authority should have understood this truth and should have proposed a more reasonable payment system like a multiple currency system on the globe. If such a system originated from the USA, the de-dollarization headache would not arise and more harmonise system works throughout the world.

The sudden improvement of the external value of the Sri Lanka rupee concerns with several factors and they are macroeconomic elements and all factors relate to this economic consequence cannot be openly discussed because macroeconomic factors like various plants in a jungle. Sometimes, they may not be all elements because complex of influence, and many factors are hidden and the value of factors influencing needs to be mathematically calculated.  The best action is to conduct mathematical research that identifying factors and calculating the relationship between factors and the value of the improvement of the external value. A multi-correlation investigation would be an excellent method and many analysts have not done such detailed research and express views.

According to assumption, de-dollarization may have a strong relationship with the improvement of the external value of the Sri Lanka rupee, but it is not a truth acceptable and subject to scrutiny. Public speaking of many analysts who gain benefits from the Western funded research institutes are reluctant to talk about the subject and they attempt to show silence on the matter.

De-dollarization and many embargos for Russia might be influenced to improve the external value of currencies of developing countries.  After the conference of BRICS could be known about this and financial analysts in Sri Lanka should not scare to express independent opinion.