The Government ought to understand that increasing the interest rate by only 1% is purely insufficient to defend the rupee at Rs. 230 or Rs. 240.
by Harsha de Silva
In the past year, we repeatedly urged the Government and Central Bank against holding the dollar at Rs. 200, as it benefitted neither the Government nor the people of this country. Excessive money printing undermined the credibility of the US dollar peg at Rs. 200, as a result vital foreign exchange began to flow through unofficial channels. Inward remittances particularly witnessed a drop of 62% in January 2021 compared to the year before. In the last 7 months alone, remittances have reduced by approximately $2.5 billion. Dollar peg and laws such as 25% forced conversions of profits pushed exporters, of both goods and services, to keep their profits overseas. Consequently, the Central Bank has ‘burned’ at least $1.5 billion to defend the peg at 200, thus we can deduce that the Government has made a staggering loss of $4 billion due to detrimental political decision making on the economy.
Last night, the out-of-options Central Bank Governor Nivard Cabraal decided to increase interest rates by 1% and devalue the dollar to Rs. 230. However, it should be noted that this is not a depreciation of the rupee, instead a devaluation to a rate decided by political forces. Thus, we immediately warned that this is not sustainable, as it is not the rate determined by the market. Nonetheless, this morning we learned that the Cabinet has decided to give an additional Rs. 38 to each dollar for remittances, but it is not clear if this additional Rs. 38 is to the previous pegged rate of Rs. 202 or the rate fixed last night for Rs. 230 by the Central Bank. In the case that it is for the previous pegged rate of Rs. 202, it means that they would be offering Rs. 240 to the dollar. It is a complete muddle, as no one knows whether the rate is Rs. 230 as stated by the Central Bank or Rs. 240 decided by the Finance Minister, as a result foreign exchange markets have all frozen today. All government policy directives have been blunders thus far, when will they listen to expert advice? Either they float the currency and let the market decide the rate or they initiate a consistent and sustainable policy direction.
Moreover, the Government ought to understand that increasing the interest rate by only 1% is purely insufficient to defend the rupee at Rs. 230 or Rs. 240. Economic theory demonstrates that it is impossible to implement a stabilization program with a mere 1% increase. Both the devaluation and increase of interest rates have to go hand in hand. Take for example; the 1% increase of policy interest rates to 7.5%, while the inflation stands at 17% is insufficient because there is still a massive 9.5% difference. It is impossible to stabilize the economy with a negative 10% interest rate, one change without the other is actually impeding sustainable change. Additionally, it should be noted that others individuals have tried implementing a dual rate but it has not worked, thus I urge the Government to devalue the rupee to a rate much closer to the black market rate. We as a responsible Opposition have repeatedly stated our views and suggestions to the Government over the past two years, however they went unheard. These policy blunders have cost the Sri Lankan taxpayers dearly approximately $4 billion!
The Central Bank Governor reiterated his firm stance, the day before yesterday, that he will not devalue the rupee, it was nevertheless decided to devalue the rupee last night following a phone conversation between Jaikshanar and Basil Rajapaksa. Furthermore, the current devaluation is solely to please the Indian’s in order for the Finance Minister Basil Rajapaksa to secure a visit, as devaluation was a precondition for the meeting. We would not be in this current crisis if we had devalued the rupee sooner consequently, we are in the midst of the biggest forex crisis that independent Sri Lanka has ever faced due to egotistic, uncoordinated and short-term policy making by the incompetent Rajapaksa Government.
Harsha de Silva is a former Minister and the Member of the Parliament
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