Fear of Rupee depreciation | Daily News

Fear of Rupee depreciation

The steady depreciation of the Sri Lankan rupee appears to be the latest obstacle confronting the government, as it seeks to exert a semblance of control over rising prices with the prospect of national elections looming in less than two years.

At beginning of this week, the United States dollar stood at 167 rupees with no indications that the rupee will appreciate in the foreseeable future. This provides a fertile ground for the opposition to berate the government and, as public discontent with the soaring cost of living grows, those in the corridors of power are concerned that there would be political repercussions.

Of course, apolitical observers agree that the entire blame for the current crisis cannot rest with the government. It is a culmination of global economic factors, compounded by the drastic trade policies adopted by the United States government that has led to the current predicament. As such, it cannot be easily undone by a country such as Sri Lanka whose economy is dwarfed by its global competitors.

The United States, led by its temperamental President Donald Trump, is engaged in a trade war with China. At the same time, it is also insisting on imposing sanctions on Iran, a major oil exporter. It has also re-negotiated its North American trade agreement with Canada and Mexico. All these actions, though not directly impacting on Sri Lanka have led to a steady appreciation of the US Dollar, with resultant consequences for the import oriented Sri Lankan economy.

Pricing formula

For instance, the government has been compelled to increase fuel prices on a regular basis now. This is done based on a pricing formula. While this may be a necessity, it has also attracted much criticism in a country where the public has been used to stable fuel prices for decades.

Similarly, the price of railway fares and gas has also increased, with a 12.5 kilogram gas cylinder increasing by 195 rupees. Railway fares were also raised by 15 per cent, the increase being the first since 2008. The authorities did attempt to sugar coat the hike by keeping the minimum price of a ticket unchanged at 10 rupees.

In what it said was a bid to stabilise the rupee, the government has also announced that it would be curtailing vehicle imports, stating it was suspending the issuing of vehicles permits to parliamentarians for a period of one year. Importation of vehicles for ministries, departments, statutory boards and state owned enterprises will also be suspended until further notice.

“Importation of vehicle using the concessionary permits issued to state sector employees will be suspended for six months. No Letters of Credits (LCs) will be permitted to be opened based on these permits during this period,” the Finance Ministry said.

However, this move has earned the ridicule of some sections of the public who point out that the vast majority of parliamentarians have already used the permits they were entitled to, to import vehicles and then sell them to others at massive profits. Social media was awash with lists of such parliamentarians and the names of the new owners of the vehicles they had imported.

Opposition politicians have been quick to criticise the government’s handling of the issue. The Joint Opposition (JO)’s de facto economic spokesman, Bandula Gunawardena claimed this week that the government was releasing funds to the local market in a desperate bid to stabilise the rupee.

Infrastructure development projects

The Central Bank has released US$157.7 million to the market within four days, Gunawardena claimed. When the International Monetary Fund is releasing US$169 million to Sri Lanka as loans, he claimed that the release of US$157.5 million to stabilise the rupee would only result in a further increase in the cost of living.

The leader of the JO and former President Mahinda Rajapaksa has weighed into the debate, countering accusations that his government was responsible for snaring the country in an enormous debt trap through massive borrowings it obtained for its infrastructure development projects, most of which are not yielding dividends and are a financial burden on the country. Rajapaksa argues that the government should get its act together instead of blaming the United States and President Trump for its woes.

Rajapaksa said in a statement that the role of a government was to keep abreast of worldwide developments instead of complaining that a foreign leader has strengthened his own economy and that our currency was collapsing on that account. “If we have a government that requires foreign countries to underperform so as to enable us to maintain the value of our currency, then this country is in deep trouble,” Rajapaksa said.

Anura Kumara Dissanayake, leader of the Janatha Vimukthi Peramuna (JVP) called on the government to take short term measures to stabilise the rupee. “The rupee has deprecated by 7.3 per cent against the Euro, 10 per cent against the Yen, 2 per cent against the Australian dollar, 4 percent against the Singapore dollar, 4 per cent against the Chinese Yuan, 8 per cent against the Bangladesh Taka and 7 per cent against the British Pound. This is a clear reflection on the government’s disastrous economic policies,” he said.

State Minister of National Policies and Economic Affairs Dr. Harsha de Silva, an economist by profession, has offered a more balanced view. Dr de Silva identifies the lack of exports as the major factor in the depreciation of the Sri Lankan rupee.

Dr. de Silva describes the government decision to introduce the fuel pricing formula as “brave” and commends the Central Bank for being responsible and not burning reserves to defend the rupee at levels that are not feasible. He recalls how in 2011 and 2012, the Central Bank artificially maintained the Dollar at 110 rupees for several months losing almost 4 billion US dollars or close to half of the reserves in just a few months and yet, the rupee depreciated by about 13 percent thereafter.

“What we see today is clearly and absolutely the outcome of that purely short-term populist economic policy of ten plus years. I shudder to think what could happen if God forbid those who continue to advocate inward looking policies grab power,” Dr. de Silva said on social media. He predicts that the rupee will stabilise in the coming weeks. “The rupee will find its equilibrium once the dust settles. Some appreciation of the currency is warranted,” he said.

Global influences

Echoing Dr. de Silva’s comments, Prime Minister Ranil Wickremesinghe also argues for strengthening of the country’s exports, to cushion its economy from global influences. Countries such as Thailand and Vietnam are not severely affected by the global economy as they fully depend on exports, the Prime Minister noted.

Finance Minister Mangala Samaraweera has also urged the public not to panic. Addressing students at Royal College, Colombo he argued that the depreciation of the rupee is “not the end of the world”. Minister Samaraweera noted that the previous government released Rs.4.1 billion into the market to control depreciation but it still depreciated by 14 per cent.

“Pumping money into the market is not the solution. We should somehow manage savings and prevent unnecessary spending. The economy is not going to crash. In a way this is a good opportunity for us to make Sri Lanka an export-oriented economy,” Minister Samaraweera said. “The situation will get better, but I can’t tell when it would be,” he declared.

While it is clear that the depreciation of the rupee is having a pervasive negative impact on prices and public sentiment regarding the government, it is also not a crisis that warrants short term, ‘quick fix’ solutions. The trick for the government though is titrating pragmatic economic policies with widespread concerns about rising prices. If it fails in this balancing act, there will almost certainly be a backlash from the voter, a repercussion the opposition won’t hesitate to exploit.

 


 

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