By Harsha Gunasena –
Harsha Gunasena
From November 30th last year, the Sri Lankan Rupee is appreciating against the US Dollar gradually. The Rupee value of a dollar on November 30th was Rs. 329 and the same on March 20th was Rs. 304. Sri Lanka is experiencing an appreciation of the Rupee for a second time.
Over decades the value of the Dollar in Rupees increased gradually. During the economic crisis for a short period from March 7th 2022 to May 13th 2022 the value of a Dollar in Rupees increased from Rs. 202 to Rs. 369. For the first time in the history the value of the Dollar in Rupees started decreasing from February 26th 2023 to June 8th, 2023 from Rs. 364 to Rs. 290. This was the result of stabilizing the Rupee shedding the speculative trends.
There are interpretations that the prevalent situation is an indication of the recovery of the economy. There is a truth in that. According to the Central Bank reports there is a positive balance in the Current Account after 1977. Current Account balance is comprising of the trade balance, which is the difference between export income and the import expenditure, remittances by the Sri Lankans working abroad and service income such as income on tourism. In 2023 as usual import expenditure was more than the export income as a result there was a deficit in the Trade Balance. (USD 4.9 billion) However since foreign remittances (USD 6 billion) and service income such as tourism (USD 2.1 billion) increased we could achieve a positive balance in the Current Account.
Graph – Exchange Rate Movement – Rupees per USD
Source:
https://www.cbsl.gov.lk
Finance Account has not shown a progress and the country has received the installments of IMF loan and loans from the World Bank and the Asian Development Bank. Also, there was a net inflow of the transactions of Colombo Stock Exchange and Government Securities. These are the positive signs of the revival of the economy. The other point is that the consumption of imported goods may have dropped due to the affordability. This would reduce the cost of imports.
The inflow of Dollars to the market is more the outflow. Hence there is a surplus of the Dollars in the market. As a result, the value of the Dollar in Rupees drops in the market. In order to control the drop the Central Bank buys Dollars from the market by giving Rupees. At the end of 2023 the Central Bank increased the foreign reserves to the level of USD 4.4 billion. Out of that USD 1.7 billion was net purchases of Dollars from the market.
This is the reason of the appreciation of the Rupee. However, this is not the total picture. Now there is an import control. Some of the goods such as vehicles were not allowed to be imported. Exporters have to convert their receipts in Dollars to Rupees immediately. The country has not yet started to repay all the loans. Therefore, the excess of Dollars in the market is not real since some elements were kept away from the market forcibly. When these elements come into the market there is a possibility that the Rupee will start to depreciate.
Sri Lanka is importing consumer goods, intermediate goods and capital goods. There is no reduction yet of the imported consumer goods in the market in relation to the reduction of the Dollar in Rupees in the market. The cost of oil is also not reduced to reflect the reduction. The reasons may be the slight increase of the oil prices in the international market and the increase of VAT from January.
The notable point here is this. The country will have to increase the level of exports of goods and services. For exporters, when exporting goods and services, the price is determined not only based on the cost of production and the profit margin but also the prices quoted by our competitors supplying the same products to the international markets. Our competitors are countries such as India, Thailand, Indonesia, Bangladesh and Vietnam. The exchange rate in those countries are not in a scenario of appreciating the home currencies continuously. Hence the international prices are not getting increased.
Interest rates were dropped and dropping, and inflation is controlled. These are good signs of a progressing economy. However, the cost of the goods increased during the inflationary period remains. The cost of the goods increased further due to the increase of VAT. If exporters buy good from the VAT registered ventures, the increased VAT is not an expenditure to the exporters which could be claimed from the Inland Revenue Department.
In this scenario if the value of the Dollar comes down to the level around Rs. 280, all export ventures may record losses.
In 2022 when the value of the Dollar increased in a short period to the level of Rs.360, the exporters gained windfall profits. This was a benefit to set off the increased costs of the local goods due to high inflation and high interest rates. This situation was eased later and in June 2023 the value of the Dollar was Rs. 290. Within a short period of time it went up to Rs. 309.
Since there is an influx of tourists the turnover of the tourism industry increased but their profit margins are getting eroded due to the reduction of the Rupee value of the Dollar. The recipients of foreign remittances also are getting lesser amount of Rupees into their hands.
We should pay attention to this sector since the sector would be the savior of recovering the economy. The answer to our economic ailment is to promote exports of goods and services including tourism. Therefore, it is ideal that if the Rupee is kept at the level that it is not overvalued and if so it would be detrimental to the exports and thereby to the economic recovery of the country.
If the appreciation of the Rupee happens in the background of increasing of production and exports of the country, then it is natural. The current situation is a temporary one. In the future when the imports are relaxed further and when the country starts to repay all the loans the situation will be changed, and the value of the Dollar in Rupees will be increased.
There are stories that economic recovery is an illusion, and we will fall back to the same level in time to come. Yes, if not proper policies are not followed. Otherwise not. It is a reality that the tourism industry is developed and the foreign remittances were increased. Promoting the tourism industry is one of the best ways to develop foreign income in the short run.
Management of the economy is a balancing act and the policy makers and implementors cannot go to extremes.
Published in Colombo Telegraph on March 20, 2024 and Gold Ceylon
https://www.colombotelegraph.com/index.php/why-the-sri-lankan-rupee-is-appreciating/
https://goldceylon.lk/why-the-sri-lankan-rupee-is-appreciating/
Ruchira / March 20, 2024
“There are stories that economic recovery is an illusion, and we will fall back to the same level in time to come.”
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Why is that?
“Yes, if not proper policies are not followed. Otherwise not.”
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What are the proper policies in that case? And is the government following such proper policies?
Harsha Gunasena / March 21, 2024
These are the proper policies.
1. Continue to maintain a positive balance of the Primary Account as agreed with IMF. Primary Account is income of the government less expenditure other than interest payments and loan repayments
2. Limit money printing as agreed with IMF
3. Reduce the size of the government. Increase the productivity and pay a decent salary to the remaining.
4. The job of the government is to govern and not to do business. Politicians like to do businesses so that they can employ their henchmen in those institutions. Therefore privatize the government entities in a transparent manner.
5. Allow the private sector to have wealth. From 1956 the government at different stages acquired the wealth of the private sector.
6. Microsoft is an asset of the US. Similarly Sri Lankan multinationals such as Hayleys, Aitkin Spence, Commercial Bank are Sri Lankan assets since they provide employment and contribute to the growth of Sri Lanka. Sri Lanka Airlines is not an asset of Sri Lanka. It is a liability.
7. Promote exports of goods and services. Promote trade. We cannot restrict imports and promote exports. Re exports the market id unlimited. Re import substitution market is limited to 22mn. Be offensive rather than being defensive.
8. Remove trade barriers. Enter into free trade agreements with beneficial trade partners. Redefine the trade agreement with India.
9. Ease of doing business index to be improved substantially in order to get FDI
These are some of the policies that came to my mind. Government is moving in this direction. Sometimes the speed is slow.
Ruchira / March 21, 2024
Thank you for the reply.
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If the government is moving in the right direction albeit slowly like you’ve stated, my concern is why there are ‘stories’ that the economy may not recover?
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As for the Sri Lankan Air, JRJ’s pet project, I think there are no takers even if the government wants to sell it at this moment hence remains a liability.
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I have, I think Rohan Samarajiva, questioning as to why enterprises like Lanka Hospitals are not sold? Which is less complicated than selling Sri Lankan.
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I think the bottle neck is not having enough exports, goods and services, without which the future may look bleak.
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In the 75 years of post independence history garments have been the only accomplishment in terms of significant exports other than the traditional agricultural products. That (garments) too I think succeeded because of external forces worked hard at getting it together.
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To me it looks like none of the current politicians have much of a clue as to how to engage and benefit from the current globalised economy which is now about 30 plus years old.
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What do you think is the single biggest issue standing in the way of progress?
Harsha Gunasena / March 21, 2024
Ruchira
My comments are given below.
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“If the government is moving in the right direction albeit slowly like you’ve stated, my concern is why there are ‘stories’ that the economy may not recover?”
There are stories since various people think differently. What we are doing now is to debate and to find a common solution if possible
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“As for the Sri Lankan Air, JRJ’s pet project, I think there are no takers even if the government wants to sell it at this moment hence remains a liability.”
That is why the government decided to take over all the liabilities. Then they will be able to find out a buyer. I do not know why such a delay for these things. RW as the PM in his first address to the nation he said SL Airlines was a burden. How many months passed after that statement?
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“I have, I think Rohan Samarajiva, questioning as to why enterprises like Lanka Hospitals are not sold? Which is less complicated than selling Sri Lankan.”
Yes. He said that. I also ask why? People say that profitable institutes should not be sold. Probably Government is afraid of them. Take SLT and Dialog. Or SLIC and Ceylinco Insurance. Who is the market leader and who makes more profits? Inefficient management also a waste.
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“I think the bottle neck is not having enough exports, goods and services, without which the future may look bleak.”
Yes. Government is in this direction. They touched the low hanging fruit tourism first. Others will follow.
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“In the 75 years of post independence history garments have been the only accomplishment in terms of significant exports other than the traditional agricultural products. That (garments) too I think succeeded because of external forces worked hard at getting it together.”
External forces as well as the efforts of Premadasa.
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“To me it looks like none of the current politicians have much of a clue as to how to engage and benefit from the current globalised economy which is now about 30 plus years old.”
Not really. Politicians cannot do everything. They can create the infrastructure. They cannot do businesses. People think that they have to do everything. Our private sector is also not capable. Damro has gone to India but Manchee had to come back. Now they try to go back.
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“What do you think is the single biggest issue standing in the way of progress?”
Attitude. Attitude of the people. They are dependent on the governments. They think that governments should do business on behalf of them. They are prepared to get jobs and not to give jobs. They work to live and not live to work. Buddha did not work to live. He lived to work. Work is not a passion of many.
Ruchira / March 22, 2024
Harsha Gunasena – Thanks again for the detailed response.
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WRT to promoting exports you’ve said: “Government is in this direction.” What has the government done in this direction other than going for the lowest hanging fruit tourism and what took so long for any government to go in this direction? Couldn’t we have done it without first letting the country fall into an economic abyss?
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I do agree that the private sector too is incapable. Any idea why?
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I’m not sure if the attitude of the people is the only problem though there may be some truth in it. For example you have mentioned and I agree Premadasa’s contribution to the development of the garment industry and it did succeed to some extent.
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TBC
Ruchira / March 22, 2024
Cont’d…
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For example I’m sure you know Dr. W. A. Wijewardena the ex- deputy governor of CBSL who writes a weekly column to CT, he in one of his books published mentions how it was JRJ who adapted certain economic policies and practices with the establishment of the Central Bank in 1950.
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Basically using the CBSL independence to infuse liquidity to economy by way of printing money to meet the budget deficits created by exorbitant government spending by almost most successive governments without really focusing on real economic growth.
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Basically JRJs motto had been economy should serve poeple, not the other way around.
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TBC
Ruchira / March 22, 2024
Cont’d…
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He blames the ill disciplined finance ministers for abusing the Central Bank and points out how Singapore decided to stay with its colonial era Currency Board ensuring there’s financial discipline while promoting economic growth. The motto there had been you should earn your living by working hard (what you too have mentioned) in contrast to JRJs one.
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To me it looks like bad policy decisions, lack of financial discipline, foresight to focus on real growth, while going on spending sprees by the policy makers that are at the core of the problem more than the attitude of the people.
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What do you think?
Ruchira / March 22, 2024
PS: Basically John Exter’s Central Banks established both in the Philippines and in Sri Lanka have been flops, with both countries going banckrupt. According to Dr. WAW, not due to any fault of Exter but because the local policy makers adapted Keynesian policies against the advice of Exeter, who was the architect of the Central Banks in both aforementioned countries.
Harsha Gunasena / March 22, 2024
Ruchira
I agree with your Post Script
Ruchira / March 22, 2024
Harsha – Thank you for the acknowledgement. At least it’s good to know that I am not all that off the track in my understanding of the problem.
Harsha Gunasena / March 22, 2024
Ruchira
I agree with you. Ours being a democracy (which is the best mode of governance), sometimes with strong opposition parties, focusing on the next election, our leaders may have lost sight on the basics you have mentioned. For instance RW when he became the PM in 2001 he stopped recruitment to the government since we had a negative economic growth at that time. His cabinet ministers openly said that they could not win the next election with this policy. But that policy was a real necessity for the economic recovery. What happened. Next election as they predicted Ranil lost. He did not try to implement that type of policy thereafter. Now it is being implemented out of sheer necessity once again. In a way the bankruptcy is a blessing in disguise to our country.
I kike to put the blame on people and I am a part of them rather than putting the blame on politicians.
Ruchira / March 22, 2024
Harsha – Fair enough. I too do agree with your sentiments, that the economic crisis is a blessing in disguise.
Harsha Gunasena / March 22, 2024
Yes. Printing money and deficit budgeting started from JRJs time as Finance Minister. In our entire history we have only two years without deficit budgeting. Those two years were 1954 and 1955 where MDH Jayawardene was the Finance Minister.
JRJ’s motto has led us to this situation. Economy served people excessively and beyond the capacity of the economy. Hence the budget deficits one of the two main reasons of bankruptcy. The other being current account deficit.
Ruchira / March 22, 2024
Harsha – Thanks. Your comments confirm my grasp as a layman of the circumstances both historical and current in relation to the economy.
Harsha Gunasena / March 22, 2024
Ruchira
Good conversation. Fortunately I am bit free.
Other than promoting tourism what they have done in this direction is to start negotiations with FTAs and one was signed.
Previous governments also promoted tourism and FTAs. Re FTAs there was strong opposition from the country. Thinking of this block is a hinderance to progress. Vietnam is having FTAs with more than 20 countries and their both imports and exports were around 100% of GDP each. Ours were a trading country historically, in the middle of the Indian Ocean.
In 2000 our exports were around 40% of GDP and in 2015 it was around 20% of GDP. Most part of this period main contributor to GDP was construction on borrowed money.
Exports come along with imports. I think we focused on import substitution rather than export promotion in order to find out a solution for balance of payment crisis.
We cannot expect governments to perform miracles if the people are on the other side of the ideology because politicians think of the next election.
Private sector is comprising of the people of this country. They are in politics, the state sector as well as in the private sector. There are exceptional personalities in all three areas. People of this country are happy with what they get. As a personal trait it is wonderful but in the case of developing a country this quality is disastrous.
Ruchira / March 22, 2024
Harsha – I agree on all points including the one that the conversation is a good one. Thank you for taking the time to respond meaningfully and happy to have been a party to it.
Harsha Gunasena / March 22, 2024
Ruchira
Thanks.
Ruchira / March 23, 2024
Harsha – my pleasure.
chiv / March 21, 2024
So Harsha, your recommendations are pretty much same as IMF. According to IMF, bankrupt Lankan politicians did not fulfill one third of the recommendations suggested in the first round and eventhen managed to get somewhere. So for now I fully agree with IMF.
Harsha Gunasena / March 21, 2024
chiv
Not really. Probably their thinking is in this line but they have recommended only first two points out of the lot, I think
Lester / March 22, 2024
Regarding 7, to maximize exports, industrialization is necessary. Without industrialization, the government will be running a deficit. As an example, the US outsourced its manufacturing base and is now $34 trillion in debt.
Harsha Gunasena / March 22, 2024
Lester
“Without industrialization, the government will be running a deficit.”
Not necessarily. We can export services such as ICT, BPO
Our population is aging. I do not know whether we missed the bus. The best time was 1977 with the liberalization but there civil unrests. Reason for US debt is not transferring manufacturing bases. From 1970 USA had budget surpluses only in 4 years.
Lester / March 23, 2024
Harsha Gunasena,
Take a look at all of the so-called “Tiger economies” in East Asia. They are fully industrialized. Even countries like Japan and S. Korea, with a minimum of natural resources, are major industrial hubs.
ICT services will be largely automated in the future, as AI progresses, There will be little need for call centers. This trend has already begun, but it will continue. A major difference was that in the past, automation took mostly unskilled jobs. In the future, however, it will also take skilled jobs. This is happening in the tech world already, with IT co’s hiring fewer junior dev ops.
Regarding US debt, it increased exponentially after the US outsourced its manufacturing base to China and other low wage nations, beginning in the 80’s. Of course there are other factors, such as prolonged low interest rates, but outsourcing is a critical one.
Harsha Gunasena / March 24, 2024
Lester
You say that industrialization is necessary. I said not necessarily. It means I do not say that industrialization is not necessary.
Services also are there. Asian tigers – yes but same recipe does not apply everywhere and all the time.
Our population is aging. Therefore it may be too late to concentrate solely on industrialization. We should be linked to the supply chains of various products.
Primary target should be to earn dollars and it should not be limited to industrialization. Then we are narrowing our options.
Native Vedda / March 23, 2024
Harsha Gunasena
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“The best time was 1977 with the liberalization but there civil unrests. “
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The best time would have been 1950s and 1960s.
The leaders couldn’t see beyond their nose, and believed in crony socialism, parochial nationalism, …… honed their skills for the purpose of creating conflicts one after another, ……………. and by mistake they also lead the people to believe in sovereignty, independence, self sufficiency, …..and made them to believe the people of this island is literate therefore clever, wise, and able.
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Harsha Gunasena / March 24, 2024
Native Vedda
Yes, I agree with you. I was concentrating on the year the economy was liberalized.
leelagemalli / March 22, 2024
Thank u Harsha@
‘These are some of the policies that came to my mind. Government is moving in this direction. Sometimes the speed is slow”.
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All parties should come together and give it a try to come out of the pit will relieve the masses. Politics should be kept aside at this critical stage of the country.
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Fairytale will only throw the gullible nation from frying pan to fire. Enough is enough collaberation is the only wayout 🫠🫠🫠
Harsha Gunasena / March 24, 2024
leelagemalli
Yes, every one should get together. During the WWII Churchill and Atlee got together and they fought each other after WWII
Harsha Gunasena / March 22, 2024
Mallaiyuran
Your points are not clear. I will respond to a few.
“UNP hadn’t followed the proper policies so the Exchange was falling so much during Yahapalanaya”
No. UNP at that time allowed the market to decide the value of the Rupee to a great extent. Previous government/Central Bank tried to keep the value of the Dollar at certain levels by releasing the country’s dollar reserves to the market. They failed in two instances and the Rupee crashed. Using the dollar reserves to the market to defend the rupee is not a proper policy.
Promoting tourism is good but tourists shouldn’t be allowed to do businesses here or to overstay. Let any body come including backpackers but promotions should be targeted to high spenders.
Sri Lankan Airlines- The business will be valued based on the present value of the future cash flows as well as on the net assets value. Air Asia was sold to the present owner for one Dollar.
Hambantota port was not a sale, it was a long term lease. This issue is generally raised by the USA and its allies. HongKong was transferred back to China in 1997 after a long-term lease of 99 years.
Increasing government expenditure was a solution to the great depression. Our problem is different to that. Therefore same solution cannot be applied here.
I did not say that NPP is following bad policies. I have given the best policies in my view for getting out of this problem. These policies were not followed even by UNP/SLFP governments. They followed those halfheartedly. That was the issue.