Why is Singapore dollar strong and SL rupee weak?

by Jayampathy Molligoda

Inflation is too high in Sri Lanka; people are finding it unbearable. How can we control the inflation from further slipping?

Singapore experience and structure of our CBSL:

 Singapore has the Monetary Authority Singapore (‘MAS’) as their Central Bank, where in Sri Lanka, we have the Central Bank of Sri Lanka (which is not a body corporate in legal terms) and within the CBSL, they have the ‘Monetary Board’. Basically, the Singapore Central Bank (MAS) has managed to keep the inflation under control even during this period of global economic recession, where most of the other countries have not been able to contain the inflation. The Singapore used the exchange rate to influence inflation, not the other way around.

 Our view is that there must be a sound, practical and legal mechanism guaranteeing the independence of the CB whilst making the CBSL accountable and transparent as in the case of MAS. John Exter, the founding Governor of the Central Bank of Ceylon, in his report stated that Governor of the Central Bank should be of unquestioned integrity and responsibility. This is very critical because an independent CB is essential for maintaining price stability, meaning containing inflationary pressure.

 As for maintaining the price stability objective, the simplest test is whether CB can continue to resist demands from the government of the day to print money and/or continue to maintain low interest rate regime when a higher interest rate is necessary to maintain price stability. This is because the government of the day would naturally tend to push economic growth rates to run at a faster rate than its capacity limit permits and their desire to incur budget deficits try to secure funds by borrowing from CB. Ours is somewhat politicized.

 However, the reality is most of the economic activities will come to a grinding halt if CBSL doesn’t print new money for the government. Besides the suffering of the people on the road, non- repatriation, avoiding sovereign breaches, not letting money market domino effect failure, payment to foreign parties, all of these have to be considered. No salary payments to government servants for a particular month if money printing is stopped.

Why can’t our CB do the same thing as MAS?

 Sri Lankan situation is totally different because it has a persistently high ‘twin deficits’ meaning (1) government budget deficits since independence and (2) BOP current account deficit with rest of the world. And CB has been compelled to resort to ‘money printing’ more that the required/ desired level and continue to borrow, thus increasing foreign debt service beyond unsustainable levels.

 The real issue has been that our Exports as a % of GDP has come down from closer to 28% in four to five decades to 12% especially since 2014 to date. Now GDP real per capita is coming down. We were boosting US $ 25 billion has increased to US $ 75 billion within 10 years, but it was through services and high spending on infrastructure development without corresponding increases in return on such investments by way of increased exports.

CBSL policy towards curbing inflation:

 Since August 21, CB has been trying to control inflation by way of increasing bank interest rates through increasing CB rates and Statutory reserve ratios (tightening the monetary policy accelerated wef March 22, however. this badly affects SMEs – the micro and small and medium enterprises have serious issues in the area of access to financial facilities or in simple terms, borrowing costs are so high that they cannot afford to borrow any more. Depending on whether the marketable – products of these businesses are in the “buyers; market’ or “sellers’ market” they could either survive or eventually collapse- only the ‘rich’ become richer (only in certain sectors) because they are in possession of own surplus money – they earn a substantial amount as interest income at current deposit rates and also have the option of keeping dollars without repatriation as stipulated in the relevant directives issued under Monetary Law Act of 1949. This is despite the rupee exchange rate was allowed to be flexible and floated from Rs 203/ per $ and now it’s Rs 368/.

  Further, during the period 2019 till august 2021, the private sector was benefited under low tax rates and low bank interest regime, where they borrowed rupee loans at 4-6 %, otherwise the exporters were compelled to go for $$ packing credit for financing export orders. In my view, our private sector is smarter than the government policy makers and some top officials in the financial/banking sector. It was the private sector who insisted that SL rupee should be floated not even a “managed float currency policy. Are we now getting the export proceeds according to the applicable regulations and if not, does the CB strictly enforce penalties for non- compliance?

Two News items published on 29/07/22:

“Earnings from merchandise exports increased by 20% Y-o-Y to USD 1,208.2 Mn in June 2022 as per data released by Sri Lanka Customs, mainly due to increase in earnings from export of Apparel & Textiles (1/2)”

  “World Bank does not plan to offer new financing to Sri Lanka until an adequate macroeconomic policy framework is in place – WB”

 Sri Lankan Export industries such as textile and apparel, tea sub sector, minor export crops, etc., should be able to be more competitive in the global market place due to the policy of currency depreciation wef 7 March 22 from Rs 203/-  to around Rs 368 (at present), but the associated local costs including the import content of the export value chain and the additional costs due to difficulties in ‘doing business’ under current conditions tend to move up sharply in the near future, thus eroding the cost competitiveness enjoyed by our exporters. As for doing business, one of the most critical current issues has been the shortage of fuel. It is in that context only the importance of making available sufficient FOREX income, be set aside for importation of fuel on a monthly basis, say US$ 300 million, should be viewed. Now that the backlog of LCs being cleared and most of the payments have been made and the incoming $$$ are now being reserved, it is important to set aside a part of export proceeds towards meeting fuel bills on a monthly basis.

Vital information on ‘FOREX’ monitoring not made available yet:

Stemming from the above argument, the CB’s priority number one should be to ensure whether export proceeds in dollars are received within the stipulated timeframes and in accordance with the directives issued under Monetary Law Act of 1949. In fact, the CB mandate by law is ensuring price stability and financial system stability and management of FOREX is the critical success factor here.

In August 21, then Governor Prof WDL appointed a working committee and liaised with customs and started putting in place the EPMS. (As far as direct documentation of export (‘cusdecs’) is concerned, the commercial banks do not receive those docs and what they can monitor is what they actually receive as proceeds only, that’s why this ICT system is needed.)

 It seems that export proceeds monitoring system (EPMS) is still not functioning at CB level. Also, CB doesn’t provide the information on actual amounts of foreign exchange proceeds received on a monthly basis.

According to the Governor, CB, only about 20% of the FOREX is getting converted in to the banking system out of US$ 1,000 million export proceeds per month. It is not clear how much has actually received within the ‘180 day rule’ on a monthly basis AND how much converted.

The present Governor, CB is now making an appeal to exporters to remit all export proceeds and convert at least 50% of the proceeds after keeping $$ for ‘eligible expenditure’. It is expedient for the CB to advise the government to set aside (out of monthly export+ direct remittances) at least US$ 300 million per month for petroleum product imports and only the deficit if any, be funded through credit lines. In the meantime, our renewable energy sources must be explored with a view to reducing dependence on diesel and petroleum inputs.

 Apparently, the Strategy adopted by the Ministry of Finance on 12 April 22 by pre-emptive debt defaults announcement has created some negative sentiments as well. Fuel imports can only be done through advance payments. LCs cannot be opened without paying an advance as most of our banks are considered untrustworthy customers in the international trading operations.

Light at the end of the tunnel: 

We are into a vicious economic cycle. What is really worrisome is that there seems to be no serious process of problem identification by following a more scientific ‘research methodology’. First and foremost, we need to find out what went wrong? Some kind of a truth commission is needed. Our policymakers together with the private sector, the government and Opposition politicians all must get together to find out what went wrong without ‘blame assigning game’. Our policymakers must learn to admit that we don’t know fully the reasons, until a detailed analysis is done. No sustainable solutions can be expected in a situation where we all have full of ‘beliefs’ -some may be true others false, therefore the real facts need to be separated out from mere opinions based on beliefs although belief is the starting point of any intellectual thought process as claimed by world renowned philosopher, Bertrand Russell. No point in blaming politicians only – maybe as national leaders they have failed to provide transformational leadership and inspire other stakeholders to drive the economy. Also, successive governments have not created conducive environment for private sector to do business and improve economic welfare of the people, otherwise, it is the private sector that is managing the economy; at least 70% of the economic activities are undertaken by the private sector. Our private sector is capable of driving the businesses as ‘engine of growth’ for national economic development.

 What can the government do under the current circumstances?

The solution is for the government authorities to follow one important process, undertake some research using scientific methods to ascertain why we have failed. It is suggested the government appoint an ‘expert panel’. It should come out with immediate, short and medium- term strategic plan based on a long-term vision. But who is going to appoint this expert panel and who are the members? Ideally, it has to be a Presidential commission.

Treasury does not have any money at all and when CPC is held up with no payment to banks. That is why our economists have been advocating stringent fiscal measures be enforced by the government so that the government expenditure could be drastically reduced. Most of the state- owned enterprises (SOEs) need to be restructured by liberalising the sectors and put in place a more transparent system to look for ‘PPP projects’ to drive economic activities using under- performed state assets. However, these measures need to be taken after a due process of obtaining the final recommendations of the Presidential commission.

Social unrest, achieving political stability and economic revival:

What we have discussed up to now pertains to our economic problems, but we have major issues in socio-political arena. We need to admit that there are a number of genuine grievances coming out from the ordinary people and also a mass uprising against corruption and mismanagement of the governments, although no concrete evidence is forthcoming to justify these claims, that’s why the truth commission findings are important. On the other hand, there is this conspiracy theory that some unexplained, hidden and most powerful forces operating outside Sri Lanka are at work -may be trying to weaken the “STATE” and portray Sri Lanka as a failed state as articulated by the Head of SIS at a high- level meeting chaired by the President Ranil Wickremesinghe. Surely, there must be some valid reasons for the government under President, GR to adopt a ‘soft’ policy. We don’t know the ‘real things’ yet.

We have been hearing as a slogan that political stability is a prerequisite for achieving much needed economic growth and revival. However, the writer is of the view that in today’s context, it should be other way around. If the government of the day cannot provide basic needs of the people, at least fuel without people waiting in long queues, it will not be possible to restore political stability, and social unrest could further accelerate. That’s why some kind of economic revival is needed to fulfil ‘basic needs’ of the people to restore some kind of ‘political stability’. Otherwise this so-called ‘political stability’ becomes a mere superficial phrase.

In the meantime, it is the responsibility of the government of the day to uphold the constitutional provisions to the letter and spirit as stipulated in the Constitution of the Democratic Socialist Republic of Sri Lanka.

The authorities need to respect the different views of the people without resorting to suppress people’s non-violent socio-political movements, whilst maintaining law and order to safeguard the peoples’ sovereign rights guaranteed under our Constitution.