28th January 2001
Renowned dancer Chitrasena who turned 80 on
Central Bank warns of currency culprits, ready to act in stabilising rupee
By Feizal Samath, our Business Editor
Speculation by dealers of two Sri Lankan state banks in the US dollar, triggered a major crisis almost ending with the currency topping the 100-rupee mark during a week of chaos and confusion following the Central Bank move to free float the dollar, officials said.
While traders reacted in a haphazard manner to the decision, dealers at two state banks plunged the rupee into a sharp fall on Thursday after requesting millions of dollars to finance an import bill that never existed, worsening the crisis and sending the market into a tailspin, Central Bank officials said.
"The dealers were apparently acting on their own. The top management had no knowledge of these trading developments," M.B. Dissanayake, chief accountant of the Central Bank and the key official monitoring foreign currency movements, told The Sunday Times.
Bankers told a meeting summoned by Central Bank Governor A.S. Jayawardena on Friday that dollar trading soared the previous day after these dealers sought to buy about 10 million US dollars and inquired from other dealers their quoted rates for the dollar, in an apparent bid to purchase.
That triggered panic buying in the market with dealers of other banks grabbing whatever available dollars and in some cases quoting rates as high as 100 rupees per dollar, until by noon, the market realised what had happened. Banks then desperately unloaded the dollars they had purchased earlier stabilising the rate at the end of the day to around the 90-plus rupee levels.
"Bankers told us this situation and realised their own folly in the speculative element," Mr Dissanayake said noting that the Central Bank Governor took a serious view of Thursday's drama. The Central Bank had separate meetings with the Sri Lanka Banks Association and the Sri Lanka Forex Dealers Association to discuss the crisis in the money markets.
The Central Bank - in a bid to ease market uncertainty - on Saturday said it was confident of stabilising the market this week through a series of "urgent measures, ready for implementation.
"We expect the market to stabilise this week. If that does not happen, we have some urgent measures ready as intervention mechanisms to restore normalcy, " Mr Dissanayake said. For obvious reasons of fuelling more speculation, he declined to list the measures.
But market analysts said this may include intervention in the market by the Bank to prop up the dollar when it sinks, by mopping up excess dollars or selling dollars and creating liquidity when a shortage sends the currency shooting to dizzy heights. Sri Lankaís economy got the shock treatment last week when the Central Bank unexpectedly announced the free float of the dollar, which however had been speculated by the money markets for the past few months. The move threw the country's trade into a spin and uncertainty that grew by the day.
Mr Dissanayake said the Central Bank, though armed with powers to take action against errant dealers (like the ones from the state banks), would not do so because the current policy is one of less interference.
"We have built a trust between with the banks and we want to work as a team towards building the markets and ensuring fairplay in the interests of the community. We don't want to penalise one or two banks and break that trust," he said, adding however that they were closely monitoring the situation.
He said the bank had enough data to suggest that there are no big import bills that should have come into the market last week or are expected this week, which means that the dollar should settle down in the absence of any speculative element. "Whether this happens is a big question," said a bank dealer in response.
The central bank official said they did not intervene in the market last week as " we were watching the situation and any intervention may have sent some wrong signals like the preferred bank rate when the whole purpose of the free float exercise is for the market to determine the rates."
At Friday's meetings, various issues relating to the crisis plus the problems caused to the general public were discussed. Bankers said they would cooperate with the Central Bank to stabilise the exchange rate to realistic levels which some stockmarket analysts said should be around 88-90 rupee levels. "I think it should stabilise to even less than 90 rupees," he said. Other banking officials including Senerath Seneviratne, treasurer at HSBC bank, said they expected the dollar to stabilise at 90 rupees in the next three months.
Mr Dissanayake, responding to worries over new rules for exporters to bring back their proceeds in 90 days after the first day of shipment or be penalised, said the bank was flexible and would accommodate any request for an extension if so justified. "Even in our new rule relating to limits on banks holding dollar positions overnight, we are flexible and would entertain any request for a higher accommodation if there is a genuine need," he noted.
Exporters said they had their "backs to the wall" in the present scenario as export proceeds sometimes don't come back in 90 days and given the growing competition in other buying markets, buyers are constantly demanding more time to settle bills.
Economists and banking sources said falling foreign exchange reserves, which according to some accounts had eased to US $ 900 million about three months ago from around US 1.5 billion in June 2000, had resulted in the free float measures. This was because the Central Bank had little in reserve to intervene in the market during a managed-float scenario.
"I believe low reserves due to some exporters holding onto their foreign exchange abroad caused the latest move," noted Indrajith Aponsu, an economist attached to the Colombo University, adding that pressure from the International Monetary Fund (IMF) also forced the government into this situation. Some government officials were at pains to explain that the current visit of an IMF mission, in which the team met President Chandrika Kumaratunga last week, was "totally" unconnected to the Central Bank move.
Mr Aponsu said inflows had reduced to a trickle and the Central Bank was said to have been discussing the free float prospects for some weeks now before implementing it.
He said the only option left - if the rupee depreciates rapidly - is for Central Bank intervention and if there is no money to seek IMF support as intervention measures. He argued that the current optimistic scenario under a free float is that on the long term the dollar should stabilise at realistic levels but in an economy dominated by imports that was unlikely to happen.
In an ironic twist to the "blame game" that continued over the week between the authorities and the public, there was a new element. Garments exporters, often accused of hoarding currency abroad which has led to falling reserves, accused tea exporters of holding funds while the latter rejected the assertion.
"It is not us but some multinational tea exporters who are holding onto their proceeds abroad that has created this situation," said one garments' exporter. Tea trade sources laughed at the claim, saying it was "hogwash".
From Neville de Silva in London
The British government is likely to let the LTTE off the hook.
Despite Sri Lanka's persistent call for the LTTE to be proscribed under the Terrorism Act 2000, speculation here is that it will be rejected in a carefully-choreographed effort.
Diplomats and journalists in London told The Sunday Times that several recent developments suggested a concerted effort to reject Colombo's call while acceding to India's demand for the banning of anti-Indian groups.
The diplomats said recent setbacks for the Blair government including last week's Peter Mandelson resignation had weakened the Labour party in the run-up to General Elections in May this year.
Opinion polls have indicated the Labour Party might lose some 50 seats. This is precisely where the LTTE and its supporters count. Some of these marginal seats have a high concentration of Tamil voters and they could decide the winner in the event of a low turn out.
The LTTE has been indicating to the Labour MPs from these seats their vulnerability and that the LTTE will determine which way the Tamils vote.
In exchange for ensuring the Tamil votes, the LTTE wants the MPs to pressure their government not to ban the Tiger movement in Britain and to insist that the Sri Lanka government accepts the LTTE ceasefire.
Last Monday the Confederation of Tamil Organisations-UK held a meeting at the Parliament Office Building chaired by Barry Gardiner, a Labour Party MP who scraped through at the last election with a majority of a little over 4000 votes. He represents a seat in Wembley which has a large concentration of Tamils and Indians.
Among the other MPs at the meeting which was only by invitation, was James Corbyn, an ardent Trotskyist of the old days and who was once described by a Tory as being "too close to the IRA'".
The IRA has been banned by the British government as a terrorist organisation and has not been offered the right of "self determination" which Foreign Office Minister Peter Hain generously suggested in Colombo should be offered to the LTTE.
Another speaker at Monday's meeting European Parliamentarian Robert Evens, who in his last visit to Sri Lanka compared the situation there to Bosnia which he repeated without any fear of being contradicted because only those who agreed with any outrageous comparison were invited anyway.
British journalists also pointed to reports that the British High Commissioner in Colombo was seeking the advice of Tamil parties on whether the LTTE should be banned from operating in UK.
Asked why the High Commission was doing so, a Foreign and Commonwealth Office official said that it was the duty of diplomats to ascertain the views of people.
An Asian diplomat dismissed this explanation saying that the British government was acting under British law, there was no need to ask anybody else how it should operate its own law.
"It is like my country asking some people in Iceland whether we should ban Eskimoes," he said.
Journalists said that this much publicised action by the British High Commission suggested that the government was preparing to say that it consulted political parties in Sri Lanka and also its own Labour Party and the consensus was the LTTE should not be banned.
The LTTE itself has been holding a series of meetings highly publicised within the Tamil community to beef up its own image and to collect funds.
It has also been meeting regularly with government and opposition politicians to press its case. It has been playing heavily on the ceasefire declared in December and now extended. When first announced some here saw it as a ploy to win the sympathy of a largely Christian population and point the finger at a predominantly Buddhist government that would not respect the Christian festive season.
The LTTE is now appealing to the British government to play a facilitating role, a curious turnaround for it initially rejected Britain and the Commonwealth Secretariat and opted for Norway.
Now under pressure, the LTTE is telling politicians of all parties what role Britain could play in pressuring the Colombo government to come to talks.
Other diplomats and journalists argued that if the Labour government banned Indian groups it will be hard put to explain why an even more virulent terrorist organisation has been allowed to operate.
Whatever decision Britain takes it is now unlikely that it will announce the banned organisations in February-March as earlier expected. It will now wait till after the election to do so. In this way it can keep dangling the carrot before the LTTE.
Meanwhile, a spokesperson from the British High Commission in Colombo said Britain would make a decision on the banning of the LTTE shortly and added that the Sri Lankan government's representations would be taken "fully into account".
The British High Commission spokesperson in a brief statement on Friday said the British Home Secretary "will certainly take the government of Sri Lanka's representations fully into account."
"We are aware of the government of Sri Lanka's views of the question of proscribing the LTTE. No decision has yet been taken, but one is expected shortly," the spokesperson said.
Foreign Minister Lakshman Kadirgamar last week said that if the LTTE was not banned "it would be treated as an unfriendly act" and would impose a considerable strain on the relations between the two countries.
The government's move to allow the rupee to float freely against the US dollar has led to the sky rocketing of food and other consumer items. The rise in food items alone has been phenomenal with various items going up by five to 10 per cent. The price of a kilo of sugar which stood at Rs. 38 has gone upto Rs. 42. Similarly the price of a kilo of dhal has gone up by Rs. two to Rs. five. Prices of potatoes, onions and chillies have also gone up by Rs. three to five per kilo.
In a related development the Co-operative Wholesale Establishment has also started rationing sugar with a maximum of two kilos being sold to a customer. They said the step had been taken to prevent businessman from buying large stocks and making big profits.
Prices of other items including hardware, building material, and pharmaceutical also shot up this week due to the fall of the rupee.
By Shane Seneviratne
The battle between the PA's big guns in Kandy Ministers Anuruddha Ratwatte and D. M. Jayaratne has intensified.
Fighting back, Minister Ratwatte has now gained control over the SLFP Balamandalaya in Kandy and one of his first acts was to propose to President Kumaratunga to appoint a committee to probe the conduct of Mr. Jayaratne.
Before and after last October's general elections, Mr. Jayaratne who is also general secretary of the PA had accused Gen. Ratwatte of involvement in election violence and malpractices.
While the two ministers clashed, the SLFP head office in Kandy has been closed down. The head office had been a stronghold for Mr. Jayaratne.
At the time of the closure there was heavy outstanding bills for electricity, telephone and water.
The main opposition UNP is to ignore and by-pass the government's proposed Parliamentary Select Committee on the four independent commissions police, public service, judiciary and Elections and go ahead with its own plans to move private members bills instead, Party Leader Ranil Wickremesinghe told The Sunday Times yesterday.
Mr. Wickremesinghe was reacting to this week's moves by President Chandrika Kumaratunga to appoint a parliamentary select committee headed by Minister Rauf Hakeem who had threatened to resign unless the Government introduced legislation to implement these Commissions within its first 100 days in office. Mr. Wickremesinghe told The Sunday Times the draft of proposed amendments to the Constitution relating to the Constitutional Council, the Elections Commission, the Judicial Service Commission, the Public Service Commission and the National Police Commission was ready as a "Working Paper" which would be distributed among all political parties and the general public.
"We are not going to help Mr. Hakeem get over his problems and his embarrassment of threatening to quit in 100 days if these Commissions were not appointed, and still wanting to remain a Cabinet Minister at all cost," Mr. Wickremesinghe said.
In an interview with The Sunday Times, Minister Hakeem said part of the delay in setting up the commission was because the President was away from the country.
He said he wished to be fiercely independent and "not seen as a mere appendage" of the Kumaratunga administration.
The Opposition Leader, however said the government had decided to appoint the select committee merely to save face for Mr. Hakeem. Mr. Wickremesinghe said that once the parties and civil society gave their views, the Opposition would proceed to introduce them as Private Members Bills in Parliament.
"Any amendments from the Government would also be accepted if they are kept to the spirit of the reforms" he said.
Meanwhile, Mr. Wickremesinghe hit-out hard at President Kumaratunga at the launching of a controversial gathering of party youth at the CR&FC grounds on Friday night saying the open economy introduced by the UNP in 1977 was facing its gravest crisis.
"The incompetence of the President and her inability to manage the economy is taking us towards destruction. The floating of the rupee without attending to economic fundamentals will result in disaster - none of the fundamentals are present today," he said.
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