Though the Central Bank rejected calls for devaluation or an IMF bailout package going by the reaction to The Sunday Times lead story last week, economists and exporters persisted – as our reports this week show – in calling for devaluation, depreciation of the rupee or seeking IMF assistance.
Central Bank Governor Ajith Nivard Cabraal came out strongly against The Sunday Times report which quoted economists as urging devaluation or an IMF bailout package to tackle the foreign exchange crisis.
The government doesn’t deny that the country is facing an acute foreign exchange crisis but devaluation, a politically sensitive issue in an election year because it will trigger inflation, and unpalatable IMF cash is anathema to ruling party politicians, officials and the CB.
While The Sunday Times report was not denied, only clarified, by the CB – since the story also quoted the CB Governor as saying the foreign reserves position is reasonable and that the issue of IMF assistance doesn’t arise, the bigger concern was that any suggestion of dwindling reserves, demand for a devaluation and balance of payments support could trigger another outflow of foreign exchange similar to what happened in the second half of last year when foreigners withdrew some $500 million from Treasury bill (TBs) and bonds.
An email poll by The Sunday Times FT last month saw 70% of the respondents saying that they had no faith in the CB handling the financial crisis. That’s true to a large extent. The CB in comparing today’s reserves position to that of 2004 (when the UNP was in power under President Chandrika Kumaratunga), is itself misleading.
A CB statement said this week the reserves are well above the levels that prevailed before 1977 and are, in fact even above the levels as at end 2004. Gross official reserves including ACU balances stood at $ 2560.5 million as at end 2008 compared to $2195.8 million at end 2004, it said.
While these reserves are sufficient to fund around 1.7 months of imports, the CB’s own data – according to its annual report of 2007 – says the $2195.8 million in reserves in 2004 was sufficient to finance 5.7 months of imports!
Then again, the reserves before 1977 tell another story and again shatters the CB myth that the reserves’ position was better now than then. In 1974 during a closed-doors economy and restricted imports, the gross official reserves was just $73.9 million but it was sufficient to finance 3.3 months of imports.
The following year (1975), $56.9 million in reserves was enough to finance 1.7 months of imports; in 1976 it was $94 million (worth three months) and 1977, $278.4 million was equivalent to 5.9 months of imports. This is because less money was required for our imports then compared to today. It’s not the money that counts, it’s the value of the currency.
Sri Lanka exporters are indeed facing some hard decisions due to the global financial crisis where consumer spending has come down and competitors are devaluing their currencies.
How can Sri Lankan exports be competitive when other countries – competing in the same markets – are reducing their production costs through devaluation and other means? For example while Sri Lanka has depreciated its currency against the US dollar by just 1.24% between end 2007 to November 2008, the UK has depreciated its currency by 33.06%, Pakistan by 23.08%, the Euro by 16.9% and India by $19.2%. China has also devalued the Yuan while Russia had depreciated the rouble by 22% between August 2008 and January 19, 2009.
Remittances from migrant workers, the main foreign exchange earner for Sri Lanka (if we leave out the import costs for raw materials in garment exports), are also a worrying factor though the government believes there won’t be any fall in this sector. This is despite a growing number of jobs being lost in West Asia due to a collapse in the construction market. The Bahrain-based Gulf Daily News said this week in a report that Bahrain's private banking and construction industries are facing widespread job losses as the global economic crisis hits home.
It said banks have already started sacking staff, including Bahrainis, and construction industry sources are predicting a major slump later this year, with potentially thousands of job losses.
In fact Sri Lankan remittances in November 2008 dipped to US$217 million from US$233.5 million a year ago, and US$247 million in October 2008. While December 2008 data is not still ready, government sources expect remittances in December to be around $200 million but possibly lower than the December 2007 figure of US$216.7 million.
The CB, among other measures, has put forward a package of incentives to attract investments in bonds and TBs by the Sri Lankan diaspora. How effective that would be remains to be seen. Thus as espoused by economists, exporters and the rest of the business community, the country’s finances have reached a critical stage and, the sooner the government realises this and listens to all shades of views and opinions on this issue, the better.
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