Absolute chaos
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There was absolute chaos in the money markets and foreign exchange trading this week after Central Bank Governor Ajith Nivard Cabraal finally wilted under pressure and allowed the rupee to float.“There is absolute chaos in the markets these days. I don’t know whether I am sitting or standing!” exclaimed Arty, the veteran money market trader, when I asked how the market was faring.
“I can’t understand how Governor Cabraal agreed to devalue the rupee after stubbornly holding it at Rs. 203 levels per dollar for about five months despite the kerb (unofficial) market trading at Rs. 240-Rs. 260 levels,” I said.
“It’s crazy. The Central Bank should intervene in the forex markets as some banks are even offering a rate higher than Rs. 260 per dollar with demand rising,” said a troubled Arty.
The chaos in the forex markets has pushed the Central Bank into a ‘damned if I do, damned if I don’t’ situation with calls to intervene in the market and provide some stability to the US dollar which could hit Rs. 300 in coming weeks, at the current levels of trading.
This week there was utter confusion and conflicts within the government and Central Bank ranks with this following sequence of events:
Monday March 7: Central Bank announces a devaluation of the rupee, stating that it should not be traded above Rs. 230 per dollar (compared to Rs. 203 earlier).
Tuesday March 8: Minister and Cabinet spokesperson Dullas Alahapperuma tells reporters at the post-Cabinet media briefing, that the Cabinet has decided to grant Rs. 38 per dollar for migrant remittances. When asked about the devaluation, he responds saying the Central Bank Governor is likely to clarify the matter. At this point, it is unclear whether the Rs. 38 incentive should be added to the new rate of Rs. 230 (making it Rs. 268 per dollar for migrant workers or to the old rate of Rs. 203, making it Rs.241 per dollar).
Wednesday March 9: The Finance Ministry adds to the confusion, recommending Rs. 20 more per dollar to migrant workers for the Avurudu season. Is this in addition to the Rs. 38 per dollar that the Cabinet recommended or what? Also on the same day, the Central Bank is learnt to have told CEOs of banks that there was no restriction on the dollar rate and it could trade above Rs. 230, even though the monetary authority set an upper limit of Rs. 230 as clearly indicated in Monday’s statement.
Thursday March 10: Money markets in disarray as the dollar starts rising to Rs.260. Adding to the chaos, the Central Bank’s daily official rate for foreign currencies pegs the dollar at Rs. 260!
The new exchange rate will impact heavily on imports, resulting in higher prices for essential goods including fuel, medicines and food and create further shortages in the market, triggering inflation and rising cost of living.
For the record, the dollar has been pegged at Rs. 203 since November 2021. It was Rs. 195 on March 9, 2021 and then went up to Rs. 210 at end August and then stabilised at Rs. 203.
With migrant workers resorting to the unofficial market – Hawala and Undiyal schemes – to send their money to families here at rates fetching over Rs. 230 per dollar; the Central Bank decided to first offer an extra Rs. 2 per dollar to migrant workers, to induce them to use official banking channels. When that didn’t sufficiently work, the Central Bank increased it to Rs. 10 per dollar. That too didn’t work. In January 2022, remittances totalled US$ 259.2 million, a sharp 61.6 per cent drop from $675.3 million in the same month in 2021.
February remittances must have also been heading downwards and would have resulted in the Central Bank being compelled to allow market forces to dictate the rate.
It was a heavy day today with all these figures and statistics floating around and I walked into the kitchen to pick up some breakfast when my attention was drawn to the usual Thursday morning conversation under the margosa tree.
“Den apahu gas ne-ne (Gas is once again out of stock),” said Kussi Amma Sera.
“Mata therenne ne, aei anduwata mei thathvaya kalamanakaranna beri kiyala (I can’t understand why the government cannot manage this situation),” noted Mabel Rasthiyadu.
“Thel nav Lankawata enawa, kisima salasmak nethuwa, mokada anduwata salli ne-ne eva eliyata ganna (Oil tankers are arriving in Sri Lanka without a proper plan as the government doesn’t have money to clear these consignments),” said Serapina.
Adding to the week’s confusion was the promises by both the President and the new Energy Minister Gamini Lokuge that power cuts will end on March 5. They didn’t. And once again chaos prevailed as some areas had power cuts and others didn’t.
Another bizarre decision this week was the announcement of an 11-member Economic Council chaired by the President to assess the country’s economic situation on a weekly basis. It consists of Prime Minister Mahinda Rajapaksa, Ministers Bandula Gunawardena, Basil Rajapaksa, Johnston Fernando, Mahindananda Aluthgamage and Ramesh Pathirana, Central Bank (CB) Governor Ajith Nivard Cabraal, Presidential Secretary Gamini Senerath, Treasury Secretary S.R. Atygalle and CB Deputy Governor Dhammika Nanayakkara.
While all or most of these members have been part of the decision-making apparatus of the country with decisions that have failed and led to the numerous crises that the country is facing today, how can they reverse the economic headwinds? With the same decision-makers, the economic status is unlikely to see any progressive change and fuel queues and a shortage of foreign currency would continue to be the order of the day.
Sri Lanka is not short of its own economic experts and competent economists and rather than relying on failed expertise, the government should have drawn in economists into a crisis-council of sorts (a move that this column has been suggesting for a long time, with expertise too from the private sector – the engine of growth) to recommend a game plan to tackle the forex crisis and ensure debt sustainability.
Such an initiative should have been a bipartisan and independent assessment, offering recommendations that are sound policies to tackle the multiple crises the country is saddled with.
Phew! What a heavy column this week. “Godak weda neda, Sir (Lot of work, Sir),” asked Kussi Amma Sera as she brought my second mug of tea.
“Ow…….ow (Yes…yes),” I said reflecting on the dollar chaos in the market and the eventual outcome of rising inflation and prices.
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