Editorial

The COVID-19 virus continued to rage this week, rocketing the death toll over the 10,000 bar. But the shenanigans taking place on the economic front overshadowed what was unfolding on the health front.

The week began with some inspired leaks to the media that there was going to be a change of guard at the helm of the Central Bank (CBSL). The bankers’ bank has long been the subject of public anger and a punching bag absorbing much of the wrath, not undeservedly. The buck stops with the Governor, though not all decisions of monetary policy germinate at the Bank these days. Sometimes, he is the sacrificial lamb for failed directives originating elsewhere.

The CBSL, however, has mismanaged the acute foreign exchange (FOREX) situation to such an extent unwittingly contributing to booming unofficial market operations.

By trying to impose price controls, import restrictions, FOREX regulations and the like, the policies this Government is pursuing, i.e. with the Treasury in cahoots with the CBSL, have only churned out the very antithesis of protecting the common man or woman from the vagaries of economic winds in a global economy and throwing them out to the streets to stand in queues for essential commodities, while the small importer must wait in line at a bank for his dollars. In the process it has unleashed a virtual laissez faire FOREX market, helping crony capitalism to flourish and politically connected businesses to thrive.

The official exchange rate depreciated from Rs.184/US dollar from the beginning of January to around Rs. 199 by the end of March because of heavy draw off on imports. The CBSL tried to maintain the exchange rate at around Rs. 200/dollar over the next six months through its so-called ‘Gentleman’s Agreement’ — a ‘moral persuasion’ with commercial banks that the latter have referred to as an “immoral suasion’ as it deviates from market principles. This unworkable policy to maintain a fixed rate gave a further impetus to the underground economy that was by then in full swing.

Foreign remittances, for instance, dropped in June and July this year by USD 350 million compared to last year and this money was not entering the economy but circulating within itself with black marketeers making a ‘killing’ due to the policies inadvertently mooted by the CBSL. Uncertainty hastened the flight of capital with all and sundry finding ways to send or retain their funds abroad

An underground economy, commonly called a ‘black market’ in FOREX has always existed even during an open economy. But it becomes a hive of activity only when there are restrictions and controls. Today, as many as five FOREX rates are in operation, i.e. the official Central Bank rate; the buying rate and selling rate of the commercial banks; the rate at the ‘black market’; and the rate at which an exporter sells to an importer circumventing official rules. The latter rate is a mechanism devised between trusted parties of exporters and importers. They were running rings round the Central Bank’s declared exchange rate. Exchange rates varied from Rs. 200 to over Rs. 240. To say therefore that there is turmoil in the FOREX market is an understatement.

In June, the outgoing Governor issued a statement that “the cash flows are poised to improve in the next few months and the Central Bank will be evaluating the national balance sheet and external macroeconomic conditions in deciding the future policy response”.

That assurance in words was not matched by deeds except the CBSL was issuing circular after circular to plug the leaks on their regulations.

The Governor seemingly with the prodding of the Government finally addressed a strongly worded letter this week to the commercial banks asking them to strictly adhere to an agreed foreign exchange rate range of Rs.200-203 to the dollar. It is impossible to maintain the dollar at these rates when there is such a critical shortage coupled with high demand for FOREX. This policy has now triggered greater uncertainty in the market heavily penalising the exporters. Already commercial banks have suspended trading or are dragging their feet in executing Letters of Credit. Even state banks while quoting the official rate on their website seem to be using unofficial rates in their paper work.

Given the dire straits of the economy, the Finance Minister introduced legislation this week to provide an amnesty to those who have not paid their taxes. While many see this, and correctly so, as an unfair act towards the honest tax payer, even the benefits that are supposed to accrue from undeclared monies coming in to the economy are minimal. Previous tax amnesties have shown this. The CBSL is responsible for detecting and taking action on illegal foreign transactions.  How it will perform this function when this Act comes into operation has been left open.

There is no money for imports still and shortages are seen in essential food items and pharmaceutical drugs with the import of fuel also in the balance, despite all the assurances that there will not be rationing of fuel. Having just cleared the debt repayment hurdle for this year, there are more, bigger payments along the road. The Finance Minister says this week they will not accept loans from those who place political conditions on it. That’s all very good if the economy was not in tatters. Even the prospective Governor-in-waiting is putting on a brave face and rejecting the need to go to the International Monetary Fund (IMF), while accepting with both hands the SDR facilities offered by the Fund to tide over the current crisis.

The Governor on the chopping block unfortunately harboured an outdated political ideology, but his principles were never in question. On the other hand, the incoming Governor is known to bend with the wind and his own probity has long been debated, especially during his term as Governor. A forensic report undertaken by international experts on bond transactions during the term of the previous two Governments is with the Attorney General.

At least in the interest of the incoming Governor, the Attorney General must say there is “no case” to prosecute, indeed if there is no case to prosecute — and clear him of the cloud that hangs over him.