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Sri Lanka ex-President blames free trade for rupee fall, praises Trump

ECONOMYNEXT – Sri Lanka’s ex-President Mahinda Rajapaksa blamed freer trade under Sri Lanka’s current administration and praised President Donald Trump’s protectionist policies as the island’s soft-peg with the US dollar came under pressure from contradictory monetary and exchange policies.

"President Trump has strengthened the US economy through a policy of giving incentives to indigenous businesses and imposing tariffs on imports to encourage local production," Rajapaksa said in a statement.

"My government also had a policy of producing whatever we could locally and reducing imports particularly of foodstuffs such as diary products, maize, soya, sugar, onion, potato, fruits, vegetables, poultry and certain industrial products.

"This government in contrast believes in limitless liberalization and free trade without a clear strategy to increase exports and reduce imports.

"The role of a government is to keep abreast of worldwide developments and to take steps to strengthen our economy instead of complaining that a foreign leader has strengthened his own economy and that our currency was collapsing on that account."

The US however also has a current account deficit and one of the largest trade deficits of the world, but its central bank has a free floating exchange based on a domestic anchor. The US Fed moved to floating exchange rates after the Bretton Woods system of soft-peg collapsed under then Fed Governor Arthur Burns. 

Sri Lanka on the other had is operating a peg to collect reserves, unwind or give central bank swaps to domestic players and is also chasing a domestic anchor in the form of a wide inflation target with a ‘flexible exchange’ rate.

The conflicting policies trigger a loss of credibility in the rupee, periodically.

As a result every time domestic credit picks up, and the central bank tries to cut rates or even maintain existing rates, by injecting cash in to money markets, the rupee falls.

The currencies of East Asian nations that operate soft-pegs including Vietnam, one of the fastest growing exporting nations – with free trade – is now under pressure. During the global financial crisis, the Vietnam Dong fell from 16,000 to 22,000 to the US dollar.





However the Sri Lanka rupee fell from around 110 to 120 during the crisis and for the first time the rupee was allowed to appreciate as credit contracted by Central Bank Governor Nivard Cabraal, unlike in crises before or after.

"The Sri Lankan Rupee which averaged Rs.110.62 to the US Dollar in 2007 was still Rs.114.94 in 2009 after the crisis had run its course," Rajapaksa said.

"The government’s task is to manage crises, not to complain about them."

The rupee fell to 130 to the US dollar in a 2011/2012 balance of payments crisis as the central bank cut rates and injected money while a drought boosted credit funded losses at state energy enterprises amid a booming credit and stock market. But the rupee was not appreciated as credit fell and reserves were built in 2013 and up to the third quarter of 2014, when credit recovered.

The current administration in 2015 also cut rates in April as the credit cycle recovered from the 2011/2012 crisis and accommodated spending with term repo releases and outright purchases of Treasury bills.

The rupee has fallen from around 131 from 2015. In 2018, as credit recovered the rupee has against started to all, due to liquidity injections. In the current panic the rupee is down to 169.50 to the US dollar so far.

Analysts had urged reforms of the central bank saying operating an inconsistent peg would hit any free trade agenda for the people.

Ex-president Rajapaksa also warned that prices of good including fuel will go up due to the fall in the rupee. (Colombo/Sept25/2018)

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