ECONOMYNEXT – Sri Lanka’s remittances through official channels picked up to 476 million US dollars in December 2022 up from 353 million dollars a year earlier as parallel market premiums disappeared money printing reduced, while Pakistan is seeing a fall.

Pakistan is seeing an external meltdown as foreign reserves are spent and money is printed to stop interbank rates from going up (sterilized forex sales).

Severe pressure from liquidity injections which fire domestic credit, imports as well as capital flight fro the lost credibility of the exchange rate, then create parallel exchange rates to which remittances are channeled.

Sri Lanka’s kerb dollar rate which topped 400 to the US dollar, fell to 371.50 to the US dollar the same or a little lower TT selling rate of banks in December after interest rates were allowed to go up, reducing private credit and money printing was halted.

However central bank in January started a series of domestic operations in January 2023, injecting 340 billion rupees term, largely replacing overnight injections made to sterilize reserve losses in 2022.

Analysts have warned the central bank not to overdo the injections and jeopardize gains in external domestic stability made so far by externally anchoring the currency at 360/370 to the US dollar, with largely complementary domestic operations. (Sri Lanka central bank caught between peg and hard place).

Expat workers leaving, but no official dollars seen

“In the first 11 months of 2022 about 0.75 million Pakistanis moved abroad mainly for jobs and other purposes like education, but the inflow of remittances has been declining instead of showing an improvement,” Pakistan’s Dawn newspaper said.

“Banks offer Rs228 per dollar while exchange companies offer Rs238 but the grey market offers even higher than Rs270.”

Sri Lanka also saw hundreds of thousands of persons fleeing the country after the currency collapsed from 200 to 360 to the US dollar in a botched float, but remittances through official rates did not improve until rates were hiked and domestic credit reduced.

Pakistan has the worst central bank in South Asia after after Sri Lanka. Sri Lanka’s central bank has busted the rupee from 4.70 to 360/370 since its creation denying sound money to the people.

Both the Pakistan and Sri Lanka rupees are derived from the Indian rupee at 4.70 to the US dollar at independence from British rule.

The Pakistan rupee has fallen to 228 to the US dollar and parallel exchange rates are around 270 to the US dollar.

In Sri Lanka, a currency board 1 to 1 to the Indian rupee (13.70 to Sterling) was broken legislatively in 1950, to set up an anchor conflicting central bank with extensive Latin America style sterilization powers, sealing the country’s economic fate of the country the next seven decades.

Over the past decade, despite ending a 30 year war, monetary instability has dramatically worsened in SriLanka under flexible inflation targeting, probably the deadliest impossible trinity regime ever devised by Western Mercantilists and peddled to third world countries without a doctrinal foundation in sound money.

Easy Prey to Flexible Policy

A World Bank survey last year found that only 2 percent of ‘experts’ in a regional survey knew that forex shortages were created by the central bank, making the region easy prey for flexible inflation targeting or other impossible trinity regimes. (South Asia, Sri Lanka currency crises; only 2-pct know monetary cause: World Bank survey).

Both ‘fear of floating’ and a currency board phobia among economic bureaucrats prevent the establishment of single anchor non-impossible trinity regimes.

Un-accountable soft-pegged central banks and their supporters in the private sector have devised a narrative to find scapegoats. A favorite is to scapegoat exporters : this is not an export oriented-economy or exporters are not bringing dollars.

Another is to blame expat workers: they are not bringing dollars through official channels and are using Hawala. Importers are usual suspects: there is a trade deficit.

In Sri Lanka, a reserve collecting central banking regime is bombarded with floating rate style liquidity injections to generate double the inflation rate found in stable floating regimes (about 5 percent compared to 2 percent), until the peg collapse time after time.

Sri Lanka ran out of reserves and defaulted in April 2022, after taking on large volumes of monetary stability driven external borrowings each time forex shortages made it impossible to make external payments under flexible inflation targeting.

In Sri Lanka monetary instability borrowings are quaintly referred to as ‘bridging finance’ by economic bureaucrats.

Pakistan is also now running hither than thither looking for external loans as foreign reserves melt and parallel exchange rates widen due to money printed.

In Pakistan banks are unable to give dollars for relatively small imports, a situation Sri Lanka faced last year.

“Manufacturers associated with the Karachi Chamber of Commerce and Industry claimed recently that banks weren’t even processing $1,500 payments for the import of spare parts — a phenomenon that’s bringing the entire supply chain to a standstill,” the Pakistan’s Express Tribune newspaper said.

Pakistan’s official reserves dropped to 4.343 billion dollars in January 07, 2023 from 17.597 billion dollars on January 06 last year.

On January 13, reserves picked up to 4.601 billion dollars.

Pakistan has also banned ‘non-essential’ imports a favourite tactic of economic buraucrats who print money and busts the flexible exchange rate (soft-peg).

Politicians Misled

Over the years economic bureaucrats have misled legislators into enacting exchange and import control laws, helping economic bureaucrats more room to delay interest rate corrections and worsen balance of payments trouble.

Sri Lanka is due to legalize the flexible exchange rate and flexible inflation targeting regime under a reform program with IMF, a highly unstable impossible trinity regime, which triggered serial currency crises in recent year and drove the country to default

Sri Lanka is going to the IMF for the 17th time instead of bringing tight laws to prevent the central bank from operating an impossible trinity regime and hold the agency accountable for external instability.

Bangladesh, which operates reserve money targeting framework with a peg (another impossible trinity regime which works fine as long as reserve money is under-supplied with sterilized purchases, but collapses as soon as sales are sterilized to suppress rates) has also gone to the IMF after mis-targeting rates as credit recovered from a Coronavirus crisis.

“..[W]hile more than 11.35 lakh Bangladeshis left for jobs abroad in 2022 – nearly doubling the figure from 2021 when 6.17 lakh flew abroad – remittances sent in through formal channels actually registered a 6.65 percent drop,” Bangladesh’s Daily Star newspaper said.

“The amount in 2022 was USD 21.28 billion; in 2021, it was USD 22 billion. How to explain this inverse effect? Why have we failed to translate a record migrant outflow into an increase in remittance inflow?”

Many third world reserve collecting central bank have seen worsened conflicts between money and exchange policies under so-called ‘monetary policy modernization’ in recent years with more aggressive floating rate style open market operations encouraged.

In Sri Lanka money was printed from 2020 mostly to close an ‘output gap’ after the IMF gave technical assistance to the trigger happy central bank to calculate it. (Colombo/Jan22/2022)