Sri Lanka to form coalition of countries with failing central banks
ECONOMYNEXT – Sri Lanka, faced with a falling currency due to monetary instability, which has undermined its free trade agenda, is planning host a summit of so-called Group of 24 countries among which are the worst central banks in the world.
The falling currency had forced the finance ministry partially suspend market pricing of oil, and also stop some imports, hurting tax revenues and also undermining a case for free trade.
"I’m hoping to have a summit here of similar countries facing similar issues," Finance Minister Mangala Samaraweera told reporters.
Samaraweera, who is the current chair of the G-24, said that he has written to the member countries to form a coalition and hold the summit.
"We want to form a coalition of countries with problems to sit around the table and discuss," Samaraweera said.
"This is not something that’s going to go away in a month or two."
He said that with major oil supplier Saudi Arabia now on the receiving end of global criticism and possibly facing sanctions over the killing of journalist Jamal Khashoggi, global markets are likely to continue being unpredictable.
"The volatility in the financial scene is going to be around for a while, so we also have to look at ways and means of facing these challenges," Samaraweera said.
The G-24 is made up of countries that have some of the worst central banks in the world who are among the best customers of the International Monetary Fund as well as being top oil producers.
In region III (Asia) are India, Iran, Lebanon, Pakistan, Phillippines, Sri Lanka and Syria.
The Reserve Bank of India is one of the worst central banks of the region, which is dragging down every country that tries to import its monetary policy by pegging to it, though policy improved somewhat after a massive balance of payments crisis in 1991.
Before the RBI was nationalized however its rupee was the dollar of ‘Asia and the Middle East’ and Sri Lanka was hard pegged to it.
Pakistan is going into a new IMF program.
Iran has a hyper-inflating central bank despite having oil.
Philippines’ central bank, created on the same lines as Sri Lanka by the same Fed official, once went bankrupt partly due to currency swaps.
In region II (Latin America) are Argentina, Mexico, Venezuela and also Ecuador.
Mexico, a colonial power bigger than the United States when money was gold, has been reduced to a migrant exporter with a bad central bank and a peso which collapses frequently, but which has improved in recent years.
The central bank of Venezuela, a country with massive oil reserves, is hyperinflating along with that of Iran.
Argentina has an archetypical sterilizing soft-peg. It is now going back to the IMF while chasing a 17 percent inflation target (no kidding) with a flexible exchange rate after creating a secondary market for its own sterilizing securities (seriously, no kidding) to keep rates down.
IMF has belatedly told Banco Central de la República Argentina it is not a very good idea and to sell them (Lebacs) down.
However one country Sri Lanka can learn a lesson from is Ecuador, an oil producer. It scrapped the the depreciating the sucre in 2000 and dollarized, when its official rate fell to 25,000 from 4,000.
The country now has low interest rates and people are protected despite residual socialist policies. Large numbers of US citizens are retiring in the country where interest rates and inflation has converged with the developed world.
Sri Lanka can also learn some lessons from Qatar and Oman with which the Central Bank of Sri Lanka is now negotiating currency swaps, analysts say.
Qatar dumped the Indian rupee with which it was dollarized as the Reserve Bank of India started printing money after it was nationalized, and formed a currency-board-like central bank, with a fairly credible peg.
But naturally neither Qatar nor Oman can be in the G-24. (Colombo/Oct23/2018)