ECONOMYNEXT – Colombo Port City will allow Sri Lanka to get on the ‘missed bus’ since independence that economists had been commenting on for many decades, State Minister for Money and Capital Markets AjithNivardCabraal said.
“We don’t want to miss the bus this time,” Minister Cabraal told reporters on a May 28 briefing. “This will be a turning point in our history. We don’t want to miss the bus this time.
Some people in a rather unsympathetic way said that Sri Lanka has missed the bus. They say at the time of independence, Sri Lanka was only behind Japan.
“But I think we need to put that narrative behind us, we need to ensure that we turn a new chapter in Sri Lanka’s economic history. We don’t want to be stagnating once again.”
Sri Lanka set up a Latin America style money printing central bank, under the advice of a so-called Federal Reserve ‘money doctor’ in 1950 ending a Hong Kong and Singapore style currency board in 1950, triggering forex shortages andimport controls barely two years later.
The Fed Latin America unit, under its then chief Robert Triffin had been setting up money unstable soft-pegs styled after the Argentina central bank set up by Raul Prebisch in several countries that ran into import substitution, economic collapses and sovereign default later.
“This law had been drawn up under American tutelage and long the lines that have been the subject of experiment in certain Latin American countries for some eight years past,” a classical financial expert wrote prophetically in the 1950 July issued of the UK-based The Banker magazine.
“This step from an “automatic” currency system (such as that which Ceylon inherited with its old Colonial Currency Board) to an ultra-modern “managed” currency system is necessarily fraught with great dangers and there may be some who will regret that Ceylon has decided to run such risks at this time.”
Some economists and analysts have been calling for a currency board to be re-established to halt ‘stop-go’ policies, currency collapses and negative output shocks that accompany soft-pegging.
Sri Lanka suffered unusual output volatility from 2015 after a bout of ‘stop-go’ policies involving targeting a output gap with money printing and busting the currency from 151 to 182 to target a real effective exchange rate index, destroying real salaries and savings.
The rupee collapsed from 131 in 2015. In 2020, amid more money printing the rupee had collapsed to 200 to the US dollar.
“Sri Lanka suffered in the last 5-6 years in its macroeconomic numbers, our growth suffered, our rupee struggled and our interest went up,” Cabraal said.
“But we needed to have a turning point as quickly as possible that’s why we spent a lot of time in getting this law (Colombo Port City Economic Commission Act) into place.”
The collapsing rupee was driving both educated people and less skilled people to countries with better central banks and monetary stability where their salaries are protected.
The China-backed Colombo Port City will be protected from soft-pegging policy errors of the Monetary Board of the central bank though dollarization, which is a step further than a currency board.
“It would generate about 83000 jobs to people who will be paid in dollars or in foreign currency so that they don’t need to go to Dubai, they don’t need to go Singapore to work. They can work out from Sri Lanka itself.”
Dubai has a currency board like system, which does not have a true policy rate enforced with money printing but piggy-backs on US rate policy rates and has uses certificates of deposits to sterilize inflows and build forex reserves.
Singapore has a modified currency board with no policy rate, and uses Monetary Authority of Singapore securities (MAS paper) to mop up inflows and build up forex reserves.
Sri Lanka’s central bank buys government treasury bills to inject liquidity, trigger unsustainable outflows, and lose forex reserves.
In addition to monetary instability Sri Lanka was also hit by nationalism shortly after independence, exemplified by an immigration law that suddenly ended thousands years of immigration and naturalization dating back to the island’s ancient kings and beyond creating state-less citizens.
The Port City on the other hand will have liberal visa rules.
Ministers said the Port City will be a cosmopolitan area which is not confined to a single country though it was reclaimed by a Chinese company.
“Now this optimum benefit will not come only from one country,” he said. “This optimum benefit will come from an international flavour in this entire city. That will not be done by Sri Lanka doing business with one country only. We want to do business with all the countries.”
“We are non-aligned, we are friends of all, we are open for business with everyone,” Justice Minister Ali Sabry said.
He said investors who bought land in the first round will get a benefit because prices will go up as the city progressively gets built.
After independence Sri Lanka’s public service was also broken systematically through direct presidential appoints of ministry secretaries and others senior officials.
Reporters asked whether the same problem that befell permanent secretaries (still found in Singapore) would also befall the Port City and whether the problem could be solved by appointing ex-officio members.
Education Minister G L Pieris said suggested ex-officious members already had too much work on their hands, and it was too much to expect them to act as member of the Colombo Port City Commission as well. (Colombo/May29/2021)