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Tuesday June 22nd, 2021
Bonds & Forex

Sri Lanka to start parallel exchange rate for worker remittances

ECONOMYNEXT – Sri Lanka will start a dual exchange rate shortly giving a parallel exchange rate premium for worker remittances putting into effect to a proposal in the budget for 2021 amid unprecedented money printing.

The parallel exchange rate premium is 2.0 rupees per dollar or a little over 1 percent. Countries that print money sometimes give large parallel exchange rate premium.

The parallel exchange rate premium to expat workers will be covered by tax payers,

Recognizing the role of expatriate workers, the budget for 2021 proposed to pay two rupees per US dollars “when such employees or their beneficiaries converts such remittances of earnings into Sri Lankan Rupees” the Finance Ministry said in a statement.

“The necessary instructions on the implementation process will be issued by the Central Bank of Sri Lanka,” the statement said.

“All Sri Lankans working overseas are invited to make use of this opportunity to remit their funds through secure sources and earn more at the point of conversion to Sri Lankan Rupees.”

Tax payers are expected to foot the bill.

“This scheme will be implemented through Licensed Banks with the government bearing the required cost of such incentives paid,” the statement said.

However Sri Lanka is now having revenue shortfalls after a tax cut in December 2019 for ‘stimulus’ and spending is financed by money printing, through Treasury bill acquisitions by the central bank.

Sri Lanka also had parallel exchange rates in the 1970s.

Most countries with Prebisch-Triffin central banks end up with parallel exchange rate premiums, usually for exporters. Latin American Prebisch-Triffin central banks have seen some of the highest premiums.

Venezuela has had parallel exchange rate premiums of 120 percent, Mexico 40 percent and Argentina 44 percent.

The usual practice was to give a fixed exchange rate for current transactions and a floating rate for capital. But countries with money printing central banks have also given multiple exchange rates simultaneously to different sectors.

Sri Lanka is now printing large volumes of money under ‘Modern Monetary Theory’, which classical economists say is a revamped neo-Mercantilist version of the ideas of classical Mercantilists such as John Law.

In Law’s the time France was suffering from the effects of the War of Spanish Succession, and King Louis XIV adopted Law’s ideas to ‘stimulate’ the economy.

Keynesianism and Post-Keynesianism also involves such ideas.

“Modern Monetary Theory, also called MMT, is not a new concept though it is called modern,” explained W A Wijewardene, a top economist in his regular column in Sri Lanka’s DailyFT newspaper.

“The theory behind it was first suggested by the Scottish economist John Law in 1705 in a book he published for use by Scottish Parliament.

“..King Louis XV who had succeeded Louis XIV was in readiness to receive advice even from the Devil. This was fertile ground for Law to win the confidence of the young and inexperienced monarch. So, he became a member of the inner circle of the King of France.”

Additional reading: A Child’s Guide to Modern Monetary Theory: Keynesianism in an old bottle?

Law fled the UK and set up a pioneer central bank in France, which printed money and created a stock market bubble involving the Mississippi Company, shortly before the economy collapsed.

Sri Lanka’s central bank is also directly financing companies through central bank re-finance of credit.

Sri Lanka stocks are also rising, amid excess liquidity. Analysts have warned that when credit picks up, the currency would come under pressure from the printed money, triggering depreciation or reserve losses.

John Mayanard Keynes, who proposed his General Theory after the Great Depression, appeared to have little knowledge or no interest in monetary history, Friederich von Hayek, who had tried to convince him that his ideas were dangerous said later.

Keynes, Hayek said was more interested aesthetic appeal and had a wide knowledge of a lot of subjects. Keynes was closely linked with the so-called Bloomsbury circle.


Sri Lanka caught in ‘fatal conceit’ of swinging away from markets

Hayek was given the Noble prize around the time the US dollar collapsed from targeting an ‘output gap’ with printed money.

Additional Reading: The Bloombury set

“Underlying all this is a misguided world view,” Economist Razeen Sally said in 2019, delivering a lecture at Sri Lanka’s central bank, when the country was recovering from targeting an output gap in 2018, and before the next round of ‘stimulus’ started which led to downgrades.

“It is a world view Lord (John Maynard) Keynes and his Bloomsbury circle had shared. And (Friedrich) Hayek accused Keynes and his ilk of suffering from a fatal conceit, for that very reason,”

“Why is the world view misguided?

“It is as if you could get a committee of really good super qualified, intelligent people, together, who are platonic guardians as it were, who only have the public interest in mind. They are the best committee to sort out the complex problems of the world because they know best.

“They also assume they have the requisite knowledge to intervene here, there and everywhere as superior to the market, in particular situations.” (Colombo/Dec22/2020)

Comment (1)

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  1. Kumar Soysa says:

    It’s always the good ole taxpayers!! When they are done, then what??!!


Comment (1)

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *

  1. Kumar Soysa says:

    It’s always the good ole taxpayers!! When they are done, then what??!!