An Echelon Media Company
Sunday June 23rd, 2024

Vietnam monetary policy for stability not trade PM tells Trump after false US charges of Dong ‘manipulation’

ECONOMYNEXT – Vietnam Prime Minister Nguyen Xuan Phuc has explained State Bank of Vietnam (central bank) monetary policy in a telephone conversation with US President after the country was falsely labeled a ‘currency manipulator’ by US mercantilists.

PM Phuc had pointed out that a strong, independent and prosperous Viet Nam with increasingly important role in the region that was in line with line with the U.S. interests.

PM Phuc had explained that Viet Nam “as a developing country with limited economic capacity, has pursued the monetary policy in favor of inflation control and macro-economic stabilization.”

For Domestic Stability

“The monetary policy has not been designed to gain advantages in international trade,” the Prime Minister had explained.

The Vietnam dong collapsed from around 16,000 to 22,000 to the dollar after trying ‘stimulus’ when a US housing and economic bubble burst around 2008/2009.

Since then State Bank of Vietnam had kept the Dong around 23,000 to the US dollar with a wide policy corridor, which allow overnight rates to move and liquidity to tighten.

The US Treasury has a history of claiming that East Asian countries are manipulating currencies when they simply maintain a peg in the style of the Bretton Woods system which was initiated by the US itself and broke when the Fed printed money to target an output gap.

Because Vietnam had not been trying ‘stimulus’ with liquidity injections for many years, the currency had been stable.

The US Treasury had so far not labeled currency boards (Hong Kong) or dollarized nations (such as Cambodia) as ‘currency manipulator which critics say would make it a laughingstock.

A strong soft-peg, or a hard peg or dollarization allows the pegged nation to have inflation close the anchor currency nation.

US Mercantilism

But Mercantilists believe that US trade deficits are caused by ‘undervalued’ currencies and not government deficit spending. Pegged central banks in East Asia typically buy US Treasury bills with foreign reserves, giving more income to US residents to spend on imports.

The phenomenon is driven by a US savings investment gap, due to budget deficits finances from abroad or foreign investments not the exchange rate.

The US had in the past tried the same failed Mercantilist remedy on Japan and China, Steve Hanke, a classical economist explains.

The Yen rose from 360 to the US dollar from the Bretton Woods system collapsed to 80 in 1995 until then US Secretary of Treasury Robert Rubin had changed tack.

“In consequence, the U.S. stopped arm-twisting the Japanese government about the value of the yen and Secretary Rubin began to evoke his now-famous strong-dollar mantra,” Hanke said.

“But, while this policy switch was welcomed, it was too late.”

Misled by US mercantilist claims that East Asia was ‘undervaluing’ currencies Sri Lanka embarked on a disastrous Real Effective Exchange Rate (REER) targeting exercise destroying the rupee, economic stability and triggering capital flights and output shocks.

Whipping Boy

The Vietnam dong has become the latest whipping boy of US Mercantilists, but other countries had been targeted by the Treasury in the past.

When Chinese imports to the US picked up, its currency replaced the Japanese yen “as the mercantilists’ whipping boy,” Hanke explained at the time.

But the relative strength of exchange rates fails to explain the US trade deficit. In China’s case the trade deficit rose while the Yuan appreciated.

While the Japan-US trade deficit declined over the last twenty years, the relationship between Yen’s strength and the Japanese contribution to the total US trade deficit was weak says.

“After all, this exchange-rate argument (read: competitive advantage) is what the mercantilists use to wage war,” Hanke says.

“And as for China, the relationship between the strength of the Yuan and China’s contribution to the U.S. trade deficit contradicts the mercantilist conjecture.

In the US Mercantilist arguments about trade deficits are not just peddled by politicians but also by economists like C. Fred Bergsten of the Peterson Institute for International Economics and supply side guru Arthur B Laffer, Hanke says.

“The United States has recorded a trade deficit in each year since 1975. This is not surprising because savings in the U.S. have been less than investment,” Hanke explains.

“The trade deficit can be reduced by some combination of lower government consumption, lower private consumption or lower private domestic investment. But, you wouldn’t know it from listening to the rhetoric coming out of Washington.

“This is unfortunate. A reduction of the trade deficit should not even be a primary objective of federal policy. Never mind. Washington seems to thrive on counter-productive trade and currency wars that damage both the U.S. and its trading partners.”

“In short, the U.S. trade deficit is the result of a U.S. savings deficiency, not exchange rates.” (Colombo/Dec24/2020)

Leave a Comment

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

Leave a Comment

Leave a Comment

Cancel reply

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

India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

Continue Reading

Sri Lanka Water Board makes profits, tax-payers inject Rs28bn

ECONOMYNEXT – Sri Lanka’s state-run National Water Supply and Drainage Board has made a profit of 5.2 billion rupees in the year to December 2023, after a tariff increase despite not getting money for 25 percent of its water it pumps out.

Total revenues went up to 61.8 billion rupees in 2023 from 35.4 billion rupees, a Finance Ministry report said.

Water revenue surged to 58.5 billion rupees from 33.1 billion rupees, cost of sales also went up to 32.8 billion rupees from 23.14 billion rupees, helping boost gross profits from 12.3 billion rupees to 29.0 billion rupees.

Finance costs surged to 14.9 billion rupees from 3.9 billion rupees,

NSWD reported net profits of 5.2 billion rupees for the year, against a loss of 2.7 billion rupees a year earlier.

The Treasury had given 28 billion rupees from tax payer money to settle loans.

During the Rajapaksa administration, macroeconomists who ran the Finance Ministry made state enterprises borrow money from banks through Treasury guarantees listing them as ‘contingent liabilities’, claiming they were ‘off balance sheet’.

The Road Development Authority, which had no revenues to speak of borrowed large amounts of money from banks which were listed as ‘contingent liabilities’ though they were a responsibility of the state from day one, allowing macroeconomists to understate both the budget deficit and national debt, critics say.

The water tariffs were raised by 81 percent after macroeconomists printed money to supress interest rates for flexible inflation targeting/potential output targeting. The currency collapsed after macroeconomists tried to float the rupee with a surrender rule in place.

Non-revenue water for which no money is collected was 25.2 percent. The agency was supposed to reduce non-revenue water. In some districts religious establishments are responsible for non-revenue water, according to an official who said it on condition of anonymity.

The water board is also unable to collect money from some services like common toilets for underserved communities. (Colombo/June23/2024 – Update II)

Continue Reading

Sri Lanka will expedite Indian projects: President

ECONOMYNEXT – Sri Lanka will expedite Indian-backed projects in the island, President Ranil Wickremesinghe told Indian business people after a visit by Indian External Affairs Minister S Jaishankar this week.

“I discussed with Prime Minister Modi the need to accelerate the joint program that we have decided, agreed on. So the major ones are identified, and Foreign Minister Jaishankar came down today [20] to have a discussion. Now this will show the new path we are taking,” president Ranil Wickremesinghe said.

“It won’t be individual projects. We’ve discussed a fair number of them. First is the grid interconnection between Sri Lanka and India, so that sustainable energy can be transmitted to India.

“We have the Sampur solar power project, which is a Government to Government (G2G) project, and a three island project, which is where we hope the ground breaking can take place in July,” he told Indian business people at the 31st All India Partner’s Meet 2024 (AIPM 2024), held at ICT Ratnadipa in Colombo.

The AIPM 2024 which was organised by KPGM Sri Lanka and India provided a platform for both countries to reaffirm their commitment to collaborative projects that promise to redefine bilateral relations and propel socio-economic growth.

“It’s a great pleasure and a privilege to have you in Sri Lanka, in Colombo, holding this meeting. It shows on one hand the close friendship that our two countries have, and on the other hand, the confidence that you have in Sri Lanka.

“Having now survived two difficult years, I must acknowledge that this was possible because India gave us a loan of $3.5 billion. All that will be repaid.”

Cooperation between the two nations needed to be enhanced, particularly in the energy sector, aiming to foster new development for the Northern region, Wickremesinghe said.

“We are looking at developing Palk Straight for wind energy and solar energy, both countries to get together and have a large farm for solar energy, for renewable energy. It also means that we will have a new economy for the northern province, which was worst affected by the war.”

Several Indian-backed projects in Sri Lanka have stalled due to protests from some parties, with some going to courts.

India is helping expand the Kankesanturai port, and is discussing development of the Palali and Colombo airports.

The National Livestock Development Board of Sri Lanka, in collaboration with India’s Amul Dairy Company, is involved in a project to enhance liquid milk production in the country.

The two nations are also considering establishing land connectivity.

Discussions have also taken place regarding expediting the Trincomalee Development Project, which encompasses industrial investment zones and tourist areas.

“Plans are underway to construct a multi-product oil pipeline from Nagapatnam to Trincomalee, pending the final observation report. Trincomalee is poised to become a hub for oil refining, with the development of ports and investment zones, transforming Trincomalee Port into a significant hub on the Bay of Bengal.

“Today, the entire East Coast is being opened up for tourism, with additional land earmarked for hotels in Galle and southern areas. Moreover, there are plans to establish more investment zones across the country, alongside expanding our professional training programs. In these endeavours, we are collaborating closely with India.” (Colombo/Jun22/2024)

Continue Reading