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Thursday December 8th, 2022

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)

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Sri Lanka in deep talent drain in latest currency crisis

ECONOMYNEXT – Sri Lanka businesses are facing a drain of talent, top business executives said as the country suffers the worst flexible exchange rate crisis in the history of its intermediate regime central bank and people lose hope.

“We are seeing a trend towards migrating,” Krishan Balendra, Chairman of Sri Lanka’s John Keells Holdings told an economic policy forum organized by the Ceylon Chamber of Commerce.

“We have seen an impact mainly on the tourist hotels side, quite an exodus of staff (migrating) to countries we have not seen in the past. 

“We have seen people go to Scotland, Ireland. It has usually been the Middle East and Maldives. Australia seems like a red hot labor market at the moment.”

Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar after macro-economists printed money to suppress rates.

Sri Lanka operates a ‘flexible exchange rate’ where errors in targeting interest rates are compensated by currency depreciation especially after the 1980s.

Classical economists and analysts have called for the power to mis-target rates and operate dual anchor conflicting monetary regimes should be taken away to prevent future crisis.

Currency crises are problems associated with flexible exchange rate central banks which are absent in hard pegs and clean floats.

“Something new we are seeing is that older people, even those in their 50s, which was a surprise, are looking at migrating,” Balendra said.

Businesses are trying to retain talent as real wages collapse.

Balendra said as businesses they see some stability returning and based on past experience growth is likely to resume, and they were communicating with the workers.

“We have a degree of conviction that the economy should get better, its the stability phase now and it will get better going forward so without the way our businesses are placed we should see good growth,” Balendra said.

“We can’t chase compensation that’s just not practical and we are not trying to do that especially if people are looking to immigrate but what we can do is show the career opportunities in the backdrop of the situation that people would rather stay here because its home.” 

Sri Lanka unit of Heineken says it is also trying to convince workers not to leave, with more success.

“We are all facing the effects of brain drain and it’s not just the lower levels… What we are doing is a balance of daring and caring,” Maud Meijboom-van Wel – Managing Director / CEO, Heineken Lanka Ltd told the forum.

“Why I say daring is, you have to be clear in what you can promise people, when you make promises you have to walk the talk. So with the key talents and everyone you need to have the career and talent conversations.

“I am a bit lucky because I am running a multinational company so my career path goes beyond Sri Lanka so I can say if you acquire certain skills here, then you can move out of here and then come back too, that is a bit easier for me but it starts with having a real open conversation with walking the talk – dare and care.” (Colombo/Dec7/2022)

 

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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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