An Echelon Media Company
Saturday May 25th, 2024

Vietnam REER ignored by IMF buoying US Mercantilists as Sri Lanka rupee falls

CHERRY PICKING: Vietnam’s Real Effective Exchange Rate is over 130 but Mercantilists insist the Dong is ‘undervalued’ using cherry picked methods.

ECONOMYNEXT – Washington-based International Monetary Fund has claimed that the external position of Vietnam was too strong and appeared to support false US allegations of undervaluation by ignoring a sharply appreciating real effective exchange rate index.

Instead the IMF used another model based on the external current account to support the charge and advocated a non-credible ‘flexible’ exchange rate for Vietnam.

Sri Lanka followed unusually discretionary policy involving a ‘flexible exchange rate’ (no credible external anchor) and ‘flexible inflation targeting’ (no credible domestic anchor) and is now on the brink of default and balance of payments deficits after repeated currency crises.

Sri Lanka was hit by credit downgrades in several ‘flexible exchange rate’ episodes involving call money rate targeting with excess liquidity and over-sterilizing outflows and under-sterilizing inflows which led to steep currency falls and foreign reserve depletion.

Sri Lanka’s troubles partly came by targeting REER, which analysts had warned was a wild goose chase as East Asians nations, from Singapore to Hong Kong (currency boards), and Thailand to China (tighter than currency boards but not as credible) usually had high real effective exchange rates.


Sri Lanka’s path to debt and destruction paved by currency collapse, REER targeting: Bellwether

Sri Lanka’s devaluationist REER targeting is a tiger’s tail: Bellwether

Credible and Consistent Policy

The State Bank of Vietnam has been running a fairly credible peg with the US dollar around 23,000 dong since the last currency collapse during the start of the ‘Great Recession’ where the country was misled into ‘stimulus’ as a Fed fired bubble collapsed.

The SBV in general has been running credible domestic operations involving sterilizing inflows and only partially sterilizing outflows through a wide policy corridor and two way simultaneous lender of last resort auctions which allows the call money rate to go up and liquidity to tighten when the Fed tightens.

However the ceiling policy rate has come down since the last currency crsis.

Such a regime tends to be tighter than a currency board, which are policy-neutral and reserve accumulation is limited to domestic reserve money growth.

Unlike currency boards, such pegs can collapse after two or three Fed cycles when ceiling rate is too low to slow domestic credit or when central bankers who ran credible domestic operations retire and their replacements fall prey to relentless Keynesian pressure from the IMF and other interventionists.

“Vietnam’s external position in 2019 was assessed to be substantially stronger than warranted by fundamentals due to structural features,” an IMF staff report claimed.


The claim came shortly after the US Treasury labeled the country a ‘currency manipulator’ after a decade of currency strength, along with the Swiss Franc, one of the world’s strongest currencies.

The IMF has been pushing Vietnam to adopt a Sri Lanka style ‘flexible’ inflation targeting framework earlier claiming it would give better domestic stability than an external anchor, despite countries in Latin America turning into basket cases under similar arrangements.

US classical economist Steve Hanke from the John Hopkins university said the Amercian Treasury tended to make false charges about ‘undervaluation’ agaist trade partners with strong curencies all the time starting from Japan.

But labelling the Swissie, one of the strongest currencies in the world was a absurd, he said.

“The absurdity of putting the Swiss franc and the dong in the same basket brings back memories of May 1, 2002,” he wrote in December 2020.

“That’s when I appeared before the Senate Banking Committee, along with then-Treasury secretary Paul O’Neill, to testify on exchange rates and the Treasury’s “Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.”

“I was highly critical of both the entire concept and the particular methods used to label a country as a currency manipulator. I indicated that the U.S. Treasury’s report was little more than an invitation for political mischief that would interfere with free trade.

“In short, I thought, and think, that the entire semi-annual currency-manipulator ritual is rubbish and should be trashed. The Swissie-dong odd couple certainly suggests that I am on to something.”

Vietnam had insisted that the strong Dong was for domestic stability and not to ‘undervalue’ the currency to boost exports.


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

Trump-style Mercantilists have long falsely blamed East Asia, which has pegged exchange rate central banks and currency boards for ‘undervaluing’ their currencies and creating a trade deficit with the US.

“Noting the staff’s assessment that Vietnam’s external position was substantially stronger than warranted by fundamentals and desirable policies, Directors called for steadfast reform efforts
to remove the remaining barriers to private investment and enhance social safety nets,” IMFs executive directors, one of whom is from the US said.

“At the same time, some Directors urged caution in interpreting EBA model results, which may not
adequately capture Vietnam-specific structural factors and measurement issues. ”

The US Treasury believes that ‘price effects’ are responsible for East Asian export performance, in the Keynesian tradition, and refuses to acknowledge that the American trade and current account deficit is caused by US deficit spending and FDI receipts and instead blames East Asia for ‘undervaluation’.

Cherry Picking Models

The IMF conveniently ignored Vietnam’s Real Effective Exchange Rate Index (REER) which is currently around 130 percent (as the US had always done) and instead points to the current account surplus, cherry picking the model to support a pre-conceived conclusion.

Vietnam’s current account surplus spiked in 2019, after policy automatically tightened in 2018 in response to US tightening (quantity tightening and rate hikes) slowing domestic credit, an apartment and property bubble.

Domestic credit slowed sharply to 12.8 percent in 2018 and 2019 from around 18 percent earlier, as the call money rate rose (without a formal rate hike) and liquidity tightened.

Reserve accumulation slowed sharply in 2018, and reserves were sold to keep the peg around 23,000 giving domestic stability.

The external current account balance which was a negative 0.6 percent in 2017 with 17.4 percent credit growth expanded to 1.9 percent in 2018 and 3.8 percent in 2019. Vietnam stocks collapsed as liquidity tightened and then recovered.

The property bubble moderated allowing the economy to grow steadily with low inflation only a little higher than the US.

The IMF however has been pushing the SBV to adopt a ‘flexible exchange rate’ which reduces credibility, panics domestic and foreign investors and ultimately generates credit downgrades and political instability as had happened in Sri Lanka and Malaysia.

“In the context of reserve adequacy, Directors welcomed efforts to allow greater two-way exchange
rate flexibility and modernize the monetary policy framework, which would help the economy
to adjust to the changing external environment,” IMFs executive director said.

Vietnam’s REER is now around 130 percent.

Price Effect Mercantilism

However the IMF – as it had done to other countries in the past – focused instead on a current account based model to bash the country to claim that Vietnam’s external position was “substantially stronger than warranted by fundamentals due to structural features.”

The IMF was set up by an arch New Dealer Harry Dexter White. New Dealers devalued the US dollar as part of several economic shocks (Regime Uncertainty) that delayed and killed the first US recovery from the Great Depression.

“There is no structural feature in the Vietnam other than prudent domestic operations,” EN’s economics columnist Bellwether said.

“This goes backs to Keynesian/Mercantilist mis-understanding of the balance of payments and central banks involving the German reparations payments.

“Keynes in 1929 claimed in several intellectual debates made similar arguments placing price effects over income, which he did not appear to grasp very well.

“He also believed that there were ‘structural features’ that doomed countries.”

Keynes has written among other things that ‘the economic structure of a country in relation to the economic structure of its neighbhours permits of a certain natural level of exports.”

Swedish economist Bertil Ohlin (and French Economist Jacques Reuff) explained in 1929 that a current account surplus (or any net position) is triggered by income effects (outflows) rather that price effects warning that a focus on ‘price effects’ would have unfortunate consequences in the future.

He warned that the apart from clearing up theory, it was a “matter of considerable practical importance not only for handling of the reparation payments, but also for central bank policy in the future.”

Prophetically countries like Sri Lanka in 2015 to 2020 is facing Weimar Republic style default, amid a relentless push to run ‘flexible exchange rates’ while pumping liquidity to target an output gap and create deficits of not just the current account but the overall balance of payments. (Colombo/Mar03/2021)

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 *

Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

Continue Reading

300 out of 1,200 Sri Lanka central bank staff works on EPF: CB Governor

ECONOMYNEXT – About 300 central bank staff out of 1,200 are employed in the Employees Provident Fund and related work, Governor Nandalal Weerasinghe said, with the function due to be transferred to a separate agency after a revamp of its governing law.

“When it comes to the EPF there is an obvious conflict of interest. We are very happy to take that function out,” Governor Weerasinghe told a forum organized by Colombo-based Advocata Institute.

“We have about 300 staff out of 1,200 including contract staff, almost 150 of permanent staff is employed to run this huge operation. I don’t think the central bank should be doing this business,”

The EPF had come under fire in the past over questionable investments in stocks and also bonds.

In addition, the central bank also faced a conflict of interest because it had another agency function to sell bonds for the Treasury at the lowest possible price, not to mention its monetary policy functions.

“There has been a lot of allegations on the management of this fund. This is the biggest fund of the private sector; about 2.6 million active, I think about 10 million accounts.

“When it comes to EPF, obviously there’s another thing. We obviously have, in terms of resources, on the Central Bank, that has a clear conflict because we are responsible for the members.

“We have to give them a, as a custodian of the fund, we have to give them a maximum return for the members.

“For us to get the maximum return, on one hand, we determine the interest rates as multi-policy. On the other hand, we are managing public debt as a, raising funds for the government.

“And on the third hand, this EPF is investing 90 percent in government securities. And also, interest rates we determine, and they want to get the maximum interest. That’s a clear conflict, obviously, there’s no question.”

A separate agency is to be set up, he said.

“It’s up to the government or the members to determine to establish a new institution that has a trust and credibility and confidence of the members that this institution will be able to manage and secure an interest and give them a reasonable return, good return for their lifetime savings,” Governor Weerasinghe said.

“The question is that how whether we have whether we can develop that institution, whether we have the strong institution with accountability and the proper governance for this thing.

“I don’t think it should be given completely to a private sector business to run that. Because one is that here we have no regulatory institution. Pension funds are not a regulated business.

“First one is we need to establish, government should establish a regulatory agency to regulate not only the EPF business fund, there are several other similar funds are not properly regulated.

“Once we have proper regulations like we regulate banks, then we can have a can ensure proper practices are basically adopted by all these institutions.

“Then you can develop an institution that we who can run this and can be taken back by the Labour Department. I’m not sure Labour Department has the capacity to do all these things.”

While some EPF managers had come under scrutiny during the bondscam and for questionable stock investments, in recent years, it had earned better returns under the central bank management than some private funds that underwent debt restructuring according to capital market analysts with knowledge of he matter. (Colombo/May24/2024)

Continue Reading

Desperate Sri Lankans seek risky foreign jobs amid tough IMF reforms

ECONOMYNEXT – After working 11 years in Saudi Arabia as a driver, Sanath returned to Sri Lanka with dreams of starting a transport service company, buoyed by Gotabaya Rajapaksa’s 2019 presidential victory.

However, the COVID-19 pandemic in 2020 and an unprecedented economic crisis in 2022 shattered his dreams. Once an aspiring entrepreneur, he became a bank defaulter.

Facing hyperinflation, an unbearable cost of living, and his family’s daily struggles, Sanath sought greener pastures again—this time in the United Arab Emirates (UAE).

“I had to pay 900,000 rupees ($3,000) to secure a driving job here,” Sanath (45), a father of two, told EconomyNext while having a cup of tea and a parotta for dinner near Khalifa University in Abu Dhabi.

Working for a reputed taxi company in the UAE, Sanath’s modest meal cost only 3 UAE dirhams (243 Sri Lankan rupees). Despite a monthly salary of around 3,000 dirhams, he limits his spending to save as much as possible.

Sanath has been in Abu Dhabi for 13 months but had to wait six months before driving a taxi and receiving no salary.


“I had to get my UAE driving license. I failed the first trial, and the company paid 6,500 dirhams on my behalf, agreeing to deduct 500 dirhams monthly from my salary,” he explained.

“So far, I have repaid only 3,000 dirhams.”

To raise the 900,000 rupees for the job, Sanath borrowed money from friends and pawned jewelry.

“I don’t know if I was cheated by the agent, but I must repay that money and also send money for my family’s expenses,” he said, glancing at a photograph of his family in a Colombo suburb.

Working night shifts in busy Abu Dhabi, Sanath said, “If I can secure 9,000 dirhams monthly through taxi driving, I will earn 3,000 dirhams in the month after deductions for the license fee and any traffic fines.”

Sanath came to Abu Dhabi with seven other Sri Lankan men through an employment agency in the Northwestern town of Kurunegala.

“Only two of us have withstood the tough traffic rules and payment deductions for offenses,” he said. Some of his colleagues are still job-hunting, while others have returned to Sri Lanka.

Sanath is one of around 700,000 Sri Lankans who have left the island in the last two years due to the economic crisis that forced the country to adopt difficult fiscal and monetary policies, including higher taxes and costly borrowing, exacerbating the cost of living.


From January 2022 to the end of March 2024, at least 683,118 Sri Lankans migrated for foreign employment through legal channels, according to the Sri Lanka Foreign Employment Bureau.

They have sent $11.31 billion in remittances through official banking channels during the same period, central bank data shows.

Many Sri Lankans leave on visit visas, hoping to find jobs later, often guided by friends already working abroad. The economic crisis has pushed them to seek better opportunities abroad, despite the risks.

Sri Lankan authorities struggle to stop such risk-takers, who sometimes resort to illegal migration, despite warnings about human trafficking.

In Myanmar, 56 Sri Lankans caught in an IT job scam were detained earlier this year, and the government is still repatriating them.

At least 16 retired Sri Lankan military personnel have been killed in the Russia-Ukraine war after being misled by unscrupulous recruiters. Officials estimate that over 400 retired military officers may have left for similar reasons.


In March, Foreign Minister Ali Sabry warned against visiting any nation on open visas, urging Sri Lankans to emigrate only through registered agencies.

Despite the risks, many Sri Lankans are desperate to leave.

Abu Salim, a 32-year-old former rugby player, came to Dubai on a visit visa hoping for a banking job, which he never got.

Now freelancing in an insurance firm, he said, “I survive, and my relatives don’t see my struggle. It’s stressful, but still better than Sri Lanka right now.”

Suneth, a former top garment merchandiser, is also job-hunting in Sharjah after quitting his initial job in Sharjah.

“My worry is the visa. I must find a new job before it expires,” he said.

Many Sri Lankans in the UAE work multiple jobs, compromising their sleep and health to make ends meet. (Abu Dhabi/May 24/2024)

Continue Reading