Absolute Chaos | Print edition

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There was absolute chaos in the money markets and currency exchanges this week after Central Bank Governor Ajith Nivard Cabraal finally collapsed under the pressure and let the rupee float.

“There is absolute chaos in the markets these days. I don’t know if I’m sitting or standing!” exclaimed artsy, the veteran money market trader, when I asked how the market was doing.

“I don’t understand how Governor Cabraal agreed to devalue the Rupee after stubbornly holding it at Rs. 203 levels per dollar for about five months despite the (unofficial) brake market at Rs. 240-Rs. 260 levels “, I said.

“This is crazy. The Central Bank should intervene in the foreign exchange markets as some banks are even offering a rate higher than Rs. 260 per dollar with rising demand,” said one artsy.

The chaos in the foreign exchange markets has pushed the Central Bank into a “damned if I do, damned if I don’t” situation with calls to intervene in the market and bring some stability to the US dollar that could reach Rs. 300 in the coming weeks, at current trading levels.

This week there has been utter confusion and strife within the government and Central Bank ranks with the following sequence of events:

Monday March 7: The Central Bank announces a devaluation of the Rupee, saying it should not trade above Rs. 230 per dollar (compared to Rs. 203 earlier).

Tuesday March 8: Minister and Cabinet Spokesperson Dullas Alahapperuma told reporters during the post-Cabinet press conference that the Cabinet has decided to grant Rs. 38 per dollar for migrant remittances . Asked about the devaluation, he responds by saying that the Governor of the Central Bank is likely to clarify the matter. At this stage, it is unclear whether the Rs. 38 incentives should be added to the new rate of Rs. 230 (making it Rs. 268 per dollar for migrant workers or the old rate of Rs. 203 making actually 241 rupees per dollar).

Wednesday March 9: The Ministry of Finance adds to the confusion by recommending Rs. 20 more per dollar for migrant workers for the Avurudu season. Is this in addition to the Rs. 38 per dollar the Cabinet has recommended or what? Also on the same day, the Central Bank reportedly told bank CEOs that there were no restrictions on the dollar rate and that it could trade above Rs. 230, even though the monetary authority set an upper limit of Rs. 230 as clearly stated in Monday’s statement.

Thursday March 10: Money markets in disarray as the dollar begins to climb to Rs.260. Adding to the chaos, the Central Bank’s daily official rate for foreign exchange pegs the dollar at Rs. 260!

The new exchange rate will have a big impact on imports, driving up the prices of essential goods including fuel, medicine and food, and creating further shortages in the market, triggering inflation and rising cost. of life.

For the record, the dollar has been pegged at Rs. 203 since November 2021. It was Rs. 195 on March 9, 2021, then rose to Rs. 210 at the end of August and then stabilized at Rs. 203.

With migrant workers using the unofficial market – the Hawala and Undiyal schemes – to send their money to families here at rates exceeding Rs. 230 per dollar; the Central Bank decided to offer an additional Rs first. 2 per dollar to migrant workers, to encourage them to use official banking channels. When this did not work sufficiently, the Central Bank increased it to Rs. 10 per dollar. That also didn’t work. In January 2022, remittances amounted to $259.2 million, a sharp drop of 61.6% compared to $675.3 million for the same month in 2021.

February remittances were also expected to head lower and would have forced the Central Bank to let market forces dictate the rate.

It was a busy day today with all these numbers and statistics floating around and I walked into the kitchen to have some breakfast when my attention was caught by the usual Thursday morning conversation under the margosa.

“Den apahu gas ne-ne (Gas is out of stock again),” said Kussi Amma Sera.

“Mata therenne ne, aei anduwata mei thathvaya kalamanakaranna beri kiyala (I don’t understand why the government can’t handle this situation),” noted Mabel Rasthiyadu.

“Thel nav Lankawata enawa, kisima salasmak nethuwa, mokada anduwata salli ne-ne eva eliyata ganna (The tankers arrive in Sri Lanka without a proper plan as the government has no money to clear these shipments),” said Serapine.

Adding to the confusion of the week are promises by the president and new energy minister Gamini Lokuge that power cuts will end on March 5. They did not do it. And once again chaos reigned as some areas suffered power cuts and others did not.

Another bizarre move this week was the announcement of an 11-member Economic Council chaired by the president to assess the country’s economic situation on a weekly basis. It consists of Prime Minister Mahinda Rajapaksa, Ministers Bandula Gunawardena, Basil Rajapaksa, Johnston Fernando, Mahindananda Aluthgamage and Ramesh Pathirana, Central Bank (CB) Governor Ajith Nivard Cabraal, Presidential Secretary Gamini Senerath, Treasury Secretary SR Atygalle and BC Deputy Governor Dhammika Nanayakkara.

While all or most of these members have been part of the country’s decision-making apparatus with failed decisions and led to the many crises the country faces today, how can they turn the economic headwinds? With the same decision makers, the economic situation is not expected to experience a gradual change and fuel queues and foreign exchange shortages would continue to be the order of the day.

Sri Lanka has no shortage of competent economic experts and economists and rather than relying on failing expertise, the government should have drawn economists into some sort of crisis council (a move this column has long suggested , also with the expertise of the private sector – the engine of growth) to recommend a game plan to deal with the currency crisis and ensure debt sustainability.

Such an initiative should have been a bipartisan and independent assessment, offering recommendations that are sound policies to address the multiple crises facing the country.

Phew! What a heavy column this week. “Godak weda neda, Sir (Hard work sir),” asked Kussi Amma Sera as she brought my second cup of tea.

“Aouch aouch (Yes…yes),” I said, reflecting on the dollar chaos in the market and the eventual outcome of higher inflation and prices.

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