Sri Lanka to keep rupiah stable: BC Governor

ECONOMYNEXT – The Sri Lankan rupee, which has been under downward pressure for two years due to liquidity injections made to enforce a low fixed interest rate, will not depreciate, the central bank governor said, Nivard Cabral.

The rupee has risen from around 185 to 200 against the US dollar since money printing increased from February 2021, although reserves have fallen rapidly in the process of exchanging against the newly printed rupees.

In the pavement and Undiyal markets, the rupee is around 240/260 rupees.

“It won’t depreciate,” Governor Cabraal told reporters after raising the key rate at which money is printed by 50 basis points to 6.50% on Jan. 20.

The mercantilists who were vocal especially after the Bretton Woods collapse generally claim that currency parities collapse when they are “overvalued” and not due to injections of liquidity.

They believe that if the currency depreciates sufficiently each year, crises can be avoided and also steal a trade advantage (competitive exchange rate) regardless of the social and political unrest created by monetary instability.

A key measure of measuring “overvaluation” is the real effective exchange rate index, where a country’s exchange rate is measured against the movements of trading partners and then adjusted for inflation.

In East Asian countries with a stable peg, which have a high REER index of up to 130%, Washington-based mercantilists instead argue currencies are “undervalued,” pointing to account surpluses running.

An indexed country’s inflation index can rise rapidly when unemployment falls due to a rise in the prices of non-traded items in a basket, even if the central bank itself does not print money.

BCC social unrest

Led by people like John Williamson, who also worked at the International Monetary Fund, theories such as BBC (Band, Basket, Crawl) were promoted after the collapse of the Bretton Woods system, leading to a vicious cycle of depreciation, inflation, and more. depreciation and even more inflation, analysts say.

Such ideas were rejected by the more prosperous East Asian countries, the GCC countries as well as the Fed and the Bank of England in the early 1980s, which tightened monetary policy to strengthen currencies. and lower inflation.

BBC theorists either rejected the concept of currency pegs (on which both inflation targeting/floating currencies and hard peg/floating interest rates were based) or were not familiar with monetary history and classical theory or more modern ideas such as Mundell-Fleming models.

Published Information shows that Williamson clashed several times with Marcus Fleming, who at the time was also at the IMF.

However, Third World mercantilist policy makers, steeped in illiberal interventionism and planning, adopted such policies, supported by the IMF in some cases, manipulating interest rates, creating high inflation, external instability, social unrest, emigration and sometimes civil wars.

Currency instability due to dodgy BBC-style currency also led to the failure of the so-called Washington Consensus, triggering a backlash in many countries, including Latin America, critics say.

Each time the Fed has tightened policy, those currencies with a key rate have crashed, sometimes triggering a sovereign default.

Sri Lanka began actively targeting the real effective exchange rate at around 100 during the overthrown Yahapalana regime, using exceptionally discretionary policy in a multi-anchor regime where liquidity was injected through multiple means to maintain interest rates. low interest.

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Allegations have been made that Sri Lanka is inflation targeting, which however requires a floating exchange rate.

The currency has crashed several times in a few months of economic activity and credit recovery, including in 2018 when taxes were raised sharply to reduce the budget deficit.

The REER was well below 100 when the currency crashed amid the liquidity injections of 2020 and has since been held with foreign exchange reserves swapped for the newly minted rupees.

In the 1980s, the Sri Lankan rupee also depreciated rapidly, triggering high inflation and frequent strikes.

In a monetary roadmap presented in October 2021, the central bank said the exchange rate target would be reviewed in 2022.

“Given the RRSP, keep the Rupee at the highly competitive level of Rs. 199 to Rs. 203 against the USD over the next three months, and review thereafter,” the roadmap reads.

Sri Lanka’s RRSP index began climbing with two years of money printing, pushing the country’s inflation above most peer countries and the Fed itself.

Inflation in Sri Lanka reached 12.1% in December.

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Why the Sri Lankan rupee is depreciating, creating currency crises: Bellwether

RRSP indices can suddenly jump when the Fed tightens policy as bad central bank currencies in the basket tumble. (Colombo/January 30, 2021)

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