The Investor Sentiment - Equity and investments forum for Sri Lankans

Display results as :

Rechercher Advanced Search

Latest topics
» Happy Birthday
Today at 9:45 am by nihal123

Today at 7:22 am by CK

» HNB.N0000 ( Hatton National Bank PLC)
Today at 6:18 am by pjrngroup

» Thread for News on CSE and SL Economy
Today at 5:16 am by NIRMALSG

» අපිට විතරද පායන්නේ ?
Yesterday at 9:06 pm by malanp

» Tourism sector
Yesterday at 5:47 pm by NIRMALSG

» අනං මනං! #/+?.<>
Yesterday at 5:15 am by NIRMALSG

Sun Mar 24, 2019 5:04 pm by NIRMALSG

» Oman's Oil and Gas Minister Dr. Al Ruhmy arrives in Lanka.
Sun Mar 24, 2019 12:11 pm by Ethical Trader

» Help him Today, so he can help another Tomorrow
Sun Mar 24, 2019 8:01 am by spw19721

Sat Mar 23, 2019 6:37 pm by PANTOMATH

» Dividend Announcement
Thu Mar 21, 2019 9:26 pm by nihal123

» PLC.N0000 ( People's Leasing and Fiance PLC)
Thu Mar 21, 2019 11:15 am by Ethical Trader

» රෝගීන් වෙනුවෙන් කැප වන සෞඛ්‍ය සේවාවක් වෙනුවෙන්.....
Tue Mar 19, 2019 9:34 am by AjithR

Tue Mar 19, 2019 9:22 am by කිත්සිරි ද සිල්වා

» How Small We are in the universe
Tue Mar 19, 2019 7:29 am by nihal123

» ඉස්සරහට අපි පරදින එකනම් ෂුවර් – ධම්මික ක්‍රිකට් ගැන කතා කරයි
Fri Mar 15, 2019 2:59 pm by nuwanmja

» HAYL.N0000 Hayleys PLC
Thu Mar 14, 2019 2:46 pm by yellow knife

Thu Mar 14, 2019 10:57 am by slstock

Wed Mar 13, 2019 6:44 pm by serene

Sun Mar 10, 2019 8:36 pm by NIRMALSG

Sun Mar 10, 2019 6:40 am by ruwan326

» Mobile Trading: the new BUZZ word in Capital Markets Industry!
Thu Mar 07, 2019 5:58 pm by Brenda John

» MGT.N0000
Sun Mar 03, 2019 2:48 pm by Hawk Eye

Sun Mar 03, 2019 8:57 am by Jana1

» Should such people be trusted and help anymore?
Sun Mar 03, 2019 4:42 am by pjrngroup

» The messenger who couldn't deliver a message
Wed Feb 27, 2019 5:56 pm by Backstage

» SHL.N0000 (Softlogic Holdings PLC)
Wed Feb 20, 2019 8:23 am by ruwan326

» Importance of 2019 government budget
Tue Feb 19, 2019 12:13 pm by කිත්සිරි ද සිල්වා

» Emir of Qatar on a private visit to Sri Lanka till February 22
Tue Feb 19, 2019 11:19 am by Backstage

» දේවදත්තගෙන් අපායේ සිට මෛත්‍රී බුදුන් වහන්සේට එවන ලද ලිපිය...~~~
Fri Feb 15, 2019 8:24 am by ruwan326

» CONN.N0000
Wed Feb 13, 2019 8:09 pm by ruwan326

» SERV - The Kingsbury
Wed Feb 13, 2019 8:08 pm by ruwan326

Wed Feb 13, 2019 7:53 pm by ruwan326

» KVAL.N0000
Wed Feb 13, 2019 7:36 pm by ruwan326

» HAYC - Haycarb
Wed Feb 13, 2019 7:24 pm by ruwan326

» DIPD.N0000 (Dipped Products)
Wed Feb 13, 2019 7:22 pm by ruwan326

» මහජනතාව බල ගැන්වෙම්න් සිටී…
Tue Feb 12, 2019 8:23 pm by ruwan326

» VFIN - where the journey leads it?
Mon Feb 11, 2019 7:35 pm by ruwan326

» LFIN - LB Finance
Mon Feb 11, 2019 7:25 pm by ruwan326

» Sri Lanka urged to develop own narrative of China’s BRI
Mon Feb 11, 2019 2:50 pm by Backstage

» Wonder why men send photos of their genitals? Here are some theories
Mon Feb 11, 2019 11:01 am by Backstage

» Flying is the Safest mode of Transport
Sat Feb 09, 2019 8:12 am by කිත්සිරි ද සිල්වා

Thu Feb 07, 2019 2:24 pm by Ethical Trader

» Lanka named top tourist destination for 2016
Wed Feb 06, 2019 2:29 pm by කිත්සිරි ද සිල්වා

» A Bit of History
Wed Feb 06, 2019 2:18 pm by ruwan326

» AMF.N0000
Thu Jan 31, 2019 6:56 am by serene

» IOC Sri Lanka unit December quarter loss widens to Rs987mn
Mon Jan 28, 2019 11:02 am by ruwan326

» මූර්ත පොළියෙන් ශ්‍රී ලංකාව අංක 1ට – බ්ලූම්බර්ග් අනාවරණය කරයි
Mon Jan 21, 2019 7:18 pm by nihal123

» Obituary Notice.
Mon Jan 21, 2019 7:14 am by කිත්සිරි ද සිල්වා

March 2019

Calendar Calendar


Information posted in this forum are entirely of the respective members' personal views. The views posted on this open online forum of contributors do not constitute a recommendation buy or sell. The site nor the connected parties will be responsible for the posts posted on the forum and will take best possible action to remove any unlawful or inappropriate posts.
All rights to articles of value authored by members posted on the forum belong to the respective authors. Re-using without the consent of the authors is prohibited. Due credit with links to original source should be given when quoting content from the forum.
This is an educational portal and not one that gives recommendations. Please obtain investment advises from a Registered Investment Advisor through a stock broker

Top Sri Lanka economist urges free trade amid soft-peg failure

Go down

Top Sri Lanka economist urges free trade amid soft-peg failure

Post by The Invisible on Tue Oct 23, 2018 11:08 am

ECONOMYNEXT- A top Sri Lankan economist renewed calls for freer trade as the country slammed import controls as a soft-peg with the US dollar failed for the second time in 2018, sending the rupee sliding, and President Maithripala Sirisena called for a report on new imports that can be controlled.

"If you liberalise imports, it creates a real bang in the economy and it creates competition and people have to work very hard to survive," Sarath Rajapatirana, an economic advisor to President Sirisena said.

"Reduce the protection. You have to introduce reforms to increase competition."

Rajapatirana was speaking at an economic forum at the Colombo-based think tank Institute of Policy Studies earlier this week.

Days later President Sirisena at a meeting of an economic council convened by him had called for a report on new 'non-essential' items that can be controlled while promoting import substitutes.

Import substitution involves giving extra profits to crony businessmen by blocking the ability of consumers - especially the poor - to purchase competing good with high import duties.

Over the last decade, businessmen that are now called 'oligarchs' had been created through a series of import duties, especially by taxing items like building materials. Food is also taxed, and farming is inefficient and is not export competitive either in quality or price.

Monetary Instability

The failure of Sri Lanka's soft-peg with the US dollar, which is called a 'flexible exchange rate' has strengthened the case of import the anti-free trade lobby, leaving the case for free trade in tatters.

The 'flexible exchange rate' has turned out to be an unusually unstable soft-peg where the anchor swings suddenly from de facto external (reserve collecting peg) with a convertibility undertaking loosely defined in terms of a real effective exchange rate index and volatility, to supposedly domestic (floating rate with a wide near-double digit inflation target) with unsterilized liquidity collected from the pegged period intact, sending the rupee sliding down.

Sri Lanka's rupee fell from around 161 to 171 to the US dollar over the last few weeks after the central bank built up unsterilized excess liquidity through a peg with the US dollar in July and August as well as Soros-style inshore currency swaps. At the time the rupee had barely recovered from the first run.

The situation had been further complicated by maturing legacy currency swaps dating back from 2013, which generated liquidity shortages. Monetary policy is now more supportive of the rupee.

Analysts have traced the origins of the first run on reserves to the failure to mop up (sterilize( inflows in the first quarter 2018 with so-called term repo auctions failing, pushing the de facto peg to its 'weak side', followed by active money printing in April following a rate cut.

Until the first quarter the de facto peg has been kept on its 'strong side' with steady selling down of down central-bank-held securities throughout 2017 allowing the central bank to build reserves.

Analysts and economists have called for abolishing the soft-pegged central bank in favour of a Hong Kong style orthodox currency board, or a Singapore style modified currency board, to help protect the poor and take Sri Lanka forward and end the monetary instability that started shortly after setting up of the soft peg in 1950. Exchange controls came less than two years later.

But Rajapatirana said trade unions would oppose a currency board.

"Currency board requires very free adjustment of relative prices," Rajapatirana said.

"So when we have trade unions and other organisations and institutions we cannot work a currency board like these countries' (Hong Kong and Singapore) economies have done."

"We don't have the tradition. I also like that Stanley Fischer, the famous professor, whenever there was a monetary problem, he says 'how would a currency board deal with it?' It's just a way of thinking about it."

"But we don't have the freedom to have fixed exchange rate forever and allow other adjustments to take place around it. We don't have the freedom. I think that is a good thing. The idea is to keep the exchange rate corridor without having to deal with large disruptive shocks."

Fischer, who was a senior official of the International Monetary Fund during the Asian Financial Crisis when soft-pegs were targeted and broken by speculators but they were unable to break Hong Kong, has said that all intermediate regimes are vulnerable to failure, while free floats and currency boards have consistent policy. (Exchange Rate Regimes: Is the Bipolar View Correct?).

He has also questioned widely held beliefs about dollarization, which operates for purposes of balance of payments in the same way as a currency board, showing that he may be one of the few people in existence who understands how pegs work.

Dollarization and currency boards have been effectively used to tame both runaway central banks and high spending politicians. Ecuador dollarized in 2000 and has avoided massive output and inflation shocks found in the rest of Latin America despite having relatively bad socialist policies.

"There is much food for thought in the story of Ecuadorian dollarization—not least, that the early success of what was a desperation move, taken in haste, without most of what were thought of as the necessary preconditions being in place, requires us to reconsider the conditions under which such a switch in the monetary system will succeed," Fischer said later.

Efforts by politicians to end dollarization has ended in failure so far. Most cases of dollarization (Zimababwe is one example) has taken place by the people with authorities giving support later by relazing legal tender laws and other rules by which people are forced to use bad central bank money.

Dollarized Panama (with a chronic persistent current account deficit) is also a sea of stability in the region, and is held out as an example to follow in Sri Lanka like Singapore or Hong Kong.

Currency boards in the past have set a strong foundation for economies to grow generating labour shortages triggering imports of workers. Sri Lanka (then Ceylon) also imported labour during its currency board period.

Middle Eastern nations like Dubai, which have currency board like systems, (pegs with a high degree of credibility) also import labour, while other central banks in the region such as Iran operate regularly collapsing soft-pegs.

Analysts had already warned that Sri Lanka has to restrain the central bank to make free trade possible. (Sri Lanka central bank has to be restrained for free trade to succeed).

Sri Lanka now has one of the most restrictive trade regimes in the world. Exchange controls and trade restriction began shortly after the soft-peg was created and the entire economy was closed in the early 1970s, when the Bretton Woods system of soft-pegs failed.

Wartime Tariffs

In 2016, following the increases in multiple import levies called 'para-tariffs' over the past decade, the World Bank described Sri Lanka's import regime as 'one of the most complex and protectionist in the world'.

Rajapatirana said that it was misleading to call policy changes done in 2010 as trade reforms.

"We said in 2010 we did trade reforms," he said. "No. In 2010 we increased the effective rates of protection."

Taxation of raw materials and inputs make exports of final goods uncompetitive as margins are eaten up by taxes.

In Sri Lanka energy is also taxed with excise and non-recoverable taxes, not value-added tax.

Rajapatirana said Sri Lanka should learn from Vietnam, which has liberalised its economy, increasing productivity which has boosted its exports.

"Vietnam is one of the most liberal economies I have seen. If you want to buy a shirt in Hanoi, four people will come and offer you a good price," Rajapathirana said.

"So it is important that we continue to liberalise the economy. We have absolutely no other way to do it."

"We need to lower tariffs and move towards a system where people can choose where they want to invest, except where intervention is needed for public goods. That is the way to increase productivity. I see no other way than that," he said.

"We can get stuck here if we don't look out and address these issues."

The State Bank of Vietnam also runs a soft-peg, but more successfully than Sri Lanka's central bank. The Vietnam dong held around 15,000 to 16,000 to the US dollar for around a decade until 2008, giving a stable foundation for the country to grow.

The peg failed spectacularly in 2008 after credit growth rocketed amid higher US interest rates and the state misguidedly engaged in 'stimulus'. The dong crashed to around 22,000 to the US dollar.

However, with credit growth at some banks rising over 20 percent, and rising US interest rates, analysts say Vietnam is also sitting on a powder keg, unless the State Bank of Vietnam takes action. So far, action has been limited to selective credit curbs.

National Policies and Economic Affairs State Minister Harsha de Silva said sections of the ruling coalition was inward looking, though his United National Party (UNP) was for liberalising markets.

He said that the economic policy clashes within the coalition government may cause Sri Lanka to 'miss the bus again'.

The 2018 budget, mainly a product of the UNP, had called for liberalising imports with the removal of so-called para-tariffs.

Rajapatirana said that paratariffs were a legacy of the civil war, which are no longer needed.

"We have done something in the last budget on paratariffs. They were needed at that time to finance part of the war, but there's no need to have it now and the more you keep it, the longer the public gets misallocated resources," he said.

However analysts say the administration will have a hard time convincing the ordinary people, after slapping taxes and trade restrictions on imports over the last month to compensate for monetary instability. (Colombo/Oct17/2018)
The Invisible
The Invisible

Posts : 878
Join date : 2016-11-28
Age : 39

Back to top Go down

Re: Top Sri Lanka economist urges free trade amid soft-peg failure

Post by Brave Heart on Wed Oct 24, 2018 11:21 am

Thanks Invi.

Brave Heart

Posts : 171
Join date : 2018-10-17

Back to top Go down

Back to top

Permissions in this forum:
You cannot reply to topics in this forum