ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said a strong exchange rate has reduced the cost of living a little, and he will continue to work for a strong rupee if elected for a second term.
“When I strengthen the rupee, you’re the burden of living will become lighter,” President Wickremesinghe told a rally in Gampola in the central province.
“I will make it stronger in the next five years.”
President Wickremesinghe was echoing the words of Goh Keng Swee, the economic architect of Singapore gave then President J R Jayewardene when the currency was under pressure by 1980 the country was pushed into an IMF program.
Goh warned J R not to depreciate the currency as ‘competitive exchange rate’ became fashionable after the collapse of the Bretton Woods in 1971 and the IMF Second Amendment left Sri Lanka without a credible anchor.
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How Sri Lanka rejected Singapore monetary advice and politicians, people paid the price
Sri Lanka’s macroeconomists ignored the advice.
To this day Singapore does not have a policy rate nor an ‘independent’ central bank for macroeconomists to print money through open market operations or other liquidity tools, and instead targets the exchange rate (external anchor) every three months.
Unlike macroeconomists who believe 5 percent inflation a year (or price pressure) is absolutely required for growth, the Monetary Authority of Singapore, does not have a policy rate, for economic bureaucrats to print money through open market operations.
Singapore’s politicians who run the central bank believe that monetary stability is required for growth, not inflation or ‘price pressure’.
“The prevailing rate of appreciation of the policy band will keep a restraining effect on imported inflation as well as domestic cost pressures, and ensure medium-term price stability,” the MAS said in its last policy statement.
“MAS will therefore maintain the prevailing rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred.”
Macroeconomists of independent central banks that target 5 percent or higher inflation with a policy rate and turfs out politicians to the opposition, and the poor to the Middle East, on the other hand believe that 5 rise in cost of living each year is needed boost growth.
President Wickremesinghe has already given powers for the central bank to create 5 percent inflation (a domestic anchor) though he wants to keep a strong exchange rate (external anchor) to reduce inflation like Singapore.
Wickremesinghe said he took over as President there was no future for the country.
“I went to the IMF, I talked to all the global leaders that I knew and saved the country,” he said.
“I was told that the debt burden was too high. I was told not to take debt more than 5 percent of GDP. I was told not to print money because the rupee will fall even more from 370 to the dollar.
“I was told not to take loans from banks because they will collapse.
“There was nothing else to do I raised VAT. Even with difficulty I knew we had to do this to come out of the crisis.
“I know the difficulty you faced. The rupee had fallen from 185 to 370. The rupee had depreciated 50 percent. The price of goods went up 100 percent.
“You lived with difficulty. You had to pawn your jewelry. You got into debt. I know this.
“But your income did not go up. When the taxes were imposed it fell further.
“But I knew when I did that the rupee will strengthen.”
“The rupee strengthened. The gas price fell. Diesel price fell. Some prices fell only 10 percent others 40 percent. Then the economy started to run.
“I have brought by plan for the future. We can fix this country.”
Sri Lanka’s central bank under Governor Nandalal Weerasinghe allowed the rupee to appreciate to 300 to the US dollar under broadly deflationary policy. It is not possible to collect reserves without running deflationary policy.
Under deflationary policy of selling down central bank securities (like selling MAS securities to banks) the exchange rate can be strengthened or weakened by changing the intervention rate. (Colombo/Aug15/2024)