Sri Lanka’s Central Bank; Crap or Brilliant?

The economy is about to be rescued from a potential plunge into the deep waters of crisis by an injection of cash from the IMF. Apparently historically, all nations ever to adopt the soft peg approach to currency buoyancy have faced that same fate.

Now there is talk that the IMF money is coming from a new ‘condition-free’ fund established exclusively for developing nations in trouble. Sri Lanka is almost depleted of foreign reserves after a binge of currency modulation during the final quarter of last year that saw us purchasing rupees with our dollars in order to ensure the rupee wasn’t devalued too much.

My CIM lecturer was telling me at that point that we are extremely stable for a war economy that didn’t rely all that much on taxes and he didn’t quite know why, and at that time i didn’t either. But i guess we do now.

Is the Central Bank an incompetent institution or is it pure genius though? that question kind of confuses me. There was the whole hedging fiasco that seems to have passed below the news radar, and not to mention the huge non-regulated financial sector holding who knows how much of the nation’s wealth that the Central Bank just failed completely to notice or moderate.

And now this pegging scenario which seems more attributable to a desperate short term measure to sustain a heavy war economy than anything else. And in that sense, it seems to have worked pretty well. The government ensures that they had sufficient funds to sustain the purchasing of weaponry while it was most needed at a time when it was sure that seeking foreign help for the war effort would have meant cumbersome conditions and impositions into its human rights track record etc.

So they went all out with the economy as well in order to sustain the war effort and did not really give a damn about the consequences. They were playing a dangerous game. They had to make sure the war was significantly completed by the time the economy started hitting the dirt. Guess they figured they’ll somehow build it all up later.

They first accumulated foreign currency through the massive sales of bonds. And later, when foreign markets turned volatile the government (or the CB) itself had to start buying Rupees so they used what foreign currency they had to buy our own money back. Thereby creating false (?) demand for the rupee and keeping its value up. We mainly kept in on par with the dollar, focusing on maintaining roughly the same dollar rate throughout. This is essentially called maintaining a ‘soft peg’ through currency manipulation.

The years of ‘GDP growth for the first ever time in the history of SL’ Back since 2004 was probably attributable to a loosening of the monetary and fiscal policies of the country and driving up inflation (which indicates positive growth, not to mention the including of government purchases of weaponry in the GDP calculations) we were at the same time buoying up our currency through the manipulation of dollars and it has all cumulated into a double whammy that would have surely sunk us to the bottom of the Indian ocean if it wasn’t for the IMF’s ‘bail out’. As explained in this LBO report.

was this all orchestrated with evil genius by an administration one track minded with pure focus on a winning a war by any means possible? Ruthless enough to disregard any and every long term ill effect to the economy which has undoubtedly magnified due the credit crunch? Or more likely they were simply seeking ways to be financially independent and were lucky enough to make it so far with barely a limp? (Which is probably a very subjective postulation)

Meanwhile most export industries are almost crippled with big garment companies the worst affected. The removal of the EU’s GSP plus taking away a cushioning affect that helped them along all this time making things worse.

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2 comments
  1. Anonymous said:

    EU’s GSP – General System of Preferences

  2. TheWhacksteR said:

    you’re right. thanks

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