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The control freak economics keeping Sri Lanka hostage 

Why is the Sri Lankan Government insisting on keeping the dollar pegged to an artificial rate that has been determined by our policymakers? This control freak behaviour has no proper explanation, but it has plenty of repercussions. 

It is the cause of the current dangerous economic slump which is being referred to by various pundits as the nation’s most dangerous economic moment since independence. 

That may be idle fear-mongering, but there is hardly any doubt that the economy is reeling because the country doesn’t have enough dollar reserves. This fact is known by one and all. 

The artificial dollar peg is the exact opposite of what Singapore is doing for example. But, Sri Lankan policymakers haven’t budged. They insist on keeping the interest rates low which is in and of itself not a bad idea. But over-reliance on this strategy has caused the dollar to plummet because remitters wouldn’t bring in dollars due to the low interest that’s paid for Sri Lankan currency deposits. It’s basic economics. 

This control freak behaviour can be best described as “freakonomics”. On a cost benefit analysis it doesn’t make any economic sense whatsoever. The fact is that Sri Lankans employed abroad will not exchange their dollars through official channels when they know that the dollar is currently pegged at an artificially propped up rate. 

Why should they, when they get much more of a return by exchanging their dollars for rupees outside regular channels? 

The powers-that-be stubbornly stuck to this policy most probably believing that if they stick long enough to their guns there is going to be something of a reversal to the status quo ante. In other words, it seemed it was surmised that if the Government stuck to the low-interest rates long enough, the currency rate issue would adjust itself because the Government would be rewarded for its consistency. 

This seems to have been wishful thinking of the most cavalier kind. Now, it seems that the shortsighted policy has had a cascading effect that would completely negate any gains that the Government hoped would accrue from keeping the interest rates down while artificially propping up the dollar. 

The low-interest rate policy was a good thing initially in particular, but when the dollar began to slide as a result the Government should not have played dollar police but should have on the contrary let our currency take the hit. 

That would have of course had its own repercussions in terms of export costs etc., but then the current scarcity of dollars would not have been precipitated. 

What has happened now is unconscionable from a policy maker’s perspective. The dollar scarcity has caused convulsions in the domestic economy. 

That in turn has made for extremely bad perceptions about how the economy is faring in general, added to which we have the woeful situation in which we have to go hat in hand begging for dollars to keep us sustained. 

It seems extremely unfair that a regime can keep the people hostage in this fashion to a policy position which it imagines would have a payoff. But there is no payoff at all and on the contrary, the country is now in a double bind in which there is a dollar crisis as well as a default perception that is stopping investors and others from touching us with a bargepole. 

Why this stubbornness the reader may ask. The only answer that can be given is “search me”. 

The Government seems to be in narrow competition with previous regimes in keeping the dollar down. The sense of one-upmanship is understandable given that the current leadership pilloried the then regime for a runaway dollar when they were in opposition and the present opposition was in power. Ergo, it is now felt that the dollar should be controlled if the Government is to avoid being made fun of for letting the dollar slip after having made so much noise about a runaway dollar when in opposition. 

But this ego issue is no reason to keep the nation hostage, particularly when the pandemic has wreaked so much havoc in the economy. 

One look at how Singapore or Bangladesh is faring should have convinced the Government that it is better to let the dollar slip rather than face the ignominy of having to be told that the only alternative may be the International Monetary Fund (IMF). 

The regime is determined to avoid the IMF option, but the best way to have avoided that would have been to ensure that the option did not have to be considered at all. 

The Singaporean authorities have made sure that the considerations of keeping the dollar controlled would not dictate how the economy performs, and in Bangladesh, remittances in fact increased during the period of the pandemic, so just imagine that. This was due to the simple reason that official channels offered the best rate for the dollar in that country because the dollar had not been artificially “rescued”. 

Under these circumstances allowing a dollar free fall of sorts should have been a total no brainer, but it wasn’t done, and the repercussions faced by the economy are now unprecedented. 

China keeping the yuan pegged low is an entirely different matter due to the vastness of the Chinese export market. Maybe it was the Chinese example that inspired the Sri Lankan Government to keep the dollar at an artificial peg. But can the yuan which has been kept artificially low since the mid-nineties be compared to the Sri Lankan rupee? With our limited export portfolio export revenue shrank dramatically when the rupee was kept at an artificial peg against the dollar. 

The dollar policy of the Government was essentially one track. It looked only at one variable and then when all the other variables began to look shaky after the one variable was kept constant, the Government thought it could start controlling all the other variables as well. For example, when it was apparent that workers and exporters are not remitting foreign currency the way they should through orthodox channels, the Government surmised they could be coerced into doing so. 

But regulations requiring that all dollars be converted to Sri Lankan rupees upon receipt have not had the necessary impact i.e: the Government’s dollar reserves have not risen significantly. Exports cannot be kept competitive in any event if the domestic economy is out of control. 

Such a situation causes chaos and the Government should have known of the ensuing negative perceptions.  It’s bad policy all round and a Bangladeshi newspaper Dhaka Tribune had recently carried an article referring to Sri Lanka as “the island of a thousand errors”! 

It seems that when the history of the present time is written there would be an analysis of the policy positions that led to this kind of decision making. There seems to be above all an arrogance that is spurred on by an inability to admit errors and an inability to engage in course correction. There is also one dimensional thinking such as the perception that exports would simply gain due to the low dollar rate, and that would pay off in the long term. 

But the fact that we do not have any dollars at all in the kitty is not helping, and this next-to-penury perception is never going to pay off. We have to keep our eye on the revenue component and slapping regulations and more regulations on tourists as well is not going to help in the least. We cannot abandon ourselves to the vagaries of market forces all the time but the opposite of that which is to regularly control market forces or attempt to do so is suicidal as well. This lesson has not been learnt, and that inability to come to terms with reality is tantamount to keeping the people of this country hostage. 

(The writer is a former Editor-in-Chief of three national English language publications and a practising Attorney-at-Law. He is an Editors’ Guild award-winning columnist, and contributing writer and columnist for the Nikkei Asian Review and South China Morning Post, while his editorials have been published in The Australian) 

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The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication.