The rupee will fall. On Independence Day in 1948, you could buy a US dollar for Rs. 3 and 32 cents (Source: AdaDeranaBiz.lk). Today, one USD is equal to Rs. 197.68. A nation’s economic performance is represented by the value of its currency. The stronger an economy, the more foreign exchange it will earn through exports, foreign tourism, etc. The more foreign currency you have, the more your own currency gains value. When an economy is mismanaged, your currency will fall. The LKR has been falling for the last 73 years, and it looks like it will continue to fall, and fall, and fall. There are many economic trends that Sri Lankans accept as though they were written in the Tripitaka, Bible, or Koran. Our political and economic leaders tell us that the fall of the rupee is inevitable. It’s like gravity, dragging everything down. But wait a minute! Is this really true? Why have the currencies of even our South Asian neighbours outperformed the LKR?   How other countries strengthen their currencies Some countries are fortunate to have vast natural resources that they can export – oil, gas, precious metals, minerals…But many that do not still have strong economies due to their superior management and marketing skills. Singapore is an amazing example.    Bangladesh  Bangladesh made headlines last week by lending Sri Lanka $ 200 million. A nation born only in 1971, with very few natural resources, a lower literacy rate and higher poverty rate than ours, and mismanaged by military dictators until 1991; yet today, their economy is surging and their foreign reserves are at $ 43 billion, more than 10 times Sri Lanka’s $ 4.1 billion. This economic performance is reflected in the appreciation of the Bangladesh taka against the LKR as shown in Figure 1.     Fundamental factors of currency valuation Relative valuation: The value of paper currencies in the forex market is usually expressed rather than absolutely by reference to the value of other paper currencies. However, the price of gold, the main hard currency of the planet, may be seen as an absolute value of the paper currency when it is represented in the currency of a nation. The value of a nation's currency quoted for another country's currency includes the particular currency pair's foreign exchange rates. Usually, this market assessment would respond to both countries' long and short-term economic prospects and their respective business and interest rate cycles. Nation’s currency: As the stock of a corporation reflects the public sentiment on the importance of the corporation, a nation's currency also reflects the way the global market views its economic prospects and potential for other nations. If a company does well and its shareholders have higher profits and dividends, its stock would appear to be increased. Likewise, a nation that is economically successful and attracts investment in interest rates would typically appreciate more than a nation with lower or decreasing interest rates. Reserve currencies: Some currencies are considered “reserve currencies”. These reserve currencies are mostly owned by central banks and can be used to support the domestic currency in markets. This status also ensures that the currency is usually recognised worldwide to pay the debts or buy commodities. In addition to being the official reserve currency for purchasing major resources such as gold and oil, the USD has historically been kept for this reason. Balance of Payments: The Balance of Payments is a nation's balance sheet. The current account, the capital account, and the trade balance. It is just as important to the stock trader as a business balance sheet: They are the largest indicator of the economic health of a country. Let's look at the components of this critical point:

•         Trading balance: The balance of trade between imports and exports of commodities and services is proportional to the difference. A positive value means an excess, while a negative value means that the nation imports more than can be sold. The balance of trade is included in the current account.
•         Current account: It is a sum of the balance of trade with two additional elements known as net factor profits and current transfers. Cash return from subsidiary corporations of a country, workers' transfer, royalty or license revenue, rent on foreign property owned by foreign firms, and so on is simply the net factor profits. Net transfers reflect unilateral in or outflows, for example help.
•         Capital account: Capital accounts are a general term for change of ownership of a nation's assets, including property, factories, equity and bond ownership, bank accounts and credits, etc.

  Central bank interest rates: Its rates determine the cost of the cheapest currency in an economy. Since the central bank is the main source of any currency and associated credit in a system, the rates they fix fundamentally determine whether credits are available for all types of end users: customers, businesses, or banks. Unemployment statistics: In addition to the methodological disparities in metrics of various organisations, statistics on employment measure the names of the different entities: Whether the economy gains jobs or loses jobs; how long unemployed people have to seek work before they find a job; the demographic component of the trends in unemployment; and a series of other problems that help political leaders but not traders as much. Other factors: However, some other main factors influencing currency assessment include development economic outlook, rate and projection for inflation or deflation, deficits or surpluses on trade, the supply of money for the country, the credit rating of the nation, and secure backup of the currency.   What's a peg of currency?  Economic performance isn’t all that matters. Currency handling requires a lot of intelligence and technical abilities. The currency peg is a policy whereby the national government sets its currency at a specified fixed exchange rate by means of a foreign currency or currency basket. Currency stabilises the exchange rate among countries. In this way, exchange rates for business planning are long-term predictable. But if a currency bond is too distorted from the natural market price, it can be difficult to sustain and manipulate markets. See Table 1 for a spectrum of exchange rate policies. A nation would take a different exchange rate regime from floating exchange rates to fixed rates, in which governments interfere before managing the value of the exchange rate to common currencies when currencies are adopted by a country or group of countries. When a government intervenes in the foreign exchange market such that the currency's exchange rate varies from the one the market provides, its currency is called to be "peg". An exchange rate policy is a smooth grip, where the government generally permits exchange rate fixing to occur in a market where the exchange rate appears to be changing quickly and where the central bank will act in certain scenarios. Sri Lanka offers a so-called soft peg, which includes injections of rupees to reduce prices and also buy and sell dollars for the exchange rate. When a currency is pegged to exchange rates that are too low, countries are experiencing a number of problems. On the one hand, the buying power of foreign products would be taken away from domestic consumers. See Table 2 for the pros and cons of soft pegs. How do you select the policy?  Many economists cannot agree on what exchange policy is best: floating, soft, hard-packed currencies, or merged currencies. The option depends on how a central bank is allowed to pursue a certain monetary policy and how successfully the banks and corporates of a country can respond to different monetary policies. If the nation's economy operates well, it will most likely be right with a strategy for exchange rate to achieve its four core economic growth objectives, low inflation, low unemployment, and sustainable trade balance. Conversely, the economy that consistently fails to achieve those objectives does not have any exchange rate policy to save.   Way Forward: How to strengthen the rupee  Long term  

•         Put properly qualified and experienced people in charge of key areas. Military officers being appointed everywhere doesn’t work
•         Provide massive incentives for expansion of existing export industries which can expand their markets – tourism, apparel, etc.
•         Decide on which industries would have the most demand globally and be best suited for our country. This has to be done on a scientific basis, not because some politician’s mistress says so
•         Provide massive incentives for foreign direct investments (FDI). These must be far better than other countries that are competing for FDI, especially in the region
•         Restrict imports of products that are not needed. Food items are needed; importing 227 Prados is just idiotic
•         Implement a proper national public relations (PR) plan – Google “Sri Lanka” and you’ll find disaster after disaster. This has got to stop. People who bring toxic ships which sink and destroy our coastline need to be put in jail
•         Teach our people some proper skills for life. Otherwise, all the best Colombo Port City jobs will go to Indians, Singaporeans, westerners, Chinese, etc. Sri Lankans will only get jobs as drivers, cleaners, etc.
•         Employ people in proper occupations that are productive to the country’s economy. Hiring hundreds of thousands of graduates to warm chairs in government offices is just plain stupid
•         Have one national plan, with sub-plans in every Ministry that conform to it. Don’t have a hundred plans going in different directions
•         Transparency – the plans must be well publicised
•         The national plan cannot contradict itself. You can’t ask the public to focus on agriculture and then ban fertiliser. That’s stupid
•         Have a proper negotiating team to negotiate international agreements. Other countries are running circles around us right now. It’s costing our country dearly

  Short term

•         Set official rates
•         Capital Control
•         Trading restrictions
•         Buying own currency
•         Stay vigilant

  © Niresh Eliatamby and Nicholas Ruwan Dias (The writers are Managing Partners of Cogitaro.com, a consultancy that finds practical solutions for challenges facing society, the environment, and all types of industries. Dr. Dias is a digital architect and educationist based in Kuala Lumpur, Malaysia and can be contacted via ruwan@cogitaro.com. Eliatamby is an author, journalist, and educationist based in Colombo, Sri Lanka and can be contacted via niresh@cogitaro.com) (The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication)