ECONOMYNEXT – Sri Lanka will need a longer-term “real depreciation” of its currency to boost its exports, said World Bank chief economist for South Asia, making a repeated assertion national mercantilists.

“Let me take a longer-term view of the currency, by looking at the situation in Sri Lanka,” Hans Timmer, chief economist for the South Asia region at the World Bank, said at the conference. ‘a business forum organized by the Ceylon Chamber of Commerce in Sri Lanka.

Since the Latin American-style central bank was created in 1950 by an American “money doctor” to pursue “independent monetary policy” despite an indexed regime, the Sri Lankan rupee has fallen from 4.70 to 203. for one US dollar.

The “independent monetary policy” involving large-scale liquidity injections in 2020 and 2021, in addition to the monetary instability in 2015, 2016 and 2018, which led to an increase in the foreign debt in dollars, brought the country at the edge of the external fault.

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Timmer did not specify how or if Sri Lanka now has a “real appreciation” and, if so, to what extent.

A “real depreciation” can also be obtained (depending on the measure used) by reducing domestic inflation or with deflation.

“Overvaluation” is generally defined by a real effective exchange rate, a purely mercantilist measure of money, which is the basis of social stability and of people’s incomes – on commercial considerations.

A real effective exchange rate adjusts the nominal exchange rate by an index of consumer prices of trading partners. If it is greater than 100, it is claimed to be overvalued.

According to Sri Lanka’s central bank, the rupee is now “undervalued” with a REER of 85 in October. Inflation is on the rise, however.

A nominal depreciation destroys the real wages of workers – including in non-exporting sectors – sparking strikes and social unrest in its wake as the country’s price structure is changed. Profits for exporters stay until wages catch up.

Sri Lanka had been destroying the exchange for some time to keep the REER below 100, an exercise that critics said would destroy solid money early on and put the country in deep trouble as it had in the past. other countries, throughout history.

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When currency parities collapse due to high “RRSP” indices, mercantilists blame “overvaluation” rather than cash injections, although Sri Lankans

The exporting powers of East Asia, which have hard currencies, often have high RRSP indices, compared to Latin America which is depreciating like Sri Lanka and is generally referred to as a “basket” by some.

“When nearly two-thirds of our citizens’ spending is on imported goods, a strong Singapore dollar helps keep consumer prices low,” said Singapore’s economic architect and Prime Minister Lee’s key theorist. Kwan Yew, explaining the three main reasons why the country chose a strong exchange rate based on currency board principles (no key rate).

“The second objective was to inform our citizens that if they wanted more and better services, they had to pay for them through taxes and fees. There is no free lunch here.

“Third, we wanted to tell academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore. An insightful mind is needed to distinguish peripheral form from fundamental and transient modes of permanent values.

According to the World Bank’s own RRSP indices, Korea, the People’s Republic of China, and Hong Kong have RRSP indices between 120 and 140.

Many mercantilists claimed during the East Asian crises that they were “overvalued” because uncredible ankles collapsed.

However, Hong Kong, which had a currency board, did not collapse as it is legally prohibited from injecting money at a fixed rate despite having a REER above 150 as defined by the Bank. global.

Speculators who tried to generate cash to hit the bet like they did in Thailand and Malaysia ended up with huge losses as short-term rates skyrocketed.

The International Monetary Fund now claims that East Asian currencies are “undervalued” in tandem with claims peddled by the US Treasury, if a country has a current account surplus and is collecting US reserves. exchange.

Vietnam, which has a REER of 130, has been wrongly accused by the United States of “manipulating” its currency simply because the State Bank of Vietnam was exploiting an anchor with a higher level of credibility by using now a fairly wide political corridor that responds to interventions.

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Sri Lanka’s peg to the US dollar had lost its credibility and is now under pressure.

Countries with high exchange rates, which do not need to borrow much abroad due to high real domestic savings and whose central bank sterilizes inflows tend to have a current account surplus.

Countries that receive financial inflows and spend them domestically tend to have current account deficits.

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When money is printed, the current account deficit exceeds financial inflows and the currency peg collapses. (Colombo / Dec09 / 2021)