September, 20, 2018
Sri Lanka’s Rupee has fallen by over 2201% against US Dollar in a 41 year history since the economy was opened to the globe in 1977, the analysts notes. Accordingly as at January 1st 1977 US Dollar exchange rate in terms of Sri Lankan Rupees stood at Rs. 7.27 levels whilst as at 19th September 2018 nearly 41 year history US Dollar had appreciated making Sri Lankans pay over Rs. 167.4125 (Central Bank announced Telegraphic Transfer Rate as 19 September 2018) for a US Dollar.
Having celebrated Sri Lanka’s 70th anniversary of independence in 2018 with much political rhetoric, it would be appropriate to look back the journey of the Sri Lankan Rupee (SLR) during the post-independence period according to experts.
That time the local currency had been known as Ceylon Rupee before the country became a Republic in 1972. Experts highlight that a country’s currency is a point of pride, seen essential to the identity of the nation, though it may not be so sacred as the national flag or the national anthem. Analysts points out that the domestic currency can also be treated as the mirror image of the economy showing its ups and downs.
“The stronger the currency, in terms of its purchasing power to exchange for goods and services as well as foreign currencies, the stronger the economy” and market experts highlight that going by the above yardsticks, it is doubtful whether we can be proud of the destiny of our Sri Lankan currency.
In a 70 year history since Independence, according to an analysis the Sri Lankan Rupee is down by as much as 4,942.5% or by 49 times vis-à-vis US dollar from Rs. 3.32 per US Dollar ($) in 1948 to latest rate of Rs. 167.4125 per US Dollar ($). Inversely, 1 Ceylon rupee was equal to US $ 0.30 in 1948. This means that US cents 30 could buy one Ceylon rupee at independence. Today, a meagre US cents 0.0059 is sufficient to buy one Sri Lankan Rupee.
“If the local currency is the mirror image of the economy, the weakening of the Rupee by such magnitude is a reflection of the economic downfall of Sri Lanka” an analyst said adding that the Sri Lankan Rupee’s value is shrinking rapidly against the US Dollar.
Below is a graph showing the cost of a US dollar from the time when the Sri Lankan economy was opened to globe in 1977. Using the rate of exchange between the Sri Lankan Rupee and the US Dollar available for each day since 1973 from Federal Reserve Board with update, one can also estimate the depreciation of the Sri Lankan Rupee.
The above chart outlines that since Sri Lanka became an open economy in 1977, Sri Lanka’s Rupee had largely depreciated from the time of the first Executive President J.R. Jayewardene era and the US Dollar ($) cost in terms of Sri Lankan Rupees rose to 350% till President Ranasinghe Premadasa’s time. And then till President D.B. Wijetunga’s time the cost of US Dollar ($) had increased by 43%. From President Wijetunga’s time to President Chandrika Bandranaike Kumaratunga’s time the US Dollar cost has rose by 4% whilst till the end of President Chandrika Bandaranaike Kumaratunga’s the cost of US Dollar rose by 107%. On the other hand during President Mahinda Rajapaksa era the cost of US Dollar had rose by 29% in terms of Sri Lankan Rupees. Meanwhile so far to date from 8th January 2015 in a period of little over three and a half year’s cost of a US Dollar had rose by 26% during President Maithripala Sirisena’s era, and era that is yet to continue.
In a historical note it outlines that when considered on the rapid depreciation of the Sri Lankan Rupee against US Dollar in the mid 70's appears to reflect a cumulative correction since about 1960, when Foreign Exchange controls were introduced in then Ceylon. Since October 1980 the Sri Lankan Rupee was allowed to float against the US Dollar ($). If you use the period since 1982 you get an annual depreciation of 7.16% and 8.55%. And if you look at the period since August 1994 when the President Chandrika Bandaranaike’s government came into office, annual estimates from 1995 to 2003 are as bellows.
According to the analysis it is evident that the large depreciation over in 1998 data reflects a short term fluctuation stemming from the general collapse of Asian currencies that year. The drop in 2002 and 2003 is much below the average annual rate returned the rate to the long term trend after few years of faster depreciation. In 2004 it is depreciating along the average trend. However it is important to note that the depreciation of the "Real value" of the Sri Lankan Rupee needs to also include depreciation of the US Dollar ($). The US consumer price index over the same period since 1982 rose linearly at 3.56%. So the real value of the Sri Lankan Rupee is dropping by a factor of 10 every 22.8 years according to analysts, meaning Sri Lankan Rs. 10 in 1980 is the same as Sri Lankan Rs. 100 in 2004 times. In contrast the US Dollar ($) takes 65.8 years to drop by factor of 10 in real value according to experts.
Sri Lanka has been ranked as a country with an immensely robust imports since 1977. Thus analysts note that it is normal for the Sri Lankan Rupee to depreciate against US Dollar.
According to international economists, a devaluation means there is a fall in the value of a currency of a country, meaning Sri Lankan Rupee is worth less compared to other foreign currencies, especially the US Dollar.
International Economists over the centuries have outlined that ‘Effects of a devaluation’ include Cheaper Exports, making a currency's devaluation or the exchange rate resulting in more competitive exports since it appear cheaper to foreigners in global marketplace, whilst it further make country’s real estate properties appear cheaper to foreigners.
However economists outline that a devaluation of a currency will also make Imports more expensive making imports, such as fuel or petrol, food and raw materials more expensive, whilst a country like Sri Lanka continue to be largely an imports dependent economy. A devaluation could cause Inflation to occur whilst it may also lead to push up wages to keep labour, and according to economists in a period of stagnant wage growth, devaluation of a currency can cause a fall in real wages, since devaluation causes inflation. And if the inflation rate is higher than wage increases, then real wages will fall as a result.
Another thing also highlighted by economists and market analysts is that the ‘Difference Between International Monetary Fund (IMF) and the World Bank’. The international analysts note that the primary difference between the International Monetary Fund (IMF), and the World Bank lies in their respective purposes and functions.
“The IMF exists primarily to stabilize exchange rates, while the World Bank’s goal is to reduce poverty. Both organizations were established as part of the Bretton Woods Agreement in 1945” the economists note.
The Bretton Woods Agreement remains an important part of world financial history. The creation of the International Monetary Fund (IMF) and valuation of gold and foreign exchange rates remain important to this day. The agreement also made currencies convertible for trade and other current account transactions. The strong value of the U.S. dollar eventually led to the collapse of this system after more than 20 years according to international analysts. U.S. President Richard Nixon called for a suspension of the Bretton Woods Agreement in 1971 when it collapsed. The agreement was dissolved between 1968 and 1973. In 1973, the agreement officially ended. Delegates from 44 countries met to create a new international monetary system. The main goals of the meeting of the 730 delegates were to ensure a foreign exchange rate system, prevent competitive devaluations and promote economic growth. Preparation for this event took two years. The primary designers of the system were John Maynard Keynes, of the United Kingdom, and Harry Dexter White, the chief international economist of the Treasury Department. Keynes’ plan was to establish a global central bank called the Clearing Union. White’s plan limited the powers and resources of each country. In the end, the adopted plan took ideals from both, leaning more toward White’s plan.
In 1958, the Bretton Woods system became fully functional. This happened as currencies became convertible. In order to convert currencies, countries settled their international balances in dollars, while U.S. dollars were fully convertible to gold. The exchange rate applied at the time was US $35 per ounce. Keeping the price of gold fixed and adjusting the supply of dollars was the responsibility of the United States.
One of the major items that came about from the Bretton Woods Agreement was the creation of the IMF. It was created to monitor exchange rates and lend reserve currencies to nations. It was formally introduced in December 1945 when 29 members signed the Articles of Agreement. The Bretton Woods Agreement also created the World Bank Group, which was set up to provide financial assistance for countries during the reconstruction post World War I phase. The Bretton Woods Agreement was dissolved between 1968 and 1973. An overvaluation of the U.S. dollar led to concerns over the exchange rates and their tie to the price of gold. President Richard Nixon called for a temporary suspension of the dollar’s convertibility. Countries were then free to choose any exchange agreement, except the price of gold. In 1973, foreign governments let currencies float, which put an end to the Bretton Woods system.
The International Monetary Fund promotes monetary cooperation internationally and offers advice and assistance to facilitate building and maintaining a country’s economy. The IMF also provides loans and helps countries develop policy programs that solve balance of payment problems if a country cannot obtain financing sufficient to meet its international obligations.
The loans offered by the IMF, however, are loaded with conditions. Often, a loan provided by the IMF as a form of "rescue" for countries in serious debt ultimately only stabilizes international trade and eventually results in the country repaying the loan at rather hefty interest rates. For this reason, the IMF has many critics worldwide.
On the other hand the World Bank's purpose is to aid long-term economic development and reduce poverty in developing countries. It accomplishes this by making technical and financial support available to countries. The bank initially focused on rebuilding infrastructure in Western Europe following World War II and then turned its operational focus to developing countries. World Bank support helps countries reform inefficient economic sectors and implement specific projects, such as building health centers and schools or making clean water and electricity more widely available. World Bank assistance is typically long-term, funded by countries that are members of the bank through the issuing of bonds. The bank’s loans are not used as a type of bailout, like with the IMF, but as a fund for projects that help develop an underdeveloped or emerging market nation and make it more productive economically.
In the recent times the President Donald Trump’s policies in the United States had also affected the other economies to experience a rise of US Dollar compared to currencies used in other economies at a time world is also hyper about digital currencies.
- Reporting by Devendra Francis
