Economists vs economists

By FS

(February 15, Sri lanka Guardian) A former US president once asked where he could find a one-handed economist. Asked the reason for this strange request, he said, “Most economists, I come across, when asked to offer suggestions to a problem say, ‘on one hand, this should be done … but also say … on the other hand, this (another solution) should be done.”This episode is often related – and was done at a recent discussion - to illustrate how economists often don’t think alike.

In the debate over devaluation in the country’s foreign exchange crisis, some economists this week provided a different view from others who have joined exporters in saying foreign reserves are depleted and something needs to be done, including depreciation of the rupee, to prop up exports.

Furthermore opposition parliamentarian Ravi Karunanayake told reporters on Thursday that the reserves have dwindled to little over $800 and sufficient for a few weeks, a claim which is yet (as at Friday noon) to be challenged by the Central Bank (CB).

While most economists and exporters are urging a free-float of the rupee and, only, when necessary the intervention of the Central Bank particularly at this time when other competing countries in the export sector have depreciated their currencies to help exports, some economists like Prof. W.D. Lakshman, a respected academic and government advisor, say rupee devaluation is just a temporary solution to staying competitive and not the best solution.

A labour economist attached to the ILO told a seminar, reported in this section, that devaluation will hurt the consumer. In response, pro-rupee depreciation economists say that the consumer’s plight will worsen further if the government doesn’t have enough foreign cash to pay for imports. What they – and exporters - are appealing for is not a sharp devaluation of the rupee but a reasonable mix of rupee depreciation coupled with a stimulus package that would tackle all issues faced by the export trade.

In fact, exporters argue the stimulus package, announced recently, provides just marginal benefits and doesn’t take care of the entire problem. For example, the stimulus package offers a 5% rebate on exports if a company maintains previous (year) export levels. But exporters argue that the rupee has depreciated by 20 % in the past two years and if so what happens to the balance 15% loss?


Anti-devaluation experts also put forward the argument that the export sector should address the real issues regarding competitiveness instead of relying on currency fluctuations.

Defending their position, exporters say these issues are essentially about more efficiency leading to better productivity which, if such a thing happens, would increase productivity levels but doesn’t take care of the bigger issues of rising costs -- inflation, raw material, taxes, fuel and electricity.

There is no doubt that export revenues, big or small, are required to pay for imports and if that drops, consumer prices will rise. Food and fuel prices have come down in the past few months, an ideal time to peg the rupee to a more market-linked level that will also not hurt the consumer (too badly).
Another situation emerging in the local money markets directly related to the foreign exchange crisis is where two rates are prevailing in US dollar trading. Since the CB is short of dollars it is only selling small quantities of dollars to banks.

The People’s Bank, it is learnt, is unable to get dollars from the CB as the request is to service huge bills from the Ceylon Petroleum Corporation and state fertilizer purchases. As a result, smaller banks are trading their dollars – bought from the CB at Rs 113.85 per dollar – to the PB at a higher rate of over Rs 114 and making a killing in currency trading! “The CB is not giving dollars to the state banks as their request is for over $50-100 million while smaller banks are asking in the region of $5-10 million,” one banker said.

In the meantime the CB roadshow to market the $500 million bonds to Sri Lanka’s diaspora – to raise money for government spending - has already begun overseas and the response is eagerly awaited not only by the banking regulator but the industry as a whole.

While on one hand, critics say raising this money is not easy as Sri Lankans permanently residing abroad, particularly in the United States and Europe, are seeing their disposable income levels dwindling due to the global financial and economic crisis, on the other if the CB is able to raise this money this year, that would boost reserves and confidence in the economy. The foreign exchange situation however, as we have stated in the past, is critical and needs to be addressed through a rational exercise instead of peace-meal approaches which are short-term and not sustainable.

-Sri Lanka Guardian