PBJ, Modern Day Rip Van Winkle

P.B. Jayasundara

( May 09, 2012, Colombo, Sri Lanka Guardian) A banker referring to Treasury Secretary Dr. P.B. Jayasundera’s outburst, of accusing them of being manipulators vis-à-vis the exchange rate (ER) market as reported by a section of Tuesday’s dailies, said that the economy was opened up 35 years ago in 1977, and since then the ER market has been active.

“Why then has Jayasundera, Rip Van Winkle like, accusing us of ER manipulation after being quiet for such a long period of time?” he asked.

“One doesn’t have to go thus far in years, let’s start from last year, which was the genesis of the present day ER pressure, why did not the Treasury Secretary then accuse us of manipulation without waiting to do so now?” the source further asked.

“And what about the importers, are they also not ‘co-conspirators’ of ER manipulation with us according to Jayasundera’s definition of ‘manipulators,’ when we try to search for US dollars ($s) to meet their letters of credit (LCs) commitments, thereby causing pressure on the ER, why accuse only us?” the banker added.

It’s not manipulation, but demand for $s that is causing the ER to weaken, he said.

The source further said that Jayasundera’s assurance of a $ 75 million inflow on account of an investment for the start of a Sheraton Hotel complex here is well and good, but when one considers Central Bank of Sri Lanka’s (CBSL’s) Treasury (T) Bill holdings, some Rs. 223 billion* ($ 1.7 billion** as at Friday ), it’s not an inflow of $ 75 million that is needed to ease pressure on the ER, but a sum 24 times that number ($1.9 billion), he said.

CBSL’s T Bill holdings are correlated to the value of new money (printed money) that has entered the economy. Ideally, new money should enter the economy in relation to the foreign inflows that it’s receiving, and not by operating in a vacuum, as appears to be the case now.

Further, new money entering the economy through CBSL’s money printing machine, unsupported by inflows, is also likely to cause demand side inflationary pressure (ie the tendency of prices of goods and services to go up) in the economy, hitting the poor and the fixed wage earner the hardest as a consequence.

On the other hand inflationary pressure caused due to inflows may be mitigated by reselling those foreign exchange (forex ($)) back to the market, thereby absorbing rupee liquidity from the system, which in turn may spur further economic activity by the import of capital goods from the $s so bought and made available, for the use of the market.

But when CBSL has a paucity of $s, it doesn’t have the space to resort to this mechanism.

Raising of policy/interest rates, reintroduction of vehicle taxes, and worse, accusing market players of being manipulators, have had already killed the forex market, with daily volumes which were some $ 80 million a year ago, having had by now fallen by a half to the $ 40 million levels.

*CBSL also conducted a repo auction, and, as well as through its repo window, absorbed some Rs. 23.3 billion of excess liquidity from the market on Friday. CBSL, when it absorbs such excess liquidity, provides banks T Bills of an equivalent amount as security in return. If the value of such T Bills is also added on, then CBSL’s T Bill holdings go up to Rs. 246.3 billion.

**On the basis that 1$=Rs. 130 in interbank spot trading