HIGH-INCOME EARNERS SHOULD POSTPONE LUXURIES

The loss of LKR in the market to purchase USD sold by the CBSL should not be replaced with new LKR by the CBSL In order to stabilize LKR Driven mainly by outflows of US dollars from emerging markets due to a robust US economy, gradual tightening (of inte

State Minister of National Policies and Economic Affairs Dr Harsha de Silva asked the high-income earners of the country to be socially conscious to help cut the demand at the margin, in the face of the rapid rupee depreciation.

The LKR will find its equilibrium once the dust settles. Some appreciation of the currency is warranted

“Social consciousness of our highincome people is also important now; perhaps postpone by just a couple of months that new luxury car or that trip to Alaska. These will all help to cut the demand at the margin,” Dr Silva said in a Facebook post.

The full post;

“I feel that the LKR has overshot (depreciated more than) its fair value; it should strengthen somewhat in the coming weeks. But, the fundamental issue is the lack of exports.

The LKR is again under pressure. The reasons for the current episode are primarily exogenous; driven mainly by outflows of US dollars from emerging markets due to a robust US economy, gradual tightening (of interest rates) by the Federal Reserve and investors taking refuge in the US with escalating trade tensions with China.“while the impact of this shock is being felt across the world, Current Account deficit emerging countries, like Sri Lanka, are getting battered more than those with healthy trade balances.“however, whether the slide we saw was fully warranted is a question I have in my mind. I feel the LKR at 170 has overshot its market-determined fair value. It could be partly disruptive speculation and partly genuine, lack of confidence in the Central Bank to have the situation under control.

“However, I think both these issues have now been addressed and the LKR will find its equilibrium once the dust settles. Some appreciation of the currency is warranted.

“The Central Bank must be credited for being responsible and not burning reserves to defend the LKR at levels earlier not feasible. We saw how during the 2011-12 homemade crisis (having held the currency artificially at 110 levels for months) ended up; losing almost USD 4 billion or close to half of the reserves in just a few months and yet the LKR depreciating by close to 13 per cent.

“My view is that the Central Bank could maintain the LKR at a level adjusted slightly upwards to correct for the overshooting.

“A criticism, however, is that they should not sterilize the interventions; in other words, the loss of LKR in the market to purchase USD sold by the CBSL should not be replaced with new LKR by the CBSL. The unsterilized defence will lead to some tightening of rates but that is an okay price to pay for a short while to stabilize the markets and build confidence around the new equilibrium exchange rate.

“When our exports to GDP share started to decline steadily year after year; from around 27 per cent in 2005 to around 12.5 per cent in 2015 with the Rajapaksa regime dismissing it with talk of ‘economic nationalism’ the writing was on the wall. What we see today is clearly and absolutely the outcome of that purely short-term populist economic policy of 10 plus years. I shudder to think what could happen if God forbid those who continued to advocate inwardlooking policies grab ‘power’; where will the LKR

stop? 500?