Ravi K’s Gimmicks Do Not Work In Economics

By Hema Senanayake –January 27, 2016

Hema Senanayake

 Sri Lanka is an interesting country. Its currency, the rupee has been depreciating for a while. The Minister of Finance Ravi Karunanayake, it seems was convinced that rupee was depreciating due to depleting “foreign reserve levels.” So, the obvious common-sense solution was to boost foreign reserves. He did find an innovative solution. He got a rich Belgian man to deposit U.S. dollars one billion in Sri Lanka – And as a result official foreign reserves were increased by one billion dollars.

Someone told me that there are signs that rupee is getting strengthened. I being macroeconomic analyst was not convinced because I know for sure that this kind of gimmicks do not work in economics. The most unfortunate thing is that economists in Sri Lanka, it seems, are not dare to analyze this kind of gimmicks.

This new government has a habit in finding microeconomic solutions (i.e. business type solutions) for macroeconomic problems or issues. These solutions cannot prevail and would not strengthen the macroeconomic situation in the country. The mega show of “Davos” too went in line with the same approach. Why do I say so?

It is because the prudent macroeconomic management must begin within the country. The government is not doing enough in this regard. It looks like that the subject of macroeconomic management is a devolved subject; it seems that it is being devolved not to provinces but to rich racketeers in the world. The said deposit of dollars one billion would do more harm than good to the macroeconomic situation in very near-term. Let me explain this point a little further.

In the world market, the crude oil prices hit the lowest by now. A few days ago, the price of a barrel of crude oil was 29 dollars. In late January of 2011 the crude oil price was USD 135 per barrel. What does this mean for Sri Lanka in terms of country’s current account and Balance of Payment (BoP)?

Anyway, why the above question is important? It is because that these two accounts posted or maintained by the Central Bank of Sri Lanka (CBSL), directly relates to the value of rupee. Now you might immediately think as follows:

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