we ARE on course to a dual currency regimen

by Kumar David-2022/07/10

Communist Cuba, even when Castro was at the peak of his powers, employed a dual currency system of the Cuban peso and the ‘dollar’ (by which I mean any hard currency). ‘Dollar-shops’ all over the country sold imported goods for hard currency. Import ‘dollar’ costs were recovered, but there was no obvious gain for the economy except commissions and taxes, and seemed a pointless exercise. It did provide consumer satisfaction by providing access to imported goods.

But there is another secret. Nearly 1.8 million Cubans live in Miami, other parts of Florida and in the U.S. southern states. They remit loads of money (about $2 billion a year) to their families (like our workers do) but not everybody rushes to dollar-shops with their treasure; they simply cash it (more so if attractive exchange rates are available). Hey bingo it now becomes a net foreign currency earner as in Lanka. Yes, it creates its problems; some families with overseas earners are well-off and social stratification grows especially in village society. And there are other problems in Lanka like booze loving males shipping off family females to work overseas. There is a need to balance between these considerations but it can be a big foreign currency earner. We are familiar with the game except that we don’t have dollar-shops and don’t offer a higher exchange rate to enhance remittance inflows.

A more serious situation is when a national currency collapses as in Zimbabwe etc where inflation rose to hundreds of percent. The local currency was abolished (except for wrapping a loaf of bread). For years the economy functioned on dollars and all payments were made in that medium. Lanka now seems to be heading for something in-between. Production companies are being asked to pay for their fuel in dollars. Also the Public Utilities Commission has formulated an experimental scheme where foreign currency earning exporters will he asked to pay for electricity in dollars so that a part of their foreign earnings is shared with the exchequer and the community. Central Bank (CB) regulations will have to be changed but that’s a detail if the concept itself is deemed good. The tricky point is what higher exchange rate to offer for remittances and how to manage the game. I can think of half a dozen complications, CB bureaucrats will therefore come up with two dozen.

My discourse today is ‘where is the rupee headed?’ The Ranil Wickremesinghe (RW) government is hopelessly out of depth in addressing the fuel emergency. Petrol and diesel queues are a visible slap in RW’s face but everything – production, exports, public transport, goods in shops – is fuel dependent. Fuel is king of any modern economy as even mighty Germany is learning to its cost as Russian gas supplies are curtailed. I steadfastly maintained that RW should not be dumped while negotiations with the IMF were in progress. The IMF team will report to its bosses and it remains to be seen what the terms of the eventual protocol are. Whatever, the need for an unelected RW administration to continue in office has now passed and it’s time to call elections. But 22A does not permit early dissolution of Parliament, that is not before two and a half years of its election without the consent of a majority of the 225 MPs. Thereafter the President can dissolve at will. I would like to see them all thrown out pronto, but we must not undermine formal legitimacy in these dangerous times.

RW and his team of goats including deceitful Power & Energy con-artist Kanchana do not see the loathing that they evoke on the streets and in petrol queues. The job of the police and army now is to shield reviled political bigwigs from the anger of the masses. The language in the queues is atrocious, even parents are not spared. Admittedly it’s irrational, the damage was done by the Rajapaksa gangsters before RW et al took office, but people are so incensed there is no reasoning with them. Two weeks more without petrol/diesel/gas and with power-cuts lengthening is maybe the most this government can survive. Then what? Will an alternative lot do any better? Whistling in the dark! Or will it be anarchy?

The government has failed to bring fuel and slept on the job for six weeks; it has shown itself to be incapable of understanding the critical importance of fuel for the survival of a modern economy and society. At the early stages of his administration RW was winning additional power and outmanoeuvring Gota. Now that very fact has turned him into the centre of attention and expectation. If RW’s team fails to surmount the fuel crisis they had better start packing their bags. Their implicit argument “We can’t do it, but nobody else can do it either, so let us cling on to power” is plain greed. That cock won’t fight.

What does this mean for the subject of my essay, a dual currency regimen? It will bring the event closer as breakdown of social order will further undermine the LKR, now about 365 to a US dollar. If petrol price in the black-market is an indicator of where we are heading bear this is mind. In late June the black-market price of petrol was Rs 800 a litre. On first July it had risen to Rs1,500, and is now unavailable at any price. A collapse of LKR will add pressure for a dual exchange rate (like FEECS) scheme or an explicit dual currency regimen. The other option is to transfer (sell) national assets, say the Trinco fuel storage facility to India in exchange for fuel, food and medicines but I have not yet examined the cost-benefit ratios closely. We have ultra-nationalists who will shriek and die proudly proclaiming “Hela jathika abimane!” rather than suffer the shame of mortgaging the metaphorical family silver. Count me out, I’m not one of them goofy nationalists; I’d rather sell the silver and live.

A collapse of LKR due to inherent causes such as a continuing disaster in foreign debts, collapse of local economic activity or social turmoil is intrinsically bad. We must do all we can to prevent it. However, this has to be seen as a separate matter from renting out local facilities in exchange for profit whether to India or anybody else. If it’s a win-win deal why not? India, it is believed, would like to lease out the Trinco oil farm, it is said the Advani Group via PM Modi and President Gota has applied pressure to be allowed to build a wind-farm in Mannar and a solar plant in the NCP in exchange for fuel, food and other forms of economic assistance.

I am not knowledgeable of nitty gritty details of the shenanigans but the concept in general terms per se is fine with me. If a win-win deal can be struck what’s the problem? Take Hambantota Harbour, the trouble is that it was an eye-wash prestige stunt to perpetuate Mahinda’s name and for the Clan to collect bounties and commissions. The damage was done then and we were unable to pay back our dues. After that had happened leasing the harbour to anyone is in principle fine. We lease out a property or a facility, collect rent, use a portion for maintenance of the property and the other potion is available for consumption. In principle what’s the problem? Why else does anyone rent out property? Each case has to be judged on its financial merits.

The advantages of a more flexible currency regime, even short of a dual currency system can be debated. Say LKR totters but survives, however the country’s foreign debt and balance of payments woes will not go way for a long time, maybe a decade. From pragmatic considerations there is a case to be made for exchange rate flexibility. The DFCC Bank is offering inward remitters 2% higher interest rates if they hold the funds in a 12-month deposit with the bank; as I mentioned the Public Utilities Commission has proposed that a portion of dollars received by foreign currency earning companies be exchanged with the state; the hotel sector has asked that it be allowed to retain a part of its income in foreign reserves; and expatriate Sri Lankans are holding back in anticipation of better exchange rates for inward remittances. To an extent a dual currency regimen has already commenced.

The IMF team has worked on a medium-term stabilisation and debt restructuring package – the fuel crisis per se is not within its remit. The protocol will stipulate higher taxes and interest rates, pruning of budget deficits (less spending on social welfare, higher fuel and electricity prices) reducing the Foreign Debt-GDP ratio, now about 130% to below 80% (a measure which will require painful belt-tightening), and a de facto dual currency system. The IMF’s dictates will be a medium to long-term programme and run for long after RW and his team are gone, perhaps dead and buried. The opposition will cry blue murder but has nothing concrete to offer instead. An election run by a caretaker government is timely to release pent up pressure if nothing else. The opposition parties need now to announce their programmes, maybe just for the record! Let’s take it from there.