Fear of Rupee depreciation

Thursday, October 4, 2018

The steady depreciation of the Sri Lankan rupee appears to be the latest obstacle confronting the government, as it seeks to exert a semblance of control over rising prices with the prospect of national elections looming in less than two years.

At beginning of this week, the United States dollar stood at 167 rupees with no indications that the rupee will appreciate in the foreseeable future. This provides a fertile ground for the opposition to berate the government and, as public discontent with the soaring cost of living grows, those in the corridors of power are concerned that there would be political repercussions.

Of course, apolitical observers agree that the entire blame for the current crisis cannot rest with the government. It is a culmination of global economic factors, compounded by the drastic trade policies adopted by the United States government that has led to the current predicament. As such, it cannot be easily undone by a country such as Sri Lanka whose economy is dwarfed by its global competitors.

The United States, led by its temperamental President Donald Trump, is engaged in a trade war with China. At the same time, it is also insisting on imposing sanctions on Iran, a major oil exporter. It has also re-negotiated its North American trade agreement with Canada and Mexico. All these actions, though not directly impacting on Sri Lanka have led to a steady appreciation of the US Dollar, with resultant consequences for the import oriented Sri Lankan economy.

Pricing formula

For instance, the government has been compelled to increase fuel prices on a regular basis now. This is done based on a pricing formula. While this may be a necessity, it has also attracted much criticism in a country where the public has been used to stable fuel prices for decades.

Similarly, the price of railway fares and gas has also increased, with a 12.5 kilogram gas cylinder increasing by 195 rupees. Railway fares were also raised by 15 per cent, the increase being the first since 2008. The authorities did attempt to sugar coat the hike by keeping the minimum price of a ticket unchanged at 10 rupees.

In what it said was a bid to stabilise the rupee, the government has also announced that it would be curtailing vehicle imports, stating it was suspending the issuing of vehicles permits to parliamentarians for a period of one year. Importation of vehicles for ministries, departments, statutory boards and state owned enterprises will also be suspended until further notice.

“Importation of vehicle using the concessionary permits issued to state sector employees will be suspended for six months. No Letters of Credits (LCs) will be permitted to be opened based on these permits during this period,” the Finance Ministry said.

However, this move has earned the ridicule of some sections of the public who point out that the vast majority of parliamentarians have already used the permits they were entitled to, to import vehicles and then sell them to others at massive profits. Social media was awash with lists of such parliamentarians and the names of the new owners of the vehicles they had imported.

Opposition politicians have been quick to criticise the government’s handling of the issue. The Joint Opposition (JO)’s de facto economic spokesman, Bandula Gunawardena claimed this week that the government was releasing funds to the local market in a desperate bid to stabilise the rupee.

Infrastructure development projects

The Central Bank has released US$157.7 million to the market within four days, Gunawardena claimed. When the International Monetary Fund is releasing US$169 million to Sri Lanka as loans, he claimed that the release of US$157.5 million to stabilise the rupee would only result in a further increase in the cost of living.