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Serious foreign exchange management problem at Cental Bank last year

2 posters

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics

* Dr. PB on monetary, exchange rate policy

Treasury Secretary Dr. P .B. Jayasundera says steps taken to rectify "distortions in monetary policy and fiscal policy" were now bearing fruit after a serious foreign exchange management problem took the country to the brink of a balance of payments crisis last year.

"There was a serious foreign exchange management problem. Reserves rapidly declined and the exchange rate stubbornly remained firm. And when everyone realised this was not the way to manage the economy, bold steps were taken. A flexible exchange rate policy was introduced and monetary policy tightened," Dr. Jayasundera told a recent forum.

This was the first time a public official alluded to a management problem, rather than being touted as a phenomenon beyond the government’s control.

Monetary and exchange rate policy is the purview of the Central Bank. Since June 2011 economists and analysts had warned that the country was heading into a balance of payments crisis, only to be ostracized by certain officials at the Central Bank who scoffed at such warnings.

Delivering the 9th Annual Sujata Jayawardena Memorial Oration organised by the Colombo University Alumni Association at the Sri Lanka Foundation Institute on Wednesday (10), Dr. Jayasundera said both monetary policy and fiscal policy were distorted coming into 2012.

"Bold steps were also taken to contain fiscal risks caused by distortions in the power, petroleum and transport sectors. The country adopted a serious adjustment path so that stability was not compromised," Dr. Jayasundera said.

Officials at both the Central Bank and Treasury have told us that the Central Bank decision to keep the rupee stable by selling dollar reserves while keeping interest rates low drew some criticism from the Treasury.

The government had announced the 3 percent depreciation at the last budget which surprised the Central Bank, which was clearly unaware of the move, currency dealers said.

By February this year, the Central Bank could no longer ignore the problem and took a policy u-turn.

That there is bad blood between Dr. Jayasundera and Central Bank Governor Ajith Nivard Cabraal is no secret with both taking badly veiled shots at the other at public forums in the recent past.

"Dr. Jayasundera is no better with the country’s fiscal policy in a mess. But at the end of the day Dr. Jayasundera’s job is to spend. The Central Bank on the other hand is supposed to be independent. We cannot expect total independence, but in recent times the Central Bank was more politicised than ever before. After all, it refused to act on the early warning signs of a balance of payments crisis because some of its officials felt a rupee depreciation was bad for politics. The resulting policy shift was very good, but the late response translated into severe adjustments. EPF investments, Greek Bond investments, campaigning to host the Commonwealth Games have also dented the image of the Central Bank," an economist said not wanting to be named. "But one thing is certain, the Central Bank has the best talent in the country, it is a shame we are not making the best of them, or rather I should say, not giving them a little freedom to do their best," he said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=63520

gamaya


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

I wonder how much would be the loss to the public due to selling government USD reserves @ 110 in their calculated effort to keep rupee steady.

Of course We would never know.

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