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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » Onions, potatoes to cushion Sri Lanka depreciation shock

Onions, potatoes to cushion Sri Lanka depreciation shock

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ruwan326

ruwan326
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Onions, potatoes to cushion Sri Lanka depreciation shock-Oct 03 2018


Onions, potatoes and rice which are now grown in the country will cushion the people against currency collapse, Central Bank Governor Indrajit Coomaraswamy said, as the rupee's unstable soft-peg with the US dollar saw its second run in 2018 despite weak credit growth.

Sri Lanka was no longer the country it was when it got independence in 1948, as it is producing more rice domestically and in a good rainfall year, no rice is imported, he said.

"Things like potatoes and onions we are producing more which can compete with imports," Coomaraswamy told reporters.

"So the whole scenario has changed in terms of the impact of the exchange rate on the cost of living. It still does, please do not get me wrong. It does have an impact.

"Though currency deprecation may lead to bus fare hikes, train fare hikes and some imported items going up in price, the impact is relatively low because we have had fairly decent Yala (minor cultivation season) and Maha (major cultivation seaon) harvests."

"And also things like onions and potatoes which we import, domestic production is competitive so there is a limit beyond which import prices can go up."

Import Substitution

Sri Lanka started to grow onions and potatoes –effectively, non-tradable import substitution products supported by protection—in the 1980s when the country saw the worst monetary instability and currency depreciation in its post-independent history, triggering waves of strikes that eventually gave the 'open economy' a bad name.

Sri Lanka's balance of payments troubles began shortly after a money-printing central bank was created in 1950 with a soft-peg where the exchange rate and interest was simulataneously targeted, abolishing a hard peg with a floating interest rate, unlike countries like Singapore, which kept floating interest rates.

In the 1970s, SriLanka closed its entire economy as the Bretton Woods soft-peg system, which was based on similarly contradictory policy, collapsed, as gold prices shot up in a commodity bubble and oil-shock fired by the Federal Reserve with the Vietnam War in progress.

In the US, President Nixon slapped import restrictions for a few months after the dollar stopped gold convertibility in 1971 eliminating the conflict of the soft-peg with gold, until the start of the short-lived Smithsonian agreement. The second deal also collapsed in 1973 leading to floating fiat-money exchange rates seen today.

At the time people in Sri Lanka were urged to grow and eat manioc (cassava), sweet potatoes, taro (kiri ala) and other native yams like hingurala, to save 'foreign exchange' as the central bank bought government securities with printed money to maintain a fixed pattern of interest rates.
Cont....https://economynext.com/Onions,_pota...3-12091-1.html

samaritan


Moderator
Moderator
It has been the practice even in the past not to import onions & potatoes during harvests here, in order to safe guard interests of the local producers and during off season these are imported.


So, there is nothing new for Dr.Indrajit to shout "Eureka" as if he has invented something new to mitigate rupee depreciation. Sadly the CB Governor is also behaving like a cheap politician. 


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