Sri Lanka’s currency problems stem from government brutality, JP Morgan forex analyst says – The Island


The government of Sri Lanka is using tough tactics to control the local currency against free-floating currencies, says Vinuja Singharachchige, Forex analyst at JP Morgan.

Vinuja, who is a former researcher at the Advocata Institute expressing his own views and not necessarily the views of associated organizations, says in a press release that even if you want $ 1 to be around LKR 200, reality must be on his side.

“Currency crises have been common in our modern history, with countries facing sudden devaluations to the point where we can predict trends. There was the Mexican peso crisis of 1994 and the Asian financial crisis of 1997. Both examples may highlight the dangers of maintaining an exchange ratio that does not reflect the real value of the currency, ”he says.

“A currency can fulfill its function if it is a stable store of value. If there is a sudden divergence from the market, it threatens savings. Some believe that the government should be at the center of the economy and that it must take measures to respond to the external economic environment. The problem with putting government at the center of economic decision-making is that the economy has to be monitored and operated by individuals who have to make decisions while many countries let markets decide what prices and other parameters should be. The best markets are by no means perfect and sometimes need a correction, but in many ways it’s better to be reactionary than to have a poorly managed economy, ”he notes.

“There are different ways of determining exchange rates. Many developed countries have floating systems where buyers and sellers of currencies can step in and buy and sell at a rate determined by the free market, but our currency is severely constrained compared to free-floating currencies. What can happen in situations like ours is that the central bank tries to keep the rate at the level it wants, but at some point you have to accept reality. As much as you want 1 USD to be around 200 LKR, you need the reality to be on your side. In a healthy economic system, your cash inflows and outflows would naturally determine that 1 USD is worth around 200 LKR.

“You may also have a scenario where the government has strong reserves to be able to support its valuation of the currency by buying and selling reserves, and unfortunately we don’t have that capacity. This is why countries with currency problems have exchange rates parallel to the black market. “

“It’s better to face the reality of the situation and not try to force things to turn out the way we want them to. The reality is that we have a debt burden that needs to be paid off, and we need imports to live on which we should not be particularly wary of either. Imports play an important role in any dynamic economy. Add to that the lax monetary policy that has been used to ease the burden of the pandemic. “

“The downside of trying to fix the problem rather than kicking the box is that the immediate consequences can be hard to swallow, but it’s reasonable to believe it’s way better than having to react to the problem that suddenly arises where the fallout would be much worse. he says.

“Just like a business, we have to make sure that our fundamentals are worked out, because the balance sheet day of every country or company is inevitable if the fundamentals diverge too dramatically. Not so long ago, Black Wednesday was the time when the UK government had to withdraw the pound sterling from the ERM (exchange rate mechanism) for failing to keep the pound within a certain range in because of the pressures against the currency.

“History has repeatedly shown us the fallout from poorly managed currency valuations. While economic turmoil affects all countries, it is important to note that our problems are not simply the result of negative external factors, but compounded by our own underlying shortcomings. He notes.

About Ruben V. Albin

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