ECONOMYNEXT – The large reserve losses in Vietnam in 2022 after low rates show that Sri Lanka’s currency problems cannot be solved with exports, but the problem lay elsewhere in the central bank, opposition legislator Kabir Hashim said.

“Vietnam is a good example,” Hashim, an economist told parliament. “Vietnam printed money keep interest rates down this year. What happened? The currency came under pressure and they lost about 20 billion US dollars.”

The Vietnam Dong fell from 23,000 to the US to 24,800 before the central bank started to hike rates from October and impose credit controls to tame domestic lending to stabilize the currency.

“Vietnam’s last year’s exports were 355 billion US dollars,” Hashim said. “A country which has such a large volume of exports is experiencing a deficit in the balance of payments.

“So the problem is not simply increasing exports, but doing the correct monetary policy.”

In the third quarter of 2022 alone Vietnam lost 15.6 billion US dollars as money was printed to keep rates down. But exports were up 15.6 percent to 312 billion US dollars by October.

In October when Vietnam started jacking up rate and imposing tight credit controls inflation was measured at 2.89 percent.

Under ‘flexible’ inflation targeting Sri Lanka suppresses interest rates until it is too late to prevent a currency crisis. Currency crises are as economic disease associated with soft-pegs (reserve collecting central banks with policy rates) which are absent in clean floats and hard pegs).

Related Vietnam foreign reserves plunge US$15.6bn in 3Q as exports soar

Higher volumes of exports simply increase the spending power of the recipients of the money boosting imports accordingly.

Imports were 303 billion US dollars.

Vietnam also had to pay out about 5.6 billion US dollars through the primary investment account as FDI firms repaid dividends, keeping imports in check. Expatriate workers also take money out.

In the third quarter about 2.0 billion dollars of payments through the secondary income account further reducing the money for imports.

Tourism receipts also boost imports in the same way.

However, if the central bank prints money before or after defending the currency to keep rates down injecting fictitious rupee reserves into the banking system, outflows exceed inflows, creating pressure on the unstable peg or ‘flexible’ exchange rate.

Sri Lanka’s macro-economists and money printers have a well-oiled set of scapegoats to blame for monetary troubles after printing money to blow the balance of payments apart.

Exporters for blamed not creating an ‘export oriented’ economy like Vietnam and Bangladesh.

Then hard-working expatriate workers, another group of dollar earners, were blamed for sending money outside of the central bank system through net settlement systems used for centuries, long before electronic gross settlement system were built.

They have also blamed importers for creating a ‘trade deficit’. Imports above hard exports come when recipients spend earnings from non-hard goods like remittances, IT or tourism and the government spend its foreign borrowings.

There have been also claims that exporters are keeping money abroad, a type of private foreign reserve build up that can block imports – after declaring correctly in invoices there prices for tax purposes.

However the central bank itself is commits itself to do the exact action of building reserves and curtailing credit and imports, under an International Monetary Fund program net international reserve target.

Blaming trade for monetary troubles is part of an overall ideology known as Mercantilism, which Adam Smith attempted to defeat with (classical) economics, but after the soft-pegged Bretton Woods system was created after World War II, the ideology has re-surfaced.

In 2020 Sri Lanka ran a BOP deficit of 2.4 billion US dollars, in 2021 in 3.6 billion US dollar- and there was a BOP deficit of 3.1 billion US dollars by August 2022, Hashim said.

“There is a total loss of 9.3 billion US dollars,” Hashim said. “Is it a wonder that we go bankrupt? There are wrongs committed by printing money.”

When money is printed, the excess imports denies the ability to the government to repay foreign debt, the Ceylon Petroleum Corporation to pay for oil and the people to pay for all the imports demanded by the newly created money at the existing exchange rate.

Sri Lanka’s economists got the power to print money and undermine a previously consistently pegged exchange rate in 1950 leading to import and exchange controls.

Hashim said Sri Lanka had ignored the advice of the best classical economists brought to the country by former President J R Jayewardene to advise the country.

Related Sri Lanka ignored Singapore’s Goh, flexible CB law not a change: Kabir

In 1980, Singapore’s economic architect Goh Keng Swee had advised economists not to print money. Sri Lanka’s economists generally prints money to keep reserve money from contracting and interest rates from going up, like Vietnam did until October 2022.

Sri Lanka also printed money to keep rates down until April 2022, losing large volumes of reserves and the central bank itself got into debt.

There are street riots after the Bank of Bangladesh cut rates as the economy recovered after the Coronavirus crises in 2021 and the Taka collapsed from 85 to 105 to the US dollar in 2022.

When the currency was stable for over 10 years the economy did well in the stability, some Sri Lankan economists claimed that Bangladesh was an ‘export oriented’ economy.

Hashim said Sri Lanka ignore the advice of the best classical economists in the region, including Singapore’s econmomic architect Goh Keng Swee, who was brought by then President J R Jayewardene in 1980 when Sri Lanka was hit by BOP troubles after two years of strong growth. (Colombo/Dec14/2022)

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