Suggestion to establish a ‘currency board’
Sri Lanka is at crossroads and whilst the intention of every Sri Lankan is to put the economy back on track, there is no credible dialogue ongoing regarding an overall financial stabilisation plan with ambitious objectives and credible execution modalities to yield fast and meaningful results to the society as a whole.
If no proper planning is done and no proper implementation mechanism is followed, the citizens can keep protesting for the next many years with the only outcome being change of rulers.
It is no secret we have an economic issue on hand. The sad thing is no one is initiating and progressing with a healthy dialogue offering solutions on the table and debating the pros and cons associated with them. If this trend continues the learned will once again fail the suffering masses of our motherland.
This article is an effort to reverse the trend. I am tabling a solution that can be analysed, debated upon, and if necessary, rejected; provided that there are better alternatives at hand.
The basic actions listed below should be taken regardless, note that these are a few of the many ideas which can easily be spelt out by seasoned economists;
1. The economy must be set on a growth trajectory with an aim of reducing the deficits. We must focus on balanced and diversified growth leading us to the creation of jobs, financial stability and sustainable development. Role of the Board of Investment is one which has been forgotten completely. We must make BOI to be in the forefront with far-reaching efforts both locally and internationally to attract Foreign Direct Investment. It is time we introduce a ‘Single Page’ ‘24 Hour’ approval process eliminating the existing approval process which is a nightmare for any investor.
2. Immediate focus on public finance with specific targets is crucial: Elimination of waste is primary. Especially when the waste is associated with the draining of foreign currency. As an example we are now talking for weeks about the shortage of paper. But still tons of paper are wasted on a daily basis. Simple things such as making the existing ‘electricity bill’s size’ 75% less is an example. Who wants such large-sized water, electricity and other utility bills?
Let us start with paper. Every State institution must be given a target to reduce the usage of paper by 75%. Let’s then see how much the overall saving of paper importation will benefit the savings in USD. We must not only restructure lossmaking public entities but should also focus on making every public institution reduce its existing import related expenditure by 75%. This will then leave only the Ceylon Petroleum Corporation, Litro Gas and Lanka Coal Company to be tackled with their respective USD requirement. These institutions too should be looked at from a procurement efficiency and cash flow management aspect (better rates, long term credit from suppliers if they wish to continue business, etc.).
3. Digitising every possible area of State-owned institutions is primary. ICTA can play a lead role but we must select at least a 1,000 local IT companies and link them with the needs of the State-owned institutions. The private company should work on a revenue sharing method whilst their profits should be linked to the savings made by the State-owned enterprises. This will make our IT companies have a captive business to seek for more/international contracts whilst contributing to job creation and savings in public finance simultaneously. The digitisation not only improves the efficiency of the State-Owned Enterprises, but it will also reduce cost (Example, elimination of paper from the system, reduce the usage of fuel because people can obtain their services without the need to travel, etc.), increase efficiency and overall profitability.
4. As panic will prevail and escalate within the public due to the forex shortages and increased banking sector regulations in the coming days, it is important to have consolidation of the banking sector to support the economic revival. With the situation wherein banks are exposed to financial imbalances, large public debt, declining foreign currency reserves, part built/unsold real estate developments and worrying cashflow situation of almost all the businesses, the banking system must be protected against a possible disaster and therefore consolidation as well as systematic extra monitoring mechanism to ascertain the stability of the banks are a must.
The ‘currency board’ to stabilise Sri Lanka’s economy
The trend of the weakening Rupee will continue for the next year. In order to make sure things don’t go out of hand, especially considering the way we have handled matters of the past, a suitable solution will be to establish a ‘currency board’.
The currency board, once established will provide the necessary answers to our ailing economy with a special concentration on preventing the Rupee from weakening further.
The fact that it can be installed immediately and no reforms in State finances, State assets or trade is needed before the establishment makes it a comparatively much easier solution.
Having existed in over 50 countries, the success rate of currency boards is 100%. A factor which all Sri Lankans should look at with enthusiasm.
Modern ‘Currency Board’ established in Hong Kong in 1983, The ‘Currency Board’ of Estonia which was established within a record time of 30 days and the Lithuanian ‘Currency Board’ established in 1994, The Bulgarian ‘Currency Board’ which stopped the nation’s hyperinflation immediately in 1997, etc. are a few examples from which Sri Lanka can learn and reform its economy.
Bulgaria, which turned its fiscal deficit to a surplus and tripled its foreign exchange reserves in 1997, later became a country with the second lowest Debt-to-GDP ratio in the EU. Lithuania – a country which I represent in Sri Lanka as an Honorary Consul was praised by the IMF for its turnaround as one of the best in the EU and the key contributor was its ‘Currency Board’. It will be my pleasure to secure the necessary guidance and expertise from Lithuania on the formation and continuity of Sri Lanka’s ‘currency board’ if we all agree to move forward with that as a solution.
Whilst critics would argue that the currency boards only suit smaller countries and existence of weaker banks will hamper its progress, I believe Sri Lanka fits the size of the other nations which adopted this solution since the size of our economy is smaller in comparison. Further, our banking system is still strong to the extent we do not have any weaker banks in operation.
I reached out to former Prime Minister Ranil Wickremesinghe to discuss the viability of my proposed solution. He was of the opinion that the currency board must be incorporated within the purview of, or as a part of the Central Bank. I however believe that due to the past performance and politicisation of the Central Bank (despite the latest credibility and goodwill it has gained with the appointment of the new governor who seem to be best-suited for the post), a separate, newly-established ‘currency board’ will offer a cleaner, professional and goal-oriented mission.
I fondly recall my initiative in the launching of ‘Sri Lanka Economic Forum’ in January 2016. We had the foresight to arrange politicians, bureaucrats and professionals including the world’s top economists in one stage because that is the way forward for our country to realign its economic management systems. Professor Joseph Stiglitz, Professor Ricardo Hausmann and many leading economists were consulted to offer long-lasting solutions and guidance for Sri Lanka’s economic development and sustainability. The nation must thank George Soros who not only funded the forum but also spent over $ 3 million later to engage the ‘Harvard Center for International Development for the sake of uplifting our economy.
Harvard University completed a ‘Macro Economic Growth Diagnosis’ of Sri Lanka and also hosted a team of Sri Lankan lawmakers to visit Harvard and to study the diagnosis and its potential implementation recommendations. An effort which will be remembered by history as a truly valuable one but as always our politicians and bureaucrats failed to make any use of it. If done, we will not be protesting on the roads today, splitting our hair on how to resurrect the economy of our motherland.
Leaving aside the past, I am happy to have initiated and publicised the ‘currency board’ solution in the national interest and will now leave the rest to the nation’s learned professionals to debate and decide the way forward with the same.
Let us navigate this violent storm and achieve safe landing at the earliest as a united and civilised nation.
(The writer is the Chairman of Supreme Global Holdings.)