|Money Markets must know the
shift in policy on interest rates
The Central Bank
has hitherto refused to raise its policy interest rates despite
accelerating inflation. It has also kept a tight rein on the
Rupee in the foreign exchange market.
This week the Bank has restricted the availability of funds to
the banks and the money market from its Reverse-Repurchase
facility. It has followed this up with rejection of high
discount bid prices for Treasury Bills in the recent auction and
restricted the amount of T. Bills accepted to Rs 13 billion.
This has had an effect immediately on the secondary market for
Treasuries. According to LBO report “Gilt prices crashed in thin
trading with some dealers quoting 14.0 percent for discounting
treasury bills for small value customers of around 100,000
rupees, but t-bills over a million rupees were quoted at around
16.0 percent, up around 530 basis points from Monday” .
Why did the Central Bank take this unusual step even allowing a
disruption of the bill market? Financial sources refer to the
unusually high demand for foreign currency in the local foreign
exchange market. The Dollar rose to Rs 103.75 on heavy volume
Do the actions of the Central Bank constitute a change in policy
on interest rates or is it a temporary response to a heavy
pressure on the Rupee in the foreign exchange market? Does it
mean that the Central Bank is willing to allow the Rupee to
depreciate now, a reversal of the policy of holding it steady
through out 2005 and 2006, despite accelerating inflation which
in turn is caused by the expansion in the broad money supply to
fund the increasing budget deficit?
Economists point out that increasing budget deficits funded by
the banking system; while holding the Rupee steady will lead to
increasing deficits in the current account of the balance of
payments. Holding domestic policy interest rates unchanged
during inflation also leads to speculation against the Rupee.
There is a close relationship between the money market and the
foreign exchange market and the policy of ‘cheap money’ hitherto
followed would have encouraged traders to keep their foreign
currency abroad where interest rates are rising while borrowing
locally at cheap interest rates for their working capital
The Central Bank sold foreign exchange throughout 2005 from
April onwards. Economists have pointed out that the high growth
rate with increasing inflation was not sustainable but the Bank
thought otherwise and held both the interest rates low while
intervening in the foreign exchange market to keep the Rupee
steady. Something had to give way and it was a worsening of the
current account of the balance of payments. This could be
sustained only if more foreign funds would flow into the
country. In 2005 the foreign inflows apart from those foreign
inward remittances of migrant workers, was mostly by short term
borrowings. But there is a limit to the availability of short
term funds that can be borrowed.
Any disruption to the money market due to uncertainty about
policy is undesirable. The markets must know whether there is a
more permanent shift in policy on interest rates so that they
can form their expectations of the future rationally rather than
on rumors or sentiment. So it is heartening to note that the
Central Bank has issued a statement indicating a change in its
policy regarding interest rates by raising the Reverse-Repo rate
by 50 basis points. This should calm the markets.
Standards, Codes and Rules - Friend or Foe
of Poor Nations?
Governor of the Central Bank of Sri Lanka Ajith Nivard
Cabraal made a presentation titled ‘Standards, Codes and Rules –
Friend or Foe of Poor Nations’ at the recent Commonwealth
Finance Ministers’ Meeting held in Colombo. He dealt with the
issue of widening economic disparity among the rich and poor
countries in relation to the declaration adopted by the
Commonwealth on this issue in 1971 in Singapore. He pointed out
that many developed countries during their developing period had
lesser constraints compared to many rules of ethics and human
rights with which developing countries have to operate today.
Excerpts of his presentation:
“As we all know, the family of Commonwealth countries is a truly
global, multi-ethnic, multi-religious, multi-cultural,
multi-national collection of vastly differing economies,
societies and political ideologies. It may also be not
inappropriate to state that the Commonwealth is enriched greatly
by this diversity. At the same time, we have to be mindful that
the countries within this group are at various stages of
economic development, ranging from poor developing nations with
annual per capita incomes of about US Dollars 160 to very
wealthy industrialized nations with per capita incomes of about
US Dollars 36,000. Hence, although we may, in general, say that
we derive our strength through diversity, we still have to take
serious note that the great disparity in living standards is an
issue that needs to be uppermost in our minds if we are to move
forward in harmony and brotherhood. In that context, I think it
is very appropriate that, this year, the Commonwealth Finance
Ministers have decided to focus on several dimensions and
options that impact on this issue, which is borne out of the
fact that they have selected “Agenda for growth and livelihood”,
as this year’s theme for the meeting.
In order to critically examine the issue of wealth disparity in
perspective, let us take our minds back to the Commonwealth
Heads of Government meeting in Singapore in the year 1971. At
that meeting, the declaration of Commonwealth Principles was
adopted. These Principles acknowledged that wide disparities in
wealth existed between different sections of mankind. The Heads
of Government also acknowledged that such disparities were too
great to be tolerated and that such disparities would create
world tension. Accordingly, the Commonwealth resolved to work
towards the progressive reduction of these disparities. The same
declaration undertook to steer the group’s efforts to overcome
poverty, ignorance and disease, as well as to raise standards of
life and achieve a more equitable international society.
Twenty years later, in 1991, the Harare Declaration was issued.
This declaration conceded that many Commonwealth countries were
still poor and that they faced acute problems, including
excessive population growth, continuation of poverty, debt
burdens and environmental degradation. At the same time, it was
acknowledged that while disparities among members appeared to
have worsened, some favourable results were also being achieved.
For example, despite the widening economic gap, many nations had
been able to establish better democratic processes, good
administrative frameworks, more independent judiciaries, keener
respect for human, fundamental and labour rights, and several
other social successes. Those were of course significant
achievements, and we should all be proud that we have been able
to create such conditions in our countries.
Notwithstanding those gains as noted in 1991, and the many
subsequent successes, we may still have to admit that our
collective efforts to address one of the fundamental Principles
of the Singapore Declaration, namely, that of addressing the
issue of income disparity, has been, by and large, unsuccessful.
Today, 35 years after the Singapore Declaration, it is actually
becoming even more acute, and consequently, we need to respond
to that widening gap appropriately, urgently.
As we all know, countries that are affluent today were not
affluent at some point in time in their history. However, they
have reached an affluent status today through their various
actions and initiatives. Obviously therefore, as in the case of
any successful outcome, we could learn from those case studies.
In fact, we in Sri Lanka felt that we should do so
professionally and objectively. We began by examining the
economic and political environments in which many of the highly
successful countries operated. We studied the external and
internal conditions that prevailed during the early days of
growth of those countries. We also attempted to analyze the
factors which enabled those countries to break the shackles and
reach a stable platform from where they launched themselves to
the next level of development.
In that exercise, one of our key findings was that, in the
journey to reach developed and industrialized country status,
many of those countries had immense space and flexibility to
grow in an uninhibited environment. Further, when the present
day rich countries were growing, (from per capita income of US
dollars 1,000 to US dollars 10,000), they faced very few
obstacles in the movement of capital and labour.
In uninhibited environment
They did not have to be overly concerned about human or
labour rights. They were free to impose trade quotas and grant
very visible and obvious subsidies to their local entrepreneurs
and farmers. They were not subjected to stringent global
standards for copyrights. They were not desperately worried
about safeguarding the ozone layer or the environment. They did
not have to make too much of a fuss about money laundering. They
did not spend expensive professional time and money on
compliance tests. They did not have to deal with 24 x 7 media
reports. The list goes on. Some even had ready access to the
natural and human resources of other countries, which they
But today, many low-income countries, despite their potential to
grow are functioning in an “international environment” that is
“controlling” almost all economic activities. Accordingly, they
are seriously constrained by these stringent benchmarks, however
wonderful they may be, which from a rapid development point of
view, poses serious and continuous challenges. For example, at a
time when these countries are desperately attempting to break
free from the poverty trap, the allocation of resources to them
by way of aid inflows by wealthy nations have been reducing. In
fact, the net official resource inflows to developing countries
were negative in 2005 and projected to remain negative in the
next few years as well.
In the meantime, although the Commonwealth group supported the
Doha Declaration of WTO and were moving towards the direction of
freest possible flow of multilateral trade on terms fair and
equitable to all, while taking account of the special
requirements of developing countries, the current multilateral
trade negotiations have not been moving in the right direction.
Hence, it is clear that not only are the present day poor
nations struggling in the emerging, highly complex and
controlled economic environment, they are also facing reduced
resource transfers, and not being accorded special treatment
they should be afforded in order to propel them out of poverty.
Some may however argue that the tremendous benefits of
globalization has levelled the playing field and that advantages
are available to any and all who care to access, and it is just
unfortunate if some persons are unable to take advantage of
Weaker have lesser chances
Nevertheless, I believe we are all aware that weaker communities
have lesser chances of access and that situation leads to
widening even further, the ever-widening gap. Therefore, it is
timely and appropriate that this forum addresses the need to
impress upon the more wealthy nations to increase aid flows,
open out greater trading opportunities, and move towards higher
investment and resource build-up in the lower income countries.
Lest I be misunderstood, let me add that, not for a moment am I
suggesting that the progressive steps the world and the
international community have taken over the past few decades in
developing new standards and norms are in any way, inappropriate
or unwelcome. Those initiatives were certainly necessary and
have been beneficial for the overall advancement of society.
But, we must, at the same time, collectively address the ever
growing constraints arising out of the inflexibilities and
restrictions imposed in the transfer of capital, wealth, skills,
knowledge and the imposition of new standards, which may
consciously or unconsciously act as subtle barriers to poverty
In order for all of us to appreciate the fact that what I am
saying is not something new, let me now quote a Principle as set
out in the Singapore Declaration, and affirmed in Harare.
“Our aim is to achieve the freest possible flow of international
trade on terms fair and equitable to all, taking into account
the special requirements of the developing countries, and to
encourage the flow of adequate resources, including governmental
and private resources, to the developing countries, bearing in
mind the importance of doing this in true spirit of partnership,
and of establishing for this purpose in the developing
countries, conditions which are conducive to sustained
investment and growth”.
While this Principle enunciates a very laudable and noble
philosophy the unfortunate reality may be that the plethora of
what we may call “worthy restrictions”, (albeit they may be for
the greater good of mankind), may be actually but unwittingly
assisting to keep the same developing countries in a tighter
trap of poverty. The powerful message that emerges from this
situation is clear. The present low-income countries, when they
have to struggle in this unsympathetic environment, need more
understanding; greater allocations for funding and investment;
increased direct aid flows; and tangible support and direct
concessions to recognize satisfactory “compliance”.
At this stage, I would like to acknowledge a step in the right
direction that has been followed by some advanced countries
through certain targeted schemes, such as the GSP+ scheme, which
provides some welcome relief to low-income countries.
Unfortunately however, even such concessions are often coupled
with stringent criteria such as Rules of Origin which again adds
to the ever growing list of “do’s and don’ts”, which list must
be quite a nightmare for those who have to keep track of these!
Of course all this has served to create a new breed of corporate
executives titled, “Compliance Officers” (CO’s), who may at this
rate, soon end up becoming even more important than CEO’s!!
The Principle in relation to addressing income and wealth
disparity among nations is equally applicable to societies
within nations as well. Towards that end, I am pleased to
announce to this distinguished audience that Sri Lanka has
already developed a comprehensive policy framework “Mahinda
Chintana”, based on the election manifesto submitted by
President Mahinda Rajapaksa at the last Presidential Elections
which addresses this issue comprehensively. This policy
framework provides a sustainable development strategy designed
to address growth and livelihood issues, while covering the
income – disparity issue that prevails in our own country.
As per the “Mahinda Chintana” development strategy, every
endeavour is to be made to tap domestic resources for
investment. At the same time, the Government clearly realizes
that it is imperative to encourage large scale investment flows
into the country to make a significant impact in the
acceleration of the growth process.
It is now an accepted norm that large infrastructure projects
such as highways, railways, airports, ports and power projects
not only add to the stock of investment in a country, but are
also considered a better recipe for poverty alleviation rather
than income support and subsidies.
A large number of such investment opportunities now exist in Sri
Lanka and no doubt in many other Commonwealth countries as well.
In that context, we need to use the opportunities provided by
events such as today’s meeting to establish bi-lateral
relationships leading to the promotion of investments. While
Governments attempt to achieve consensus for multi-lateral
facilities and agreements, it may also be time for individuals
to seriously consider B2B investment opportunities.
Your Excellencies, Distinguished Guests, I am confident that the
delegates present at this Forum will actively, seriously and
diligently explore possible ways and means of promoting
interactive growth that would generate livelihoods and reduce
poverty in our respective countries.
If we all do that successfully, we could look back and proclaim
that we did our bit to fulfill the lofty outcomes as envisaged
in the 1971 Singapore Declaration.