“Out of the woods” an expression, refers to having been lost in a forest, dates from Roman times; it was first recorded in English in 1792. Today Sri Lanka is not out of the woods yet, for the economy of United States of America (USA) has been gradually strengthening for about a year and as the result the United State Dollar (US$) has got stronger and the Sri Lankan Rupee (SLR) has depreciated against it to an all-time low of Rs169.00 and the indications are that it will continue to depreciate even further beyond this year. This was an anticipated outcome for the leaders of Unity Government, who have little choice on the matter could only take measures to stabilize it. As strengthening of the US$ is only half the truth for post-independence seven decades all governments of Sri Lanka have only themselves to blame for the way its leaders have handled the economy.
In nominal terms, the rupee is down by as much as 5,090 per cent or by 50.9 times vis-à-vis US dollar since independence from Rs3.32 per US$ in 1948 to today’s rate of Rs169.00 per US$. Inversely, one Ceylon rupee was equal to $ 0.30 in 1948 was a high valued currency, meant that US cents 30 could buy one Ceylon rupee at independence; whereas today, a miserable US cents 0.006 is sufficient to buy one SL rupee is a reflection of its low value and is one of the lowest valued currencies in the South Asian region and the economic downfall of Sri Lanka is worse in comparison with the East Asian countries which strengthened their currencies through sound external finances supported by high Gross Domestic Product (GDP) growth. The rupee has fallen down by 7.41 per cent per annum from Rs15.19 per $ in 1976 to Rs169 per $ today, compared with a marginal depreciation of 0.55 per cent in the previous period of 1967-1976. The rupee depreciation was much visible after 1977, with the introduction of flexible exchange rate system along with a broad package of economic liberalisation, replacing the fixed exchange rate operated hitherto, the then government had expected that market-determined exchange rates would eliminate the bias against exports and facilitate export-led growth. Unfortunately, that did not happen possibly for two reasons; firstly, in the post-independence period of 1948-1977 the rulers’ lifeless economic policies led to trade deficit that destroyed the sound economic base. As the result the rulers had to face uprisings from the people; first from Southern unemployed youths that was duly supressed; followed by the 1983 riots that caused an uprisings from North-Eastern youths that was supressed after it developed into a bloody civil-war lasting three decades. The economic liberalisation of 1977 thus failed to produce the envisaged economic transformation as the export sector continued to rely on low-tech, low-value added exports mainly from manufacture of garments and agriculture and created an increase in imports to meet the consumer market. The Sri Lankan economy belonging to the lower-middle income category was still based on low-skilled, labour-intensive production structure; in contrast, the East Asian countries accelerated their export-led economic growth to reach the high-income category globally by means of knowledge economy driven by science, technology and innovation. The lack of vision to exploit the strategic location of the island nation together with absence of proper reforms to facilitate trade and the 1983 riots caused Sri Lanka to miss out to engage in global product sharing opportunities that the economic liberalisation created. Because many foreign manufacturing companies that had broken up their production processes into vertically separated stages that could be carried out in different countries flew in to invest in Sri Lanka flew out with the riots. These economic setbacks deterred export growth against rising imports to widen the trade deficit which compelled continuous depreciation of the rupee.
Second, the excessive budget deficits which persisted throughout the post-liberalisation period due to increase in consumer market imports and in the same period gradual increase in defence expenditure with the civil-war intensity increasing year after year contracted domestic savings and the resultant savings-investment gap ended up as balance of payments deficits necessitating to depreciate the rupee further overheat the economy, thereby pushing import demand upward fueled demand-pull inflation causing price-wage spiral.
All these policy-related deterrents led to deplete foreign reserves and the continuous rupee depreciation was inevitable in the post-liberalisation cum civil-war period. The previous regime did defended the rupee by releasing its foreign reserves to the market from time to time to prevent abrupt increases in import prices and the government’s debt service burden. This gave a false sense of stability and thereby encouraged imports and to depress export growth led to the low interest rate policy provided a further boost to imports and to weaken the rupee. But fearing the loss of political power successive governments including the present one failed to resolve the basic cause of the civil-war and have been reluctant to implement the much needed structural reforms essential to cut down the government deficits which pressurised the exchange rate. Though it called for reduction in current expenditure; heavy dependence on populist measures such as consumer subsidies, handouts and public sector employment creation resulted in raising the current expenditure. When the civil-war was finally brought to finish with foreign intervention in 2009, it was anticipated that defence allocation would reduce considerably; but that never happened and government continued with negative peace for another six years and the government revenue, did not expand to commensurate with the expenditure hike resulted in persistent budget deficits. With the absence of proper reforms in place and economic misalignments resulted in past regime selling segments of land and many dollar earning business ventures to foreign countries to induce them to help with the post war rebuilding process and all contributed to the downward path of the rupee. When the regime change took place in 2015 with yet another foreign intervention, the Unity Government formed faced a heavy trade deficit and an all-time high foreign debt loans to service with many white elephant ventures and a fully corrupt administration to carry on.
Bitter Truth is that strengthening of the dollar and growing trade deficit has prevented the rupee from stabilizing and this trend is set to go into next year unnoticed and with no panic. It is best to remember that exchange rate is not the only factor that decides the fate of the economy; but to follow the strategy of the previous regime and spend reserves to prop up the rupee will only end up with highly depleted reserves as well as a depreciated currency. Fortunately, a fact not appreciated by the people is that in spite of all the short comings the two leaders of the Unity Government, have managed to turn many white elephant ventures that will in due course turn into dollar earning ones by renegotiating the loan arrangements to long term lease; but it is true they are alone or together not out of the woods yet!