Sunday, July 3, 2022

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Sorry Mr. Governor, adjust the sail or quit the ship!

When you came to the office in early April, we had very high hopes of you. Yes, you yourself said you can’t do magic but we thought you will think out of the box and out of your theory books to fight the fire at home! But we were wrong sir! Instead of fighting fire with fire or any extinguishers, you started to guard the house! Sir, we don’t need a guard for a house under fire; we need a good fire fighter! The way you’re guarding the house will end up giving us only ashes and nothing else. Look at your decisions over the last five weeks! Very theoretical, non-practical due to ground situation, and subject to lots of assumptions! These are not the decisions that will take us anywhere but complete shut down and collapse of the economy.

You said you are against the printing of cash . Very theoretical and popular statement! Sir, no government wants to print cash if things are perfect . We run with a huge budget deficit and we are a subsidized economy. Everything in this country is subsidized! And our taxes are low. Instead of making popular statements against money printing, you should’ve said that we need to increase taxes drastically, both direct and indirect, and that we should get rid of most of our subsidies! Sir, you must fight the cause, not the symptoms. You know very well that money printing, and the inflation that results, are the best form of taxation across the board, but you selected the popular root! Yes, we can stop printing, but we must get rid of all the popular subsidies and all the wastages in the government sector and we must increase taxes. We must increase the productivity of every single working individual. That’s the long term solution to this crisis, but did you take (or at least suggest to the government) a single policy measure towards that? No.

Sir, all steps and policy decisions you have taken so far are directed towards starving the economy. It seems you try to discharge the patient by killing him and not by curing him! Yes, thats a one way of discharging the patient, but not the way we expected or want! Look at all your popular but theoretical policy decisions over the last one and half months.

No printing of cash, increasing the interest rate by almost 100%, directing exporters to not ask for dollars from banks, directing banks to follow the central bank indicative rates when quoting for dollars and then quoting artificial low indicative rates, declaring the holding of dollar notes illegal, no imports on open accounts, no LC without 100% cash margin, etc etc are all decisions directed towards starving the economy and its growth. These are all text book measures, but will not help increase the productivity, reduce inflation, or increase dollar inflows and government revenue. These are all typical measures of a watch dog or guard, but not of the dynamic fighter we wanted!

Please note that we are a crisis hit country. These text book measures are not resolving our issues. Our issue is the scarcity of dollars and the low government revenue. Our issue is not inflation or the depreciation of rupees. Inflation and rupee depreciation are only symptoms (AKA natural reactions) of those issues. You try to focus on reactions, but treating the reactions instead of the cause will end with the patient dying! Did any of your measures so far result in attracting one additional dollar to the country? One additional rupee to the government revenue? Did any of those measures help to reactivate the economy or its productivity? No.

You increased the policy interest rate by 100%. You expected this will control the inflation? Yes. Only in theories sir! Our inflation is not a result of consumers consuming more, as you appear think, but because of the scarcity of goods, or the increase of import cost . Import costs went up because of world issues and rupee depreciation. Rupee depreciated happened because we ran out of dollars! By increasing interest to such high levels , you will kill all local industries and investments. You know very well that no producer or business in Sri Lanka can make 25/30% return risk free , specially after paying a proposed 40% income tax. So, what do you want? Everyone to stop doing production or business but instead invest that money in government treasury bills at 25% and sleep? Is that your method of increasing the productivity of the country and reducing inflation?

You asked exporters to refrain from asking dollars from the bank. If they can’t ask from banks to where they are remitting the dollars, from where do you want them to ask dollars? From the black market or from your grandma? If exporters can’t import using there export proceeds, whatever the inputs they need, how do they continue export businesses? If exporters can’t use their dollars, why do they continue exports ?

You declared that you are going to illegalize holding dollar notes! You think just because you declare that, people will come in queues and deposit their dollar notes in the banks? You will not get a penny, sir! People hold dollar notes because they don’t believe in rupees, and they know that the rupee will get depreciated much further, even though you artificially hold it lower. Are you going to send CID or the police to every household to find hidden dollars? Sir, you need to learn something very important. Never give false indications to the public that you are in control of something when you are not! By doing so, you take upon yourself the responsibility of something which is out of your control, and the public will loose confidence in the institution and the system itself . Your predecessor made that mistake in style! That’s why you are here, so don’t get yourself thrown into the same dustbin!

You declared that you are banning the open account imports to control or curb the Undial/Havala system! Very good, if you can do it, but make sure the imports are available to the public. If you cannot make the foreign currency available for those importers to import goods through your theory book policy measures, there’s no point in you curbing the informal market. When the tap water runs dry, people will dig wells whether it is authorized or unauthorized! Your responsibility is to ensure the smooth flow of tap water, and when you have failed in your responsibility, there’s no point in barking at well water! People will dig for their survival regardless!

Finally sir, please remember, economic theories in text books wont work in a collapsed, bankrupt, destroyed economy. You were witnessing the systematic distraction for 35 years but never raised your voice, when you were inside that system. You are now trying to rescue a sunken ship of which you yourself was a member of crew for 35 years! Now, what matters are not your theories but the ground reality! That reality will run the system beyond all your theories! Look at it from Far East to the west. Look at it from East Asian countries to Asian countries to middle eastern countries to the African continent to the South American continent! Every country which went through these kinds of economic calamities and disturbances went through a particular cycle of recovery. We are not an exception. We will have high inflation, high depreciation of currency, higher printing of money, higher circulation of dollars among the public, higher taxes, higher incomes, higher expenses, higher prices for everything, and virtually, over a short to medium term, everything will get repriced, and that repricing will compel our labour force, our entrepreneurs, and our country to increase productivity for survival and then for growth. Once our productivity as a nation goes up, we will start to sail again !

That’s where the wind is blowing. It’s best you adjust your sail, or quit the ship ! What matters for us is the journey, the passengers, and the ship, not the captain!
Forwarded as received.

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