Monday, October 20, 2008

Letter to the Governor of the Central Bank of Sri Lanka

Dear Sir,

If I would be presumptuous enough to propose urgent action, in light of current world economic conditions, for Sri Lanka to take maximum advantage of the situation. We can show the world we are able to maximize the benefit of the crisis to our advantage. The reason I appeal to you is I still have some faith that you may be able to see the wood from the trees and be bold enough to take action, which could be a recipe for the rest of the world to follow at some stage in the future. There is no downside to you.

I believe Sri Lanka should take maximum advantage of the current conditions instead of being concerned about its effect on the SL economy, thereby taking defensive actions. We must instead go on the offensive.

With the expected free fall in the price of oil, which is poised to drop below $50, I expect you to be able to keep the price at the pumps unchanged and instead tax the difference. This additional US$500 million, which you will have from tax should be set aside to pay off your very high interest loan you negotiated recently as interest rates have dropped to zero in US treasuries. If you still need the cash you can renegotiate this as a new loan at an interest rate of 2% as the country risk rating would improve by repaying a loan early, saving the country untold billions.

Please ensure that the Central Bank watches carefully the prices of our imports as steel and other commodities have dropped by more than 50% and should be reflected in the invoices. If they have not some of the importers may be over-invoicing to stash money overseas and they can easily be brought to task. As you may be aware, the case in Sri Lanka is there are limited number of importers who work in concert, who will not pass the price reduction to the consumer, and together with the wholesaler and retailer keep the shop price the same for all these items while making the profits themselves.

A price drop is actually deflation, which means we must drop to zero inflation immediately as there is no reason for any inflation in a period when prices are falling. This is exactly the situation for you to devalue the rupee to 130 to the dollar without seeing an increase in the import price of products in rupees. A unique situation to find oneself in. This depreciation will help the exporters who are hurting and who are putting the jobs of their workers especially in the garment sector at risk. If you do this I believe we can keep the dollar earnings of exports unchanged as the price of tea will most likely remain unchanged and the fall in garment earning will be more than offset by increasing remittances from the our workers overseas. Again you are in a lucky situation to see your export and invisible earnings rise while at the same time seeing a significant reduction in the import bill giving you a balance of payments surplus in the short term and hence foreign reserves.

Remember in a period of deflation, cash is king so all the foreign currency reserves you hold will help you in the long run to stabilize your currency reduce the country risk therefore be able to borrow at extremely favorable rates should the need arise.

Don’t wait to take reactive steps, take proactive steps and you will be proved right and at worst you can make a name for your self outside these shores which counts more than to be known within as the latter is only for ones failings and not ones achievements.

These simple actions can reduce money supply growth just enough to keep inflation at zero, something you never thought would happen in your lifetime. That is because you are embedded in the past and not in the future to a changed world that happens once in anyone’s lifetime and that is now.

The deficit spending you have resorted so far will not be necessary if proper action is taken to ensure that a few politicians and industrialists don’t benefit from the drop in prices, and instead ensure that the government in the form of taxes or tariffs raise revenue, without affecting inflation much in the way the oil price fall is used only for the government’s benefit.

Identify the best people to help you. 80% who work in the Central Bank are just time servers, who have to be cautioned or reassigned and not just to hog desks and have a subsidized buffet lunch that encourages a siesta. I recommend as a step in restructuring the Bank, you offer a buffet breakfast between 7and 8 am, and make sure they all work till 3.30 with a cup of tea and sandwich served at noon. On their way home when they exit the bank give a small snack to eat on their way home to give them the energy to get home. Trust me the productivity you get from them will double.

Yours truly, A subsistence farmer who spends less than Rs100 a month.

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