ECONOMYNEXT – A currency board for Sri Lanka would bring immediate confidence to investors and help stop the economic crisis, top emerging market investor Mark Mobius who has experience in investing in stable countries with fixed exchange rates said.
“I like the currency board idea. It has worked around the world. Provided you have a really ethical board of directors of the currency board, to make sure that they do not deviate (from the currency board rules),” Mobius said in an interview in Colombo.
“But that to me is the solution. It will immediately bring confidence.”
Mobius said he had been investing for a long time in Hong Kong which has a currency board.
Hong Kong set up a currency board in 1983 after the currency became unstable and has kept its exchange rate at 7.8 to the US dollar and is a territory which has among the highest economic freedom in the world.
A currency board cannot buy Treasury bills to create forex shortages and the exchange rate is permanently fixed.
As result non-classical economists or mercantilists cannot engage in ‘stimulus’ or output gap targeting to create forex shortages and balance of payments crisis.
Soft-pegged currencies (central banks with foreign reserves) collapse due to liquidity injected through open market operations to keep interest rates down when domestic credit picks up.
They also cannot depreciate the currency in the pursuit of temporary trade gains (mercantilist objectives), give short term zero-sum profits to export firms at the expense of workers and trigger strikes and social unrest.
However the currency board has to have its own law and had to be a “true currency board” not like the case in Argentina where it was claimed to be currency board but operated in a different way Mobius said.
“The law has got to be changed,” he said.
Argentina had a ‘convertibility system’ under the same Latin America central bank law and the exchange rate collapsed in 10 years. Soft-pegs generally collapse in the second Fed cycle as the ceiling rate is brought down.
Mobius said he saw opportunities in Sri Lanka’s equity markets in companies “with strong balance sheets, high returns on equity which can grow profits in dollar terms” which can survive a crisis.
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He had bought an apartment in Sri Lanka and had hired a decorator who had quoted a dollar price because some material had to be imported.
However when he went to the bank to get the money he had been told only rupees would be released. He was wondering what to do and ‘waiting for the answer’ since the rupee was falling and if the money was withdrawn their were doubts whether material could be imported.
However in the case of sovereign bonds, were traded off shore and money did not have to be brought into Sri Lanka, he said.
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Sri Lanka had a currency board from 1885 to 1950 and it was broken legislatively in favour of an intermediate regime. Currency boards are generally set up in crises.
The Ceylon currency board was set up by British colonial administration after the Eastern and Oriental Bank (a note issuing chartered bank failed and closed its doorz leading a 50 percent depreciation of the Ceylon Rupee.)
Singapore also kept is currency board after independence to avoid inflation and balance of payments crises. (Colombo/Apr27/2022)
