BY EDWARD THEOPHILUS

It is regret to note that the coronavirus pandemic and associated unstable economic environment created in the world has caused to dramatically depreciate official currency units of developing countries.  Sri Lanka’s rupee value has depreciated to more than Rupees 200 to a US dollar and other developing countries also gaining similar results whether the countries are like or not to the new environment. Despite the prediction of certain currency speculators that the US Dollar would be collapsed, it can be seen that currencies of developing countries have depreciated to an unreasonable level. The prediction may be pessimistic and it is difficult to believe that the currency market would be in a negative environment in the medium-term for developed countries. The currency units of developed countries don’t record a similar type of depreciation recorded in developing countries.  Developed countries have the economic power to respond against uncertain conditions and developing countries haven’t got such power. In this environment, developing countries expect from International Monetary Fund a workable solution to the problem.  

The depreciating currency value negatively impacts developing countries as domestic economies of developing countries are depending on imports and the current currency depreciation condition forced many countries to control imports and indirectly go to an exchange control regime. There may be a different point of view of international economists and many developed countries like Australia heavily dependent on remittances coming from the developing world.  Developed countries have foreign assets and foreign reserves as well as they have the power to borrow and settle the problem in mid to long term, but developing countries have not such power and they are in a grave condition. Central Bank of Sri Lanka has introduced new regulations for outward remittances and new control measures would impact the investment process.

International Monetary Fund is the fundamentally responsible organization to act in such a situation and the World Bank has taken action to provide credit facilities to some developing countries for medical expenses. The managing director of the International Monetary Fund, Ms. Kristalina Georgieva admitted that the world’s poor countries would suffer if the COVID-19 fallout drove markets to the lowers level since  the1930s.” It is an excellent statement of IMF boss and she also stated that emerging markets and lower-income nations across Africa, Latin America and much of Asia are most at risk.  Usually, IMF is more concerned with developed market economies, but this time it concerns on lower-income nations. 

The depreciation of the currency value of developing countries has been a continuous process since before the corona pandemic and the International Monetary Fund needs to consider an effective and result oriented solution be proposed to the world rather than patches to settle the issue. Since the inception of the International Monetary Fund vital policy actions proposed to developing countries and some of the suggestions were discordant to them as the proposal concerned with the political power of developing countries.

The original condition of the Briton wood Agreement was to allow member countries to revalue or devalue currencies by 10% without permission of the fund. American proposal was to introduce a common currency called BANCOR, but it was not successful. According to the IMF agreement, no country can officially revalue or devalue the currency unit in the way experienced under the Gold Standard System.  It was a problem for the world at that time; however, the world is dynamic at present and the stability of exchange units has been changed since the inception of the IMF despite the desired level by the proposed situation. Sri Lanka had the first experience of official devaluing with the permission of the IMF in 1967. The currency unit was devalued by 20% in response to the official devaluation of Sterling pound by 17.5% and later Sri Lanka introduced the Foreign Exchange Entitlement system which was an indirect devaluation of currency unit for import payments and revaluing for non-traditional exports and the FECS system also removed in 1978 introducing adjustable peg system in which the currency unit has been radically declined during the 42 years. Now, the depreciation has come to a peak level and it seems that it is good for Sri Lanka and other developing countries making a parity for currency unit against the US dollar on the current basis at least to maintain the agreed exchange rate for ten years.

The depreciation of currencies in lower-income nations negatively affects imports and debt repayment and the import of capital goods for economic development purposes would be expensive and returns from the investment would be lower than expected. In this way, the lower-income nation will have difficulties to attract foreign investments and exchange control regimes in these countries hit to the free-market system.

Industrialized countries and high-income countries with trade power liked to a depreciating value of currencies in developing countries as it supports buying raw materials at a lower price and after the 1973 oil crisis developing countries were highly disadvantaged by oil trade.  developed countries did not listen to the plight of developing countries.  The popular advice of developed countries to maintain an export economy in less-developed countries where supply output (industrial, commodities and other services) at a lower price to developed countries. With the results of Coronavirus, the IMF has turned to Africa and expressed concerns on debt repayment and increasing special drawing rights. It is a good moved, however, special drawing rights would not positively help to stabilize the exchange value of domestic currencies in developing countries.

The year 2000 the European Union took a successful decision to stabilize the currency introducing EURO as a common currency and could the IMF introduce common currencies for two major blocks in Asia, SARC and ASIAN countries and stabilize the currency in these countries. Such an action might force countries to agree with many conditions. Countries in the Asian continent must agree with such conditions as the preventing of currency depreciation would bring many happy returns to each country. In this connection, the role of China and Japan will be crucial and support to develop strong trade ties and foreign exchange reserved in all countries.

How practically implement the idea may invite a broader debate.  It needs more research and an idealogical contribution to the proposal from different countries and if it would successful two new common currencies could be introduced to the international financial system before 2025.

When the EU created it associated with politics and military blocks, this proposal purely associates with currency stability and economic relations.

The current backward economic environment the SARC countries must work together and financial stability is vital for all members of the SARC. Since the first decade of the 21^st century, the cooperation SARC deteriorated on the economic matter because these countries had problems in cooperation due to political reasons.

The office of the president in Sri Lanka needs to take policy initiatives to stabilize the currency.