Sri Lanka currency board would bring immediate confidence: Mark Mobius

ECONOMYNEXT – A currency board for Sri Lanka would bring immediate confidence to investors and help stem the economic crisis, said Mark Mobius, the biggest emerging markets investor, who has experience investing in stable countries with fixed exchange rates.

“I like the idea of ​​the currency board. It worked all over the world. Provided you have a really ethical board of the currency board, to make sure they don’t deviate (from the rules of the currency board),” Mobius said in an interview in Colombo. .

“But for me, this is the solution. This will immediately bring confidence.

Mobius said it has long invested in Hong Kong, which has a currency board.

Hong Kong set up a currency board in 1983 after the currency became unstable and maintained its exchange rate at 7.8 to the US dollar and is a territory with one of the highest economic freedoms in the world.

A currency board cannot buy treasury bills to create currency shortages, and the exchange rate is permanently fixed.

As a result, unconventional economists or mercantilists cannot engage in “stimulating” or targeting the output gap to create currency shortages and a balance of payments crisis.

Soft-pegged currencies (central banks with foreign exchange reserves) are collapsing due to liquidity injected through open market operations to keep interest rates low when domestic credit picks up.

Nor can they depreciate the currency in pursuit of temporary trade gains (mercantilist goals), give short-term zero-sum profits to exporting firms at the expense of workers, and trigger strikes and social unrest.

However, the currency board must have its own law and must be a “real currency board,” unlike the case in Argentina where it was claimed to be a currency board but operated in a different way, Mobius said. .

“The law needs to be changed,” he said.

Argentina had a “convertibility system” under the same Latin American central bank law and the exchange rate crashed in 10 years. Soft pegs typically collapse during the second Fed cycle when the cap rate is lowered.

Mobius said it sees opportunities in Sri Lanka’s stock markets in companies “with strong balance sheets, high returns on equity that can boost dollar earnings” that can survive a crisis.

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He had bought an apartment in Sri Lanka and hired a decorator who quoted a price in dollars because some materials had to be imported.

However, when he went to the bank to get the money, he was told that only rupees would be released. He wondered what to do and “waited for the answer” since the rupee was falling and if the money was withdrawn, there were doubts about the possibility of importing material.

However, in the case of sovereign bonds, they were traded overseas and the 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 legislatively overridden in favor of an intermediate regime. Currency boards are usually set up in times of crisis.

The Ceylon Currency Board was established by the British colonial administration after the Eastern and Eastern Bank (a chartered note-issuing bank went bankrupt and closed, resulting in a 50% depreciation of the Ceylon rupee .)

Singapore also maintained its currency board after independence to avoid inflation and balance of payments crises. (Colombo/April 27, 2022)

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