Defusing Foreign Interferences and Influences | Daily News

Defusing Foreign Interferences and Influences

Central Bank of Sri Lanka
Central Bank of Sri Lanka

Part IX

The one clear fact that emerged from our recent economic chaos is that our entire economy is fueled by the US dollar (USD). This is ironic considering that most ordinary Sri Lankan citizens would go through their entire lives without once touching or even seeing a USD currency bill.

One of the first indicators that our economy was in trouble was not the shortages in essentials and popular imports. It was the long queues at the passport office. This kind of “currency migration” is typical when the national currency fails to live up to its value. It is at that point people start migrating in search of a currency that will give them a sense of buying power.

As it is, our current inflation rates are unprecedented. The fact that we are printing money nearly 80 percent more than we did five months ago is not a good sign. According to the World Bank, Sri Lanka is ranked as one of the top 10 countries with the highest in food inflation in 2022. It was revealed at a discussion headed by Presidential Adviser on National Food Security Dr. Suren Batagoda, participated by District and Divisional Secretaries 60 percent of our population have reduced their food intake due to the prevailing food shortages caused by two consecutive bad harvests.

Shortage of US dollars.

However, due to our forex crisis we are struggling to import and meet the gaps. Central Bank Governor Dr. Nandalal Weerasinghe worries that if these ominous statistics are not addressed soon, the ensuing riots will lead to a bloodshed. Addressing the Parliamentarians before the recent budget debate, he warned that a rebellion fueled by genuine concerns would make the recent anti-Government agitations (which he hinted as one with a different motive) seem tame in comparison.

The Government too therefore encourages our youths’ endeavours to seek jobs overseas. Countries such as Malaysia and Saudi Arabia had already responded with the promise of jobs.

Sending our workforce in their prime to work outside solves an immediate problem to the Government. This will increase workers’ remittances that in turn will bolster our forex. While this improves our buying power on imports we must also consider the effect of this migration in both medium and long terms.

Earning from our expatriate communities to meet our import bills cannot come at the cost of local industries faced without adequate manpower. Saudi Arabia has promised to open up slots for skilled labour. This is a welcome move as this exposes our skilled workforce to better work environments, ethics and procedures. Thus, in the short term we gain much needed forex and as a medium term gain a knowledge transfer.

However, generally the job market that we have been able to attract in Middle Eastern and East Asian countries is for the lowest scale in blue collar labour. Our citizens often find themselves in jobs rejected by those countrymen or those with occupational hazards. In the short term we may get our forex. However, if they are to return home without skills that has an applicable use in Sri Lanka or skills that does not offer them any growth prospects (such as house maids), then we have simply wasted a valuable resource of ours.

Likewise, we cannot afford a culture that appreciates imported commodities over domestic produce. Already small and medium businesses have sprung up in most major cities that sell only imported goods supplied by visiting/returning migrant workers. One of the main reasons for our current economic woes is also our penchant for imported commodities. Milk powder for instance has become a part and parcel of our lives. Thus when there were shortages in supply, people took to the streets in protest rather than considering an alternative such as liquid milk from the domestic dairy market.

The Easter Attack should serve us as a warning of irrevocable and irreconcilable ideologies that seep into our societies through migrant workers. Wahabism or Sharia Law did not establish in Sri Lanka with the original Moor settlers. These are the influences carried into the country in recent times by those who worked as expatriate labour in countries.

Therefore, chasing the USD is not without consequences. Simultaneously, earning in USD or other foreign currency is not necessarily a guarantee for a better life. Yet, the undeniable truth is that the USD has a grip on our lives and not just as the world’s reserve currency that dictates international trade.

What Makes US’s Foreign Debt Different from Ours?

Perhaps the best example that illustrates our dependency on the USD is the difference between America’s foreign debt and ours. Foreign debt is one of the things that the US can glide over whereas other countries, especially African and Asian, get stuck as if in quicksand. The simple difference is the solution. America’s foreign debt is in America’s own currency - the USD. Our foreign debt is also in USD.

Therefore, our ability to repay our loans depends entirely on our capacities to earn USD. America on the other hand only needs to print USD. “Printing money” is another luxury that the US can afford with much less restraint than we could consider. If we print money that exceeds our GDP rate, we risk hyperinflation that will eventually lead to a total economic collapse.

US is not completely invulnerable to inflation. In fact it is currently at its highest in this century. This was caused by creating new money to inject into the economy. This has reduced the value of the USD that is in circulation.

However, to pay its debt the US does not actually print more money. It is created virtually through financial transactions. As America makes all transactions in its own currency and that currency has a global demand, US has much less to worry about settling their debts than we do.

Since we have to pay in USD, we must earn in USD. This means that we must concentrate on producing goods that is demanded by the export market and rely on imports to meet our own needs. Thus we get increasingly entangled in a web of foreign debt.

After the Reagan regime, the US too depends on imports since their move to de-industrialize to accrue benefits of cheap labour from overseas. This has attracted a lot of criticism due to the contraction in the US job market and the resulting high cost economy. Yet, from a national perspective the US has managed to procure a labour force that gets paid in a currency far weaker than the USD.

WB/IMF a Cog in the US Hegemony?

When we approach assistance from the World Bank (WB) and the International Monetary Fund (IMF), it is because we are unable to bridge the difference between the forex we have at hand and needed to settle our foreign debts. We thus entrust these institutions with this specific purpose. Then their job is to help us increase our forex and thereby strengthen our hand to settle our dues that must be done in USD.

Long queues to obtain passports. Picture by Sulochana Gamage

Therefore, their solutions concentrate on directing our efforts to improve our export markets. For example, though we are an agricultural based community, our labour costs are high but yields are low. Hence, despite the existence of the export market for rice, an IMF/WB solution may not see the benefit of the State supporting our paddy farmers with subsidized seeds and fertilizers. Likewise, the IMF/WB may not see the value of improving domestic or cottage industries. All these earn in local currencies, which hardly contribute to the country’s foreign debt obligations.

Instead, the IMF/WB may conclude that this money would be better spent on establishing factories that cater to the export market such as the apparel sector. In the meantime, the IMF/WB may recommend that we import food and our other needs from cheaper sources.

Institutions such as the WB and the IMF have drawn much flak for prescriptions such as these that will drain out that country’s essence. This kind of solution will wipe out Sri Lanka’s agrarian industry that provides livelihoods to 60 percent of our population.

Furthermore, as long as we stay dependent on imports for our basic needs as food, we will continue to need the USD for our existence. Thus, the demand for the USD - which is what makes the USD the king of all currencies - will continue unabated. This dependency is not to be taken lightly as it leaves us vulnerable to aggressive tactics such as sanctions.

As such, we would never be able to oppose or antagonize the US. We will thus be sovereign only in name. In reality we would be nothing short of a vassal State without the independence to voice our own opinion.

It is these kinds of downsides that have earned the WB and the IMF the suspicion that their solutions are tied to the US hegemonic policies. This is not a sentiment shared by only the nationalists in the said countries. Prominent economist and author of Super Imperialism: the Economic Strategy of American Empire, Professor Michael Hudson also asserts the motive of founding the WB and the IMF was “as a means of imposing neoliberal, anti-Government structure on the world to prevent other countries from regulating their industry or agriculture.”

However, we seek these institutions’ support to meet specific objectives. For instance, the bailout package Sri Lanka wants is to help the Island nation procure its essentials whilst settling foreign debts. The solutions also then focus on meeting this goal.

Their solutions are of course invasive. Yet, that is the nature of a country’s economy. Every aspect of the country is related. However, we have made the matter worse with our dependency on the USD. For instance, if we are borrowing USD to purchase agrochemicals and subsidize it to farmers whose yields are low but costs of production are high, of course the IMF/WB will recommend against supporting paddy cultivation in Sri Lanka.

We need USD to pay our foreign debt and procure our essentials. It is for this purpose we approached the IMF. However, if all we have is a blank paper to table and expects the IMF to fill in the space, we will get a solution that may look great on paper but disastrous to implement. Yet, our social issues are not IMF’s concerns - it is ours.

The IMF’s responsibility is simply to design a package that will help us manage our foreign reserves better. In this endeavour, the IMF expects a certain discipline from us. Whether we treat this as our entire national economic plan or part of it lies with us. As such, drawing a line between our dependency and independency on the USD is our responsibility. This again underlines the importance of understanding how the USD came to have such a grip on our economy.

How USD became No 1 Currency in the World

America’s actual power over the world began in August 1971 when President Nixon took the USD off gold. This is known as the Nixon Shock. It is an extreme policy shift taken by President Nixon to redress the stagflation that then prevailed. To date, economists cannot decide if the Nixon Shock was a good or a bad thing for the world.

In 1944, the US along with 44 nations became party to the Bretton Woods Agreement. Its members agreed to guarantee converting their currencies into USD to within one percent of fixed parity rates, with the USD convertible to gold bullion for foreign Governments and Central Banks at USD 35 per troy ounce of fine gold.

However, America emerged from World War II relatively unscathed whilst Europe laid in ruins. While Europe was picking pieces, US was at the peak of its own industrial revolution, influencing the course of world trade and investment. Thus, as the demand for American produced goods increased, there was a shortage of USD to procure these commodities.

This led to a persistent US balance-of-payments deficit as foreign held USD exceeded US’s gold stock. This meant that the US was finding it difficult to redeem USD for gold at the official price. Without enough gold to meet the volume of USD circulating throughout the world caused the USD to be overvalued.

President Nixon therefore took the USD off the gold grid. This forced other Central Banks to abandon gold for US Treasury bonds and recycle the USD surpluses from these bonds.

This is just the beginning of a fascinating story that saw the USD dominating the world. It was not accidental. The neoliberal agenda that the US unleashed on the world is in actuality one of the most nationalist programs in modern history.

If the US succeeded in pushing her hegemony, it then also tells of the complacency of the rest of the world. However, countries such as China and Russia have launched their own brand of nationalism. With insight and a clear vision as who we wish to be, we too are capable of true independence.

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To be continued

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