Wednesday, April 13, 2016

Abandoning the Sri Lankan Rupee in favour of the US Dollar

The inimitable, NewsCurry carries an article claiming that the Finance Minister has proposed adopting the US dollar as Sri Lanka's currency to prevent further depreciation of the rupee. 

Although NewsCurry is only satire the suggestion is actually very sensible and has been adopted in certain extreme circumstances to stabilise an economy, the most recent being in Zimbabwe.

The process is termed dollarisation or currency substitution. What this does is remove monetary policy from the hands of the local Central Bank. Where the competence of the of the Government is in doubt this is a very sensible measure and something Sri Lankans should seriously consider.

The currency then becomes what it it supposed to be - a medium of exchange and a store of value. Most importantly the Government can no longer print money to bridge the budget deficit (which is what this regime has been doing) which is what drives inflation and causes the currency to depreciate.

The country would then not need a Central Bank, although a limited bank supervision function could be carried out by a slimmed down institution. There would be no need to for all the antiquated exchange control regulations which hamper trade and investment.

Inflation would be at the rate in the US, which is in low single digit.

Overall it would bring some sanity to the proceedings, something badly in need.

Further reading on Zimbabwe's experience here.


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