Sri Lanka needs to change its monetary unit
By Edward Theophilus Wanigasekera
Historical evidence of Sri Lanka unambiguously indicates that she had been used monetary units in different names in the past before the current monetary unit, Rupee introduced into the country. The fascinating coins triumphal arch installed in Bank of Ceylon Head Quarters in Colombo displays the models of different monetary units had been administered in Sri Lanka in the history. A controversial view on currency printing in Sri Lanka has already expressed by a Sri Lanka’s academic that counterfeit coins of foreign currencies were printed in Sri Lanka before 2000 years ago. Before the rupee has introduced to Sri Lanka as the legally valid monetary unit for exchange purpose in 1872, several monetary units were used during the European rules and protégées used their own currency unit and Dutch administration used monetary units imported to Sri Lanka from Indonesia and the Netherland. Robert Knox, who was a moving prisoner in the country during the regime of King Senkadagala Rajasinghe had recorded that Portuguese and Dutch monetary units were used as valid exchange units in Kandyan Kingdom too and King Rajasinghe also accepted such foreign monetary units as valid currency for exchange purposes.
After taking over the power by British rulers, Sri Lanka was introduced British pound as the valid monetary unit and historical evidence denotes that first batch of treasury notes for exchanging purpose were issued in 1927 cancelling the Rix Dollar unit, which had been widely using in Sri Lanka before the introduction of British pound. How Rix Dollar came to use in Sri Lanka is difficult to trace in the history without clear evidence but it can be assumed that from the later part of Dutch rule in Sri Lanka to 1827, this particular Rix dollar used in the country for exchange purposes. The writer of this article has never seen this currency note so it is difficult to explain the style of it.
The word RUPEE is assumed to be a word of Bhasha Indonesia and Rupee or Rupiah monetary unit is being used as an exchange unit in Indonesia, Maldives Islands, Sri Lanka and India. The procedure adopted by British Rulers when they were cancelling Rix Dollar unit in the country was the parity of 10 Rix Dollars to a British pound. When British rulers introduced Rupee into exchange system of Sri Lanka, the exchange rate was one British pound equal to 10 Ceylon rupees. In fact, that exchange rate was higher than the foreign value of current USD or AUD. The most horrible story and the serious question of many Sri Lankan people at present is what was happened the foreign value of Sri Lana rupee despite the so much thrust of economic development. It is agreed with the economic theory that economic value to a currency would not automatically attract, but it should fulfil certain favourable economic conditions in the country to freely appreciate the foreign value of a currency unit.
After the introduction of Rupee into Sri Lanka’s economy, paper currency was issued by Sri Lanka Treasury but that authority was transferred to the Currency Board System, which established by No 32 Currency Ordinance of 1884. There is no argument that Currency Board System was an authority of a dependent economy, however, the system was able to maintain the stability of external value of Sri Lanka rupee to a certain extent compared to the weak current independent central banking authority, which is powerless when the foreign of currency is subject to decline in open market although it is prime objective of the monetary authority of the country as indicates in the act. In other word central bank policy of Sri Lanka has no focus on short term market intervention to secure the value of currency as it has less reserve to make quick buying and selling activities and International Monetary Fund too may not agree with a play to maintain the value of Sri Lanka’s rupee. It is also an issue that if central bank goes such practice, can the economy respond to bank actions bearing losses or gains might be created. The strategic cause to stabilize foreign value of Ceylon rupee under the Currency Board System was the linking of Sri Lanka rupee operations with British pound and the influence of a strong economy supported to stabilise exchange value at the money market. The strong economic conditions not in one or two sectors but the favourable conditions in the entire economy are the secret of strong currency value in any country. We can see that many problems in Sri Lanka’s economic despite the favourable reflections after 2009 especially in relation to the government budget and the balance of payment.
Although certain socialist economists in Sri Lanka (Gunesekera, H.Ade S, Form Dependent Currency to Central Banking in Sri Lanka) criticised the linking Sri Lanka rupee with British pound under the Currency Board System pointing to certain fluctuations, which occurred in line with British pound. It is a proud to note that the exchange parity of Sri Lanka rupee with British pound remained higher, when Sri Lanka gained political independence in 1948, one British pound was equal to 13 Sri Lanka rupees. The history of European monetary units demonstrates that they were badly depreciated due to war time economic depressions or recessions but they always recovered as soon as possible by the use of appropriate economic policy actions. Therefore, the fluctuation of rupee value under the Currency Board System was not too bad to make extravagant criticism. After the independence in 1948, Currency Board System in Sri Lanka was cancelled in terms of the recommendation made by John Exter and established the Central Bank of Sri Lanka with several fundamental objectives in relation to foreign and domestic value of Sri Lanka rupee. Although this authoritative changes have not been effective for radical changes in linkages of Sri Lanka rupee with British Sterling Pound as the major export companies of Sri Lanka were listed in London Stock Exchange and the price of export commodities were tagged in British pound.
When look at the countries where they use rupee as the monetary unit, Sri Lanka only uses cents as sub unit of rupee and other countries use different names for sub units. We can imagine that the reason for this name of cents for sub unit is that Sri Lanka had been used Rix Dollar and Cents before introduction of rupee in 1872. Therefore, Rix Dollar name for currency unit of Sri Lanka is unique and has a significant historical value and the country can rethink to replace Rix dollar and cents under the current modernization process. After winning terrorist war in 2009, Sri Lanka has become a new country with different attitudes and people of Sri Lanka committed to modernizations and the application of new technology and greater cooperation with other countries irrespectively the political ideologies.
While Sri Lanka rupee had been linked with British pound sterling its foreign value remained in a stable condition until the official depreciation of British sterling pound in 1967, which action was subject to over valuing of Sri Lanka currency at the foreign exchange market creating possible disadvantages to export economy. It was really disadvantaged to Sri Lanka’s export economy and the government of Mr Dudley Senanayaka officially depreciated Sri Lanka rupee by 20% under the advices of International Monetary Fund in spite of criticism made by left political parties on the rising cost of living and giving a fairly higher pay rise to Sri Lanka’s workforce. Although left political parties promised to revalue Sri Lanka rupee, when they come to power in 1970, practically collision government did not revalue Sri Lanka rupee and the cry of left political parties on the revaluing of foreign value of Sri Lanka rupee was a mere rhetoric to attract political power supports at the elections rather than actually implementing policy actions. The policy action to officially depreciate Sri Lanka rupee by 20% in 1967 was a right action for securing export market. In addition to official devaluation, Foreign Exchange Entitlement System, which was an unofficial devaluation strategy introduced in 1968 had been subjected to devalue Sri Lanka rupee by 30% and since then Sri Lanka rupee was gradually distancing from British pound and aligned to USD. However, unexpected market shocks in 1972 in relation to USD and gold parity and Oil crisis in 1973 laid foundation to further depreciate foreign value of Sri Lanka rupee but adjustable peg system and manage currency policy of Central Bank were able to maintain artificial foreign value for Sri Lanka rupee despite international advice for depreciation or floating the currency. In 1974 USD was approximate to 6 Sri Lanka rupees, which was a favourable condition without sufficient foreign currency or gold reserves but invited tight exchange controls for international capital movements.
When Sri Lanka’s economy was opened to the world in 1978, Sri Lanka rupee hasn’t had a strength for facing domestic and international economic trends and pressure and terrorist war situation since early 1980s to 2008, the foreign value of Sri Lanka rupee dramatically eroded its foreign value despite the positive objectives of the Central Bank to establish the domestic and foreign value of Sri Lanka rupee, which currently values one USD equal to114 rupees. There is no doubt that negatively floating of rupee is appeared to be beyond the reality. It is consider that rapid decline of Sri Lanka rupee created a favourable environment for exporters and Sri Lankans who are in foreign employment, however, the reality is that rapid declining of the rupee value has massively impacted on increase in domestic inflation as well as increase in budget deficit. The current low foreign value of Sri Lanka rupee is quite hindrance to maintain macroeconomic stability in the country achieving sustainable economic growth. After ending terrorist war in 2008, there are many positive signals that country has moved upward trend and several sectors of the economy such as tourism, agriculture and fisheries are embarking to high growth. Sri Lanka is recognized as an emerging economy. Although the size of the economy needs to be expanded to 10 times than current level, foreign assets and reserved visibly increased, economic policy actions focus on macroeconomic fundamentals, in the effort to gain international value to Sri Lanka it is essential a strong currency unit to reflect the international value of Sri Lanka’s assets.
What should do to give international value to Sri Lanka’s assets? In fact Sri Lanka does not want an over value currency unit, which erodes the international competitiveness. Sri Lanka needs working as a strong merchandise and service export base in Asia. However, current rupee will not support to fulfil the expectations of the nation and this writer considers that changing the monetary unit rupee replacing RIX DOLLAR would definitely support to maintain internationally better valued currency unit in the country, which represents fair international value of Sri Lanka’s assets. The current 100 rupees could be set to one Rix dollar, in which a USD will be equivalent to R $ 1.14 and all currency and rupee assets could transfer to Rix dollar bases according and this would not be a complex process. Sri Lanka has good experience in demonetarizing policy by cancellation of Rs 100 and 50 notes in 1970 and people can be adapted into new currency without any difficulties.
Many countries in the world have changed their currency units and many countries will be changed their currency units in the future and this will not be the end of the world. The change of Sri Lanka rupee to Rix dollars with a new parity will reduce current administration cost for maintaining a massive volume of notes and new dollar notes could be issued with a blue back in similar size for 1, 2, 5, 10, 20, 50, 100, 200 and 500 denominations. When people are telling green back to USD, they will tell blue back to Sri Lanka’s currency. In the year 2000, all European countries change their exchange unit to Euro, it was a peaceful transformation and at the beginning Euro had a declining trend but later it came up as a strong currency unit despite some problems in certain European countries such as Greece, Spain, Portugal and Italy. Under the market economic policies that widely initiated after cold war, many countries allowed to float domestic currency units but primary commodity exporting countries’ currency units badly declined despite strong recovery of the economy in mid of 1990. Metal and oil prices were double during past two decades in spite of this favourable increase in prices and improvement of domestic economic conditions, currency units are subject to declining, which creates million of problems to these primary commodity producing countries.
Sri Lanka’s renaissance after terrorist war in 2008 invites for radical changes in many areas and changing the monetary unit is an essential change that should be effective from 2015 to boost the economy as well as to give due international recognition to Sri Lankano comments.