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ECONOMYNEXT – Expanded economic links between Sri Lanka would present opportunities to use the Indian rupee for trade Parameswaran Iyer, chief executive, NITI Aayog, India’s National Institution for Transforming India told a policy forum in Colombo.
India’s development assistance to Sri Lanka was about 5 billion US dollars, foreign direct investment was 2.2 billion US dollars and bilateral trade was 5.45 billion US dollars in 2021 told a policy forum organized by Sri Lanka’s Ceylon Chamber of Commerce.
“Using the Indian currency for trade” would be one of the next steps in expanding economic links with Sri Lanka, Iyer said.
During Sri Lanka’s latest currency crisis India had given up to 3.8 billion US dollars in import credits, swaps and Asian Clearing Union deferrals, he said.
An import credit denominated in a billion US dollars is being settled in rupees.
Meanwhile the Reserve Bank of India has also encouraged banks in other countries including Sri Lanka to open what are called VOSTRO accounts to settle transactions.
The Indian rupee was the ‘dollar of South Asia’ until the Reserve Bank of India was nationalized and state economists started to print money, destroying its value and triggering exchange and trade controls.
The Sri Lanka rupee and most currencies in South Asia originate from the Indian rupee when it was restrained by a silver peg, later shifted to gold, before macro-economists got the power to print money at will with the retreat of classical economics in the face of Keynesianism.
Sri Lanka had a one-to-one currency board with the Indian rupee until 1950.
India’s New India Express newspaper reported that the the country was in talks with UAE and Saudi to use Indian rupee.
Ironically before macro-economists got hold of the rupee, Indian currency was the official currency in use in present day UAE which was part of what were called the Trucial States, which were under British protection as well as Bahrain, Oman and Qatar.
As the Indian rupee got into trouble after independence the country started a new currency called the Gulf Rupee.
“On achieving independence, India started of with a comfortable foreign exchange position,” the RBI’s currency museum says diplomatically. “The quest for development and the demands of ‘catching up’ laid considerable stress on the foreign exchange position.”
“As the Gulf States issued their own currency, these notes were withdrawn over a period of time from the early 1960’s and ceased to be used around 1970.”
Read more about Gulf Rupee here
Middle Eastern territories set up currency-board-like Monetary Authorities with British support which gave little or no room for development economists and Keynesian macro-economists to suppress rates and create instability and dumped the Indian currency.
A large number of Indians now work in the former British protectorates which have mostly fixed exchange rates with the US dollar and have monetary stability, unlike countries in South Asia with central banks with aggressive open market operations.
Many Sri Lankans also now work in Gulf countries with currency-board-like monetary authorities.
When Sri Lanka had a currency board, the island also had a ‘comfortable foreign exchange position’ of around 11 months of imports and the country also imported labour.
As the country’s macro/development economists printed money creating forex shortages, quotas were set for outward remittances. Sri Lanka is now a net recipient of remittances along with most countries in South Asia except Maldives, which has a better peg with less aggressive open market operations.
Most third world central banks which print money actively discourage and criminalize the use of their currencies abroad, placing restrictions on carrying notes outside the country, citing ‘monetary policy’ concerns.
However the Indian rupee is unofficially used to settle transactions with Sri Lankans travelling to India also take rupee notes, which are available in the kerb market.
Indian rupees are also available in the kerb market in a number of countries.
Related Sri Lanka should never again demonetize like India, giving reasons to trust the dollar: Bellwether
Users of Indian rupee was penalized when India demonitized large notes in an own-goal a few years ago, according to critics. (Colombo/Dec18/2022)