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Message: <blockquote data-quote="imhotep" data-source="post: 31424203" data-attributes="member: 562115">.........Thailand’s insane attempt to protect the BahtIn this case, the Bank of Thailand had maintained the value of the Baht at 25 Baht to the US dollar for a significant period prior to the East Asian Financial Crisis, despite rising inflation within the country requiring it to allow the Baht to depreciate against the dollar.To keep the baht-to-dollar rate at 25 Baht, it had sold dollars from its international reserves. This came to a culmination in 1997 when it lost $ 25 billion in its abortive attempt to protect the Baht.However, speculators, chiefly the US-based entrepreneur George Soros, had speculated against this short-sighted policy of the Bank of Thailand. Since Thailand had a recurring balance of payments gap year after year, it was logical for speculators to assume that the Bank of Thailand would not be able to continue defending the baht for long. Thus, speculators borrowed heavily in baht and converted the same into dollars using the country’s open capital account.After the Bank of Thailand had lost all its dollars and could no longer support the baht, it had to allow the currency to go into free fall in the market. Since all East Asian economies had been connected to each other through trade and investment, a phenomenon known in economics as the contagion effect, the collapse of the Thai economy and its currency triggered the onset of the East Asian Financial Crisis, which spread across all countries in the region during 1997-98.When the Thai Baht fell to a level of 50 Baht to the dollar, speculators converted part of their dollar holdings into baht and repaid all their debt while keeping the balance as profit. It was reported that they were immensely enriched through this strategic action.Making BOT Governor guiltyAfter the fall of the Thai baht and the consequential collapse of the Thai economy, a high-level investigative committee was appointed by the Thai Government to identify the people responsible for the destruction of the Thai economy.The report was released in 2000, and it identified key officials of the Bank of Thailand who could be subject to criminal prosecution. One such official identified was Bank of Thailand Governor Rerngchai Marakanond. Subsequently, Rerngchai was tried in court for the losses caused to the Bank of Thailand through his excessive use of international reserves to protect the Baht.He was found guilty and fined Baht 186 billion, equivalent to $ 4.6 billion, in 2005 for his leading role in the country’s financial crisis. Later, on appeal, this order was reversed in 2011 but, as he confessed, his mental and emotional wellbeing had been completely shattered because of the severe criticism and charges levelled against him.Thus, it is necessary for the Central Bank to obtain the approval of the Government if it wants to use the international reserves to protect the external value of the rupee.India’s smart move: Austerity despite comfortable reserve levelsThis is a national crisis, and all citizens should unite to face the challenges as a single force. In this connection, the appeal made by Indian Prime Minister Narendra Modi to all Indians, both citizens and businesses, to adopt an austerity program is a useful guide for Sri Lanka.He urged Indian citizens to conserve fuel, cut down on foreign currency-draining activities, and avoid non-essential gold purchases in view of the Middle East war and its disastrous impact on the global economy. He also asked businesses to revive work-from-home arrangements, reduce foreign travel, and prioritise the use of local products, which he termed under the slogan “Vocal for Local”.The Indian rupee has so far depreciated by about 8% YTD, and India has a comfortable foreign exchange reserve of about $ 696 billion, which is sufficient to finance about 11 months of future imports. Despite this advantageous position, India is pursuing a massive austerity program. It is timely for the Sri Lankan Government to follow suit as well.Blaming CBSL unwarrantedThe Central Bank has done what it can under the existing laws. It is toothless in handling this extraordinary situation. Hence, instead of blaming the Central Bank, all Sri Lankans should come together today to face the challenges posed by the Middle East war as a united force.</blockquote>

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