Tundra Fonder, the Swedish asset manager specializing in frontier markets, recently highlighted how the Rupee’s botched floating under former Central Bank (CB) Governor Ajith Nivard Cabraal led to the Rupee’s dramatic fall, becoming the worst performing currency in the world in less than a month and worsening economic crisis.
“When recent commodity prices hit global markets following the Russia-Ukraine crisis, Sri Lanka had no choice but to let the currency float. Unlike Egypt, this went unchecked without prior financial support packages being secured,” the Tundra Fonder-managed Tundra Sustainable Frontier Fund said in its March newsletter to investors.
In a sudden move, the CB floated the rupee in early March this year and the rupee plunged to become the world’s worst performing currency in less than a month, further deepening the country’s current financial crisis.
However, unlike Sri Lanka, which resorted to capital and import controls amid rising commodity prices, Tundra Fonder noted that Egypt not only made the right decision to devalue its currency to initially, but that it had managed to devalue its currency in a well-planned manner and with a targeted subsidy program in place to protect vulnerable segments of society.
Tundra also noted that Pakistan has only seen a gradual devaluation of its currency, due to its flexible exchange rate of the currency, while the country’s monetary authority has also taken steps to raise rates sharply. interest rates in order to cope with inflationary pressures resulting from the rise in world commodity prices.
Besides the unsustainable external debt stock, the expansive fiscal policy of the current government and the loss of tourism revenue over the past two years, Tundra Fonder considered the recent botched floating of the rupee to be one of the immediate factors. which contributed to the current economic crisis, which has now evolved into social unrest. “Local anger is understandable and massive protests are underway,” he said.
Tundra Fonder said restructuring Sri Lanka’s outstanding ISB and bilateral debt, followed by an agreement with the IMF, is the only way forward for the country to overcome the current difficulties. “The first may be imminent while the second most likely depends on the success of the debt restructuring,” he added.
In terms of long-term prospects, Tundra Fonder continues to believe that Sri Lanka is one of the countries with the best preconditions to post stable long-term current account surpluses.
“First, it has a unique advantage as a growing high-end tourist destination. Second, the long-term growth prospects of its services sector are very strong, given its strategic location next to India and the availability of deep seaports. We sometimes call the country “the next Singapore,” he said.