Frontier market asset manager highlights botched rupee float by CB under Cabraal

Tundra Fonder, the Swedish-based asset manager specialising in frontier markets, recently pointed out how the botched rupee float under former Central Bank (CB) Governor Ajith Nivard Cabraal led to the rupee’s dramatic fall, becoming the world’s worst-performing currency in less than one month and worsening economic crisis.

“When the recent commodity price hit global markets in the wake of the Russia/Ukraine crisis, Sri Lanka had no choice but to let the currency float. Unlike in Egypt, this took place in an uncontrolled manner without prior financial support packages being secured,” Tundra Sustainable Frontier Fund managed by Tundra Fonder said in its March newsletter to investors.

In an abrupt 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 worsening the country’s on-going financial crisis.

However, unlike Sri Lanka, which resorted to capital and import controls amid the rising commodity prices, Tundra Fonder noted that Egypt not only made the right call to devalue its currency initially but it was successful in devaluing its currency in a well-planned way and with a targeted subsidy scheme in place to protect the vulnerable segments of society.

Tundra also noted that Pakistan only saw a gradual devaluation of its currency, due to its flexible exchange rate of the currency, while the country’s monetary authority also took actions to raise key interest rates sharply to address inflationary pressure stemming from the rising global commodity prices.

Along with the unsustainable external debt stock, expansive fiscal policy of the current government and loss of tourism income in past two years, Tundra Fonder viewed that the recent botched rupee float as one of the immediate factors that contributed to the current economic crisis, which has now progressed to social unrest.  “The anger locally is understandable and massive protests are ongoing,” it said.

Tundra Fonder viewed that the restructuring of Sri Lanka’s outstanding ISBs and bilateral debt, followed by an IMF agreement, is the only way forward for the country to pass the current hardship.  “The former can be imminent while the latter most likely hinges on the success of debt restructuring,” it added.

In terms of long-term prospects, Tundra Fonder continues to believe Sri Lanka as one of the countries with the best preconditions to show long-term stable current account surpluses.  

“Firstly, it has a unique advantage as a growing high-end tourist destination. Secondly, the long-term growth prospects of its service sector are very strong, given its strategic location next to India and the availability of deep seaports. We sometimes refer to the country as “the next Singapore”, it elaborated.