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Tuesday February 27th, 2024

Bangladesh economists crack monetary failure, Sri Lanka stability from free market rates

INJECTIONS: Bangladesh central bank has bought large volumes of maturing short and long tenor bonds in the course of the crisis. Post 1920 pegged central banks typically inject money to offset forex market interventions. The injections made for ‘monetary policy’ are then blamed on ‘deficits’ due to the use government securities for open market operations. Classical economists were not deceived, as OMO before the Fed was conducted with private securities – typically bankers’ acceptances of 95 days or below.

ECONOMYNEXT – Sri Lanka’s success in ending the currency crisis and inflation is due to solving the problem through monetary means and free market rates while Bangladesh is still struggling with cost-push myths, an economist has told a Bangladeshi publication.

“In that situation, in that crisis mode, they used their interest rate. It was increased to more than 10 percent within a very short notice,” Ahsan H Mansur, Executive Director of Policy Research Institute of Bangladesh, was quoted as saying in The Business Standard online portal.

“We could have taken steps like Sri Lanka but we did not. We probably would not have needed such drastic steps because our economy is not in shambles.”

A World Bank report has earlier found that only 2 percent of ‘experts’ in South Asia knew that forex shortages was a problem associated with soft-pegged (flexible exchange rate) central banks which tried to target rates without a clean float.

The cost-push ‘real economy’ narrative

Bad central banks and inflationist macro-economist usually blame ‘supply side’ or ‘cost push’ inflation for monetary instability. “Exogenous shocks” is also a favourite whipping boy of macro-economists in the Cambridge-Saltwater tradition. Another is wage-spiral inflation.

“Our economic narrative was that whatever is happening is supply side driven, it happened because of the Russia-Ukraine War and it will go away once the supply side improves and there is nothing we can do to change it,” Mansur said.

“That narrative is not fully right. We should have taken into consideration our demand side.”

The narrative on cost-push inflation re-emerged among Harvard-Cambridge-MIT inflationists after World War II, especially the 1960s was that the cause of permanently rising inflation was some kind of soup between monetary and non-monetary reasons.

The soup theory was publicly articulated by Fed Chief Arthur Burns, the inflationist who was responsible for the collapse of the Bretton Woods system, and the suspension of gold convertibility in 1971.

However, classical Mercantilists who put forward cost push inflation did not claim that inflation was a causal soup or salad, but that that link operated in the opposite direction (see James Stueart – Inquiry into the Principles of Political Economy). Money adjusted through various mechanisms including changes in private sector sterilization (hoarding) and velocity, it was claimed..

They had some excuse for the mistake at that time, as the UK in particular still had free banking until 1840 and reserve money could be expanded above the specie anchor by one or more free banks at will, analysts say.

But modern central banks have legal tender laws for a money monopoly and are in full control of base money. Blaming ‘costs’, shifts responsibility for inflation to economic agents who are victims of the central bank, and more damagingly, the problem does not get solved.

Inflation also comes now from Fed’s monetary policy actions (as in the 1960s and 1970s) to boost growth or jobs which drive commodity prices up as it is the main ‘reserve’ currency in which trade takes place and many countries are loosely pegged or influenced by its actions.

Monetary Inaction

“Bangladeshi policy makers have talked a lot about reducing inflation without doing anything,” Zahid Hussain, a former economist at World Bank’s Dhaka office said in the same media report.

“They don’t have interest rate controls like us. We have a cap on our lending rate, which is why increasing the interest rate or policy rate has no chance of creating an impact on the market.”

Sri Lanka hiked the policy rate and started to roll-over maturing debt at market rates after Governor Nandala Weerasinghe took office in 2022.

At the time the country was on the verge of hyperinflation and market dollarization.

Market dollarization could however have solved the country’s monetary instability problems forever, by blocking the ability of inflationists to unleash monetary violence through open market operations, according to classical economists. (Sri Lanka dollarization, currency competition can end depreciation, instability: Lawrence White)

Sri Lanka’s balance of payments turned in September 2022 and the country has collected reserves as private credit contracted reducing domestic investments and imports.

Sri Lanka’s central bank repaid part of a swap it had borrowed in the course of intervening in the forex market and printing money in the 2020-2022 output gap targeting/currency crisis.

Sri Lanka’s central bank has just imposed lending rate controls. It is not clear whether it is the beginning  of the end of the latest IMF program.

RelatedSri Lanka banks ordered to cut loans rates by 250bp in price control

Though ‘budget deficits’ are frequently blamed, analysts in Sri Lanka have shown that the problem is actually related to monetizing debt from past deficits by macro-economists obsessed with controlling gilt yields and has little to do with the current year deficit itself.

Like black marketeers and speculators (a type of cost-push inflation0, politicians are easy targets to transfer blame.

In 2018 in particular in Sri Lanka, money was printed through multiple means (outright purchases and dollar rupee swaps as well as overnight and term injections) to trigger external instability when budget deficits were cut with tax hikes and fuel was market priced.

Flawed Framework

Under an IMF program a central bank which went to the agency after mis-targeting rates is free to print money and trigger a fresh round of instability and blow the balance of payments apart after inflation has been brought down with good monetary policy in the immediately preceding 12 to 18 months earlier.

The encouragement to print money as soon as inflation falls comes from a so-called monetary policy consultation clause (domestic anchor) as soon as private credit recovers by trying to defy laws of nature generally described as the “impossible trinity of monetary policy objectives”.

Unlike in Sri Lanka, where monetary operations became opaque over the last decade, Bangldadesh central bank purchases of domestic assets or “devolvements” as they are called are disclosed publicly.

Bangladesh has been buying long tenor bonds as Sri Lanka’s central bank also did after the end of a civil war. During the war Sri Lanka was operating a ‘bills only’ policy under then Governor A S Jayewardene.

Central banks with depreciating currencies will usually buy bills to sterilize interventions (print money after intervening in forex markets to re-inflate reserve money) and then inflationists will claim that pegs cannot be maintained.

By targeting the interest rate, under flexible inflation targeting or money supply to re-inflate reserve money after interventions, the pegged central bank undermines its own anchor and the country descends in to chaos.

Sri Lanka is now broadly operating deflationary policy (selling its own securities stock down to mop up liqudity from dollar purchases to contract reserve money below the BOP).

However it is also engaging in complex two-way open market operations which tends to make banks dependent on central bank money and could trip up the balance of payments when private credit recovers.

CB re-finance injections

Meanwhile Bangladeshi economists said the their central bank was also creating money to re-finance private credit including – ironically – for exporters.

“Increasing refinancing facilities during inflationary times means you are injecting more money into the economy. Perhaps it was done from an equity point of view, targeting small exporters etc, but that doesn’t help inflation,” Zahid said.

“Suppose we create a Tk25,000 crore refinancing scheme for SMEs, the money goes out but those who require the money do not receive it.

“In that case, we will not get the productivity effect but the money has already entered the economy and that has created a demand which turns into an inflationary stimulus.”

Similar problems are found in the State Bank of Pakistan.

Re-financing private sector credit was a favourite tactic of Saltwater economists (Economic Co-operation Agency) that led to triple digit inflation in Japan until Dodge line stabilization and Korea after World War II.

Because budget deficits and politicians are blamed (budget deficits as a general rule expand in the stabilization year compared to the year in which rates are mis-targeted) these countries can never escape either monetary instability nor the IMF, as the fundamental problem conflicting domestic and external anchors in a ‘flexible exchange rate’ is not solved.


South Asia, Sri Lanka currency crises; only 2-pct know monetary cause: World Bank survey

A World Bank report found that only two percent of ‘experts’ in the region believed that the central bank was responsible for external instability.

In Sri Lanka there is wide support from macro-economists and think tanks for money printing in multiple ways particularly for sterilized interventions (using monetary reserves for private sector imports and printing money to inject rupee reserves into banks) and opposition to single anchor consistent regimes, a problem known as status-quo bias.

Related Gate keeping and status quo bias in monetary reform explained to Sri Lanka by top economist

Critics have pointed out that monetary policy errors that led to a sovereign default of a country at peace (excessive deployment of macro-economic policy) has now been legalized in a new Saltwater/IMF backed monetary law.

Related Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena

Under the earlier law, stability was the objective and output targeting was not legally sanctioned though operated to create forex trouble after the IMF taught the central bank to calculate a potential output.


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Sri Lanka parliamentary committee says electricity tariffs should be reduced by 20 pct

ECONOMYNEXT — A parliamentary Sectoral Oversight Committee on Alleviating the Impact of the Economic Crisis has recommended to the Public Utilities Commission of Sri Lanka (PUCSL) that electricity tariffs be reduced by at least 20 percent.

A statement from parliament said on Monday February 26 that, following an analytical review of the figures presented by the Electricity Board, Public Utilities Commission, etc. and taking into consideration all other factors affecting the price of electricity, including considering the opinion given by experts that the existing electricity price can be reduced by about 33%, price of electricity should be reduced by at least 20% in the year 2024 so that the state-run Ceylon Electricity Board (CEB) will not suffer any loss.

PUCSL officials have informed the Committee that by the end of this month, they can submit the necessary recommendations to reduce the electricity bill, according to the statement.

The matter was taken up for discussion when the committee, chaired by MP Gamini Waleboda, met in the Parliament on February 22.

Officials from the Ministry of Industry, Ministry of Finance, Central Bank of Sri Lanka, Public Utilities Commission, Industry Development Board, Enterprise Development Authority, Department of Population and Statistics, Department of Inland Revenue and from government institutions including the Micro, Small and Medium Scale Industries Board and a group of industrialists had also been called for the meeting.

“The Committee gave several directives to the relevant institutions and officials to identify the micro, small and medium scale industries that are directly affected by the economic crisis and to activate the local economy and increase the foreign exchange earnings by reviving the industry sector.

“The Committee pointed out that due to the increase in electricity bills, the number of electricity connection cuts reported across the island has exceeded one million. It was also emphasised that in order to alleviate the pressure on the industry and the society, it should be arranged to provide electricity connections again by charging only 50 percent of the outstanding charges at the initial stage with the concessional basis of payment of outstanding electricity charges on installment basis,” the statement said.

The committee was also of the view to allow the customer to pay the connection fee in installments so as to avoid discouraging new entrepreneurs to start micro, small and financial industries due to high charges for getting fixed electricity connection and instructed to review the new connection fee and work to reduce it as much as possible.

The committee chair has instructed the PUCSL to conduct an audit on the electricity consumption in the public sector as an approach to ensure energy security.

“The Committee recommended to the Ministry of Finance and the Central Bank to start a loan scheme at subsidised interest for the purchase of solar panel systems with a view to promoting solar energy as a source of energy supply to industries. The Ministry of Finance expressed its agreement to provide refinancing facilities subject to a maximum as per the proposal made by the Committee to implement a loan scheme targeting micro, small and medium scale industrialists under subsidized interest rates.

The committee has also recommended that raw materials that must be imported from abroad and impose tax concessions on such raw materials be identified to ensure the supply of raw materials required for the smooth running of micro, small and medium scale industries. Copper, lead, aluminum and other industrial scraps used as raw materials in various domestic industries currently being sold by the CEB to external buyers and other entities should also be issued to micro, small and medium scale industrialists recommended by the Ministry of Industry and the Industrial Development Board, the committee has recommended.

The definition used by the Department of Population and Statistics for micro, small and medium industries and the definition used by other institutions such as the Industrial Development Board and the Central Bank for those industries are different from each other, which is an obstacle in making policy decisions, the committee had noted, directing the Department of Population and Statistics to support to the policymakers by releasing statistical data based on a common definition.

“The committee also recommended that the Credit Information Bureau should take prompt action to remove their credit information from the blacklists so as to facilitate access to credit facilities for micro, small and medium scale industries facing financial crisis to activate their balance sheets and to review all existing laws and procedures for registration of micro, small and medium scale industries as well as to obtain licenses and introduce a simple system.

“The committee informed all the parties to establish a steering Committee headed by the Ministry of Industry to implement the recommendations given by the Committee and to report its progress within a week,” the statement said. (Colombo/Feb27/2024)

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Sri Lanka sets up fund to help children of Gaza

The United Nations Relief and Works Agency for Palestine Refugees in the Near East is mandated to provide education, health, relief and social services, and emergency assistance to refugees. (Pic courtesy UNWRA)

ECONOMYNEXT – Sri Lanka’s cabinet of ministers have approved a proposal by President Ranil Wickremesinghe to set up a fund to help children caught in the war in Gaza, a statement said.

The government will contribute a million US dollars and use funds allocated by state agencies for Ifthar celebrations.

Public contributions are also called.

The Presidential Secretariat is requesting public donations citizens for the “Children of Gaza Fund” to be contributed to account number 7040016 at Bank of Ceylon (7010), Taprobane Branch (747) by 11th April.

Deposit receipts should to be forwarded to 0779730396 via WhatsApp. (Colombo/Feb27/2024)

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Top US official calls for inclusive reforms, deeper defence ties with Sri Lanka

ECONOMYNEXT — United States Deputy Secretary of State for Management and Resources Richard Verma in discussions with Sri Lanka officials had called for inclusive reforms and stronger human rights and also discussed deeper defence and maritime cooperation.

The United States remains committed to the economic growth and prosperity of Sri Lanka, statement from the US Embassy in Colombo quoted the official as telling government, civil society and economic leaders during his February 23-24 visit to Sri Lanka.

“Verma met with President Ranil Wickremesinghe and Foreign Minister Ali Sabry to discuss progress on Sri Lanka’s IMF program, including inclusive economic and governance reforms aimed at keeping Sri Lanka on the path to sustainable economic growth.  Deputy Secretary Verma stressed the vital need to protect human rights and fundamental freedoms, including freedom of expression. They also explored opportunities to deepen defence and maritime cooperation between the United States and Sri Lanka, including strengthening the Sri Lanka Navy’s capabilities to safeguard national security and promote a more stable Indo-Pacific region,” the statement said.

 On February 23, aboard the SLNS Vijayabahu, one of three former U.S. Coast Guard cutters transferred by the United States to Sri Lanka, Deputy Secretary Verma said: “I am pleased to announce that the Department of State has notified Congress of our intent to transfer a fourth medium endurance cutter to Sri Lanka.  The Department obligated $9 million in Foreign Military Financing to support this effort.  We look forward to offering the cutter, pending the completion of Congress’ notification period.  If completed, this transfer would further strengthen defense cooperation between the United States and Sri Lanka.  The ship would increase Sri Lanka’s ability to patrol its Exclusive Economic Zone, monitor its search and rescue area, and provide additional security for ships from all nations that transit the busy sea lanes of the Indian Ocean.” 

 Participating in the announcement at Colombo Port were Sri Lanka State Minister of Defense Premitha Bandara Tennakoon, Commander of the Sri Lanka Navy Vice Admiral Priyantha Perera, and U.S. Ambassador to Sri Lanka Julie Chung, who remarked, according to the statement: “The United States has previously transferred three cutters to the Sri Lankan Navy, which deploys these ships for maritime operations and law enforcement missions, countering human trafficking and drug trafficking, while supporting humanitarian assistance and disaster response efforts. The eventual transfer of a fourth vessel would be just one more point in a long history of cooperation between Sri Lanka and the United States in preserving a free and open Indo-Pacific region.” 

Verma also visited the site of the West Container Terminal (WCT), a deepwater shipping container terminal in the Port of Colombo. The WCT, currently being constructed by Colombo West International Terminal (CWIT) Private Limited with 553 million US dollars in financing from the U.S. International Development Finance Corporation, will provide critical infrastructure for the South Asian region, the embassy said.

“Operating near capacity since 2021, the Port of Colombo’s new addition will be the port’s deepest terminal and aims to boost Colombo’s shipping capacity, expanding its role as a premiere logistics hub connecting major routes and markets, boosting prosperity for Sri Lanka without adding to its sovereign debt,” it said. (Colombo/Feb27/2024)

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