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

ECONOMYNEXT – Countries tend to tinker with existing monetary systems instead of looking for better institutional arrangements because central bankers drive the agenda and block other solutions, a top economists explained at forum on sound money in Sri Lanka.

In the US, the Federal Reserve now employs around 500 economists, which was bigger than the number of individuals involved in monetary research in the top 50 universities, Lawrence White, a global expert on money, banking and monetary history has said.

Gatekeepers blocking reform

Most economists will not go against central bankers, who are in position of influence.

“And they also have a gatekeeping function. Which is, they’re involved in the editorship or the editorial boards, of many of the leading journals of the field,” White, who is also a visiting lecturer at the Swiss National Bank told a seminar organized by Sri Lanka’s Bastiat Society.

“So, for an economist to take a position that is critical of the Central Bank is to endanger his own future job prospects, his chances of getting published in one of the leading journals.”

White wrote a paper, The Federal Reserve System’s Influence on Research in Monetary Economics detailing how the agency influences thinking on monetary policy.

“I was providing some numbers to back up the idea which had already been expressed by Milton Friedman,” White said.

White’s paper cites Friedman being published for having commented that “since the Federal Reserve Board and its district banks hire a large number of economists in the field of money, the central bank has a sort of oligopoly on monetary opinion.”

In Sri Lanka Keynesian gatekeepers are also active in think tanks, blocking reform, perpetuating monetary instability through anchor conflicting regimes and making sure that macro-economists have the power to depreciate currencies and impose regressive inflation taxes on the poor.

The Fed triggered the Great Depression, ended the gold standard by busting the Bretton Woods system, triggered the Great Recession.

Most recently a massive commodity bubble and inflation spike which has worsened global hunger, is now referred to in Western media as the ‘cost of living crisis’, giving unaccountable central banks a free pass. Hardest hit are countries with ‘flexible exchange rates’ which have collapsed.

Status Quo Bias

Due to the status quo bias, a country with a bad central bank and chronic depreciation, is doomed to go to the IMF again and again, and all policy errors would end up as currency depreciation, critics say.

The central bank’s influence would ensure that no real monetary reform happens.

“And it imparts a kind of status quo bias where people will do research on helping the Central Bank choose its operating targets and procedures and technical problems like that,” White explained.

“But there’s very little research on the question of what are the alternative institutions and how would and how would other systems work compared to the central banking system we’ve got. ”

Status Quo Monetary Law

Lawrence comments came as Sri Lanka’s parliament is set to enact a new monetary law which will give ‘independence’ to a few individuals to print money for macro-economic policy, run a dual anchor regime without accountability.

Critics say the law legalizes the very policy errors that led to serial currency crises and eventual sovereign default.

The law seeks to legalize flexible inflation targeting, where attempts are made to target a domestic anchor (inflation target) without floating exchange rate, leading to currency crises as soon as inflation falls after the effects of the previous currency collapse wears off.

It also legalizes printing money for growth or targeting a ‘potential output’. The legal wording is ‘shall’.

Related Sri Lanka warned on dangers of new central bank law

Printing money for growth was outlawed by then Central Bank Governor A S Jayewardene who removed growth objectives from the central bank and made it committed to provide stability.

Though money was printed for growth after the end of a civil war there was no legal sanction in the current law, people who helped outlaw money printing for growth has pointed out.

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


Sri Lanka’s central bank was originally supposed to engage in “the promotion and maintenance of a high level of production, employment and real income in Ceylon” and the “encouragement and promotion of the full development of the productive resources of Ceylon”.

Jayawardene also fine-tuned open market operations, which was then used for deflationary policy, and the central bank at one time issued its own securities, East Asian style to build reserves after selling down its Treasury bill taken to create instability in the past.

Promotion of growth has now come back as output gap targeting, despite the country being driven into external default by printing money to target a potential output in the past several years.

In past decade, inflationary open market operations were widely used to print money to target potential output, generate excess liquidity in money markets, trigger balance of payments deficits and foreign borrowing, and then output shocks as brakes were hit, critics say.

Open Market Operations

Though there is now wide public knowledge in Sri Lanka a pegged central bank taking in Treasury bills, there is less knowledge about how macro-economists will still print money to suppress rates through open market operations.

Knowledge about operational framework, or the activities of the domestic operations department (the issue department in classical days) are a closed book for the public or legislators, allowing macro-economists to print money at will and then impose exchange and import controls.

Before 1920 and the birth of ‘macro-economic policy’ central banks only printed money to fund deficits during wars. But now economic destruction in peacetime, like in Sri Lanka and Latin America, is mostly carried out by open market operations.

In 1950, an unknown economist writing in The Banker Magazine warned that open market operations would be used to print money, though the bank’s founder, John Exter had put several safeguards to limit large scale central bank credit.

“So long as open market purchases of Government securities are allowed (as, of course, they must be), it is very difficult to prevent these becoming an indirect means of making central bank credit” available, the analyst pointed out prophetically. (Colombo/July20/2023)

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Sri Lanka discussing giving extra land, water for Chinese oil refinery

ECONOMYNEXT – Sri Lanka is in discussions with China’s Sinopec to give extra land and assure water supplies after the company decided to expand the capacity of a planned oil refinery in Hambantota, Energy Minister Kanchana Wijesekera said.

“There are concerns on how the water supply is going to be provided for the refinery,” Minister Wijesekera told reporters Friday.

The refinery will need more land and also revise conditions in a Board of Investment agreement, he said.

Read more
Sinopec to double capacity of new refinery in Sri Lanka’s Hambantota

Recommendations and decisions from Sri Lanka’s side had already been sent and Sinopec is expected to revert back in May.

“We are hoping to sign the agreement once everyone has agreed,” Wijesekara said.

The principle agreements are expected to be signed by June, he said.

The refinery could sell up to 10 percent of its output in the domestic market.

“There is no commitment by the government to purchase anything,” Minister Wijesekera said. (Colombo/Apr19/2024)

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Sri Lanka rupee closes weaker at 302.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 302.00/50 to the US dollar in the spot forex market on Friday, down from 301.50/302.00 a day earlier, dealers said.

There was increased demand for dollars after the central bank bought 715 million dollars from forex markets. In the previous two months it was buying on average about 200 million US dollars, leaving market participants and bank in a ‘oversold’ position.

There were some official dollars sales Friday dealers said.

READ Sri Lanka rupee quoted wide to US dollar as peg inconsistencies flare up

Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed at 11.30/40 percent down from 11.35/40 percent.

A bond maturing on 15.09.2027 closed at 11.95/12.05 percent up from 11.90/12.05 percent.

A bond maturing on 15.12.2028 closed stable at 12.15/25 percent.

A bond maturing on 15.09.2029 closed stable at 12.30/40 percent.

A bond maturing on 01.10.2032 closed stable at 12.40/50 percent. (Colombo/Apr19/2024)

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Sri Lanka stocks close down, banks trade down

ECONOMYNEXT – The Colombo Stock Exchange closed down on Friday, data on its site showed.

The broader All Share Index closed down 0.38 percent, or 44.80 points, at 11,753; while the S&P SL20 Index closed down 0.53 percent, or 18.46 points, at 3,456.

Turnover was at 1.4 billion. The diversified financials (Rs366mn) and banks (Rs266mn) sectors continued to see selling pressure.

“This was possibly due to uncertainty around the bond discussions,” market participants said.

With the exception of Sampath Bank Plc (up at 77.50) all other banks traded down in the day. Commercial Bank of Ceylon Plc was down at 104.50, Hatton National Bank Plc was down at 188.50, and DFCC Bank Plc was down at 77.00.

LOLC Finance Plc saw the most trades and closed up at 6.40. Another LOLC company, Browns Investments Plc, also saw high traded volumes and closed up at 5.60.

Softlogic Capital Plc was up at 7.00, and Softlogic Holdings Plc was up at 11.20. A trading suspension imposed on SHL.N0000 was lifted effective today as the company submitted the annual report for the year ended 31st March 2023.

However, shares of the Company will remain in the Watch List “due to Qualified Audit Opinion and Emphasis of matter on going concern in the Independent Auditor’s Report in the Audited Financial Statements for the year ended 31st March 2022.”

Dialog Axiata Plc, which announced its merger with Bharti Airtel Thursday, saw its share price close up at 11.90.

“There was some traction on index heavyweights,” market participants pointed out.

Top contributors to the APSI included Aitken Spence Plc (up at 134.50), Ceylon Tobacco Company Plc (up at 1,245.25, and Lion Brewery (Ceylon) Plc (up at 1,048.50).

There was a net foreign inflow of 5 million. (Colombo/Apr19/2024)

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