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Sunday July 14th, 2024

How Sri Lanka rejected Singapore monetary advice and politicians, people paid the price

ECONOMYNEXT – Sri Lanka’s politicians, especially from the United National Party have taken extremely difficult decisions to fix the country each macro-economists who do not appreciate sound money created monetary instability and economic collapses.

Ranil Wickremesinghe is now taking very difficult political decisions. People are also watching with an unusual degree of patience – so far.

Brakes have been put by the current central bank governor after inflation ran up to 70 percent, and the currency has fallen from 200 to 360 to the US dollar.

In Sri Lanka economists like to depreciate the currency like in many in other basket case countries. They think devaluation will boost exports even though depreciation and the resulting misery triggers, strikes, social and political unrest and make budgets un-manageable.

It was J R Jayewardene that gave the power to the country’s macro-economists to print money at a time when the State Department was intent on breaking the Sterling Area trade bloc and belief in interventionism was high.

Shortly after the War, only a few countries like Germany did not believe in printing money. Japan fixed itself in 1948, after about 700 percent inflation helped by Joseph Dodge, a US banker who was involved in German monetary reforms.

But Sri Lanka set up the central bank, when JR was finance minister. These columns had shown previously that he had warned the central bank not to go down the wrong road as had his Prime Minister at the time.

<>Read Sri Lanka’s tragedy and the lost wisdom of D S Senanayake on money printing

JR was a lawyer, not an academic economist. To his credit he tried to get the best classical economists in Asia, Goh Keng Swee from Singapore and B R Shenoy from India to advise the country and correct his initial mistake.

But what they were saying was apparently beyond the grasp of the country’s economists and policy makers.


The UNP administration wanted to create a Singapore after they came to power in 1977 after the country was strangled by severe exchange and trade controls.

By 1980 amid a very strong economic recovery Sri Lanka was in the middle of a balance of payments crisis and was forced to go to the International Monetary Fund.

And he got the economic architect of Singapore, Goh Keng Swee to advice the country, almost like a second opinion from a different doctor.

After the 1960s and 1970s money printing boom led to exchange controls, import controls, black markets, permits, dual exchange rates and high unemployment, JR liberalized the economy.

Politically Impossible Decisions

Like Ranil Wickremesinghe today and Mangala Samaraweera a few years ago, JR took very difficult decisions.

“You introduced a number of economic reforms which most people had considered politically impossible,” Goh told him.

“The abolition of price controls for most commodities, the abolition of the food ration system, which provided free rice to the general public, the increase in the nine administered prices – rice sold by co-operatives, flour, bread, kerosene, electricity, bus transport, coconuts, coconut oil and milk powder – virtually ended the black market in these goods as supplies from official sources were adequate to meet demand.

“The exchange rates were unified in November 1977; imports were liberalized and the rupee was allowed to find its level in the free market. The result was a flow of imported goods previously unavailable.

“These are actions which required considerable courage. They constitute a break with the conventional wisdom of past decades based on a re-distributive ethic, extensive state control and hostility of free enterprise and private ownership.”

Corrosive effect on personal integrity

Sri Lanka’s public sector and also the private sector started to become corrupted during the closed market period, not as claimed by others after the opening.

The permits and controls made it impossible to engage in economic activities which were perfectly legal before the central bank, like sending money abroad or selling goods at market prices. To get permits palms had to be oiled.

Goh more than anyone knew the bad effects of price controls.

Price controls try to defy the reality of money printing. When prices rise, there is no way to bring it down except by raising rates and halting money printing.

But price controls invariably force people to to break the law, and create a black markets.

Business sell illegally and people buy illegally, leading to a corruption of an entire society and a disrespect for rule of law.

Goh more than anyone else knew the problem. After Singapore fell, Japan introduced so-called Banana Money and inflation rocketed.

When the British took the territory back, wartime controls continued.

The British Military Administration generally called the BMA was referred to as the Black Market Administration by ordinary Singaporeans.

Singaporeans, more than anyone therefore knew the problem of monetary instability and the corruption that comes with it.

In Sri Lanka JR’s liberalization brought three immediate benefits, Goh said.

“First a substantial increase in the supply of consumer goods, previously unavailable, improved the living standards of the people,” he said.

“It brought to an end to shortages, queues, blacki-markets with their corrosive effect on personal integrity.”

The egg price controls are forcing traders and farmers to sell above the controlled price. They are being charged in court now, for breaking the law.

Printing Money

Economists at the central bank and Treasury printed money for about 55 years, with no questions asked, except by Goh and a few others, which were not known widely.

In 2004 after the central bank was effectively pushed to print 60 billion rupees driving inflation up and created forex trouble that people started to take notice. Unlike in the past, the leadership at the central bank at that time led by Governor A S Jayewardene and his Deputy W A Wijewardene did not believe in printing money.

Then and in subsequent years Harsha de Silva, Wijewardene and sections of Sri Lanka’s media led the battle against printing money.

But other economists continued to dismiss it, making two claims mainly.

That it was (a) perfectly ok to replace liquidity drained from reserve sales with newly printed money to maintain reserve money and therefore (b) reserve money did not expand, going against 200 plus years of classical monetary theory.

Such regimes are essentially what is called a soft-peg or impossible trinity of monetary policy objectives. Any replacement of NFA with NDA purchase made it impossible to maintain external stability.

However, the ideology was apparently in line with the views of Sri Lanka’s economists who were deep believers of state interventionism and money printing for stimulus and re-finance, essentially John Law.

J R had previously brought B R Shenoy in the 1960s to advice Sri Lanka on its economic troubles. Shenoy advice was to first sort out the monetary troubles.

He said to move to a clean float, which also eliminates conflicts between money and exchange rate policies.

Instead, a few years later economic bureaucrats brought the import and export control law, which was used liberally in the past two years to delay rate hikes and continue to print money.

Two decades later Goh Keng Swee warned JR that the central bank was buying up large volumes of Treasury bills.

“This method of financing has high inflationary consequences,” Goh told JR.

“The scale of such inflationary financing is alarming. It began early this year. In January, the volume of Treasury bills issued was Rs3,000 million. In March, the Parliament approved an increase to Rs4,000 million and by June 16, this limit was reached. In July, the limit was raised to Rs6,000 million and by September, the limit was reached.

“On October 17, the limit was again raised to Rs8,000 million and during my stay Colombo, Parliament against raised it to Rs10,000 million.

“Based on past performance it is safe to assume that the limit of Rs8,000 million had already been reached and it will not be long before the volume reaches Rs10,000 million.

“A three-fold expansion of the volume of Treasury bills in a year has few precedents in the world. The impact has already been felt in the large increase in prices this year and further price increases cannot be avoided next year.”

The printed money will blow a hole in the balance of payments, he said. In Sri Lanka exporters, importers and foreign workers are blamed for forex shortages, not the issuer of excess money.

“The second effect of excess expenditure met by deficit financing works though the foreign exchange.

“Where goods are imported under a system of open general licensing introduced by your government, imports of these goods will increase because people have more money to spend.

“If foreign exchange earnings do not increase in step, either through increased exports or capital inflows, the result would be a run of the country’s foreign exchange reserves or a depreciation of the currency’s rate of exchange or both. In Sri Lanka both these have occurred in the course of 1980.”

He warned of the political consequence of printing money against upcoming elections.

Depreciation will not boost exports

In Sri Lanka inflationist-devaluationism is almost a religion.

Despite 70 years of failure and the living examples of Germany, Japan, Thiland, Taiwan and China that strong stable exchange rates led to massive domestic and foreign investment and export growth, Sri Lanka economists still believe in depreciation.

“The brief expressed the fear that an appreciation of the rupee will weaken Sri Lanka’s competitive position and stifle, future growth,” Goh said referring to a question asked from him in 1980s, showing similar ideas.

“I believe these fears to be groundless for two reasons. First since the bulk of Sri Lanka’s present exports comes from tree crops whose prices are determined in foreign currencies, mainly in the London, commodity exchanges, a rupee appreciation will not mean an increase in the Sterling price of Sri Lanka’s products. Prices in foreign commodity markets are the same for similar grads of products from all countries producing them.

“Where prices differ, they result from variations in quality. A stronger rupee would mean, however, that the rupee incomes of tree crop producers would go down.

“As regards, exports of Sri Lanka’s manufacturing industries, an appreciating currency would have limited net impact. Both in Sri Lanka and Singapore, manufacturing activities consist mainly of processing of imported semi-finished material such as textiles into garments, silicon chips in semi-conductors, steel sheets into refrigerator cabinets, etc.

“A stronger rupee would mean that import costs would be lower and thus offset the effect of currency rate appreciation. Contrariwise, a weaker rupee will mean an increase in import costs of raw materials and intermediate goods use in manufacture, largely offsetting the competitive advantages arising from a lower exchange rate.

“The position is different in industrial countries. The finished manufactured product is the end of a long chain beginning with the mining of iron and goes through intermediate stages of production so that the domestic content of the finished product is much higher than he finished products coming out of factories in Sri Lanka and Singapore.”

In sharp contrast to advice doled out by the IMF driven by salt-water economists sitting in the comfort of strong exchange rates from single anchor regimes, Goh said there was no salvation in destroying the country’s money.

Unless the process is stopped and reversed, the country can find itself caught in the vicious spiral of increasing domestic money stocks, increasing demand for imports, depreciating exchange rates, higher rupee cost of imports and greater demand for Central Bank credit creation,” he wrote.

Such a cycle has occurred in several developing countries, some of whom have inflation rates exceeding 100 percent a year. It is politically easier to break the cycle at an early stage; once it has taken a firm grip on the economy the political cost is extremely high, as witness the present troubles the government of Poland is experiencing.

In the case of Sri Lanka, a depreciation of the rupee must mean that administered prices must be increased and this is never a popular political measure.

In 2022 Sri Lanka’s inflation hit 70 percent a year.

Watch the economists in action

In 1980 only part of the Treasury bills were bought by the central bank for deficit financing. With a balance of payments crisis already under way, other bills were bought to offset foreign reserve losses.

Goh told JR to watch five economic indicators to monitor the economic health of the economy.

The first was the central bank’s Treasury bill purchases.

“You may need some sign posts by which you can find your way through the intricacies of economics and be able to assure yourself whether or not the measures are taking effect.”

I suggest five principle economic indicators.

1. The volume of Treasury bills bought by the central bank. This is by far the most important statistic to watch
2. The central bank’s foreign exchange reserves.
3. The exchange rate of the rupee
4. The Consumer Price Index
5. The prices of construction materials.

Though all this was told to the political leadership in 1980 the economists ignored it.

Until W A Wijewardene started to write about it, hardly anyone knew that Goh Keng Swee, the economic architect of Singapore had given advice to Sri Lanka.

Read more:

JR and expert advice: Failing to implement Goh Keng Swee Report of 1980

In Memory of Dr Goh Keng Swee: Architect of Singapore’s Economic, Defence and Education Policies

Singapore with a Latin America Monetary Foundation

Nobody knew that the advice had had been comprehensively ignored by the central bank later.

Or that Sri Lanka was trying to build a Singapore with a Latin America monetary foundation.

Now people are talking about Vietnam. But the State Bank of Vietnam is trying to operate a better peg and is fighting with the IMF and US to be allowed to do so.

Whether it will succeed is not known, but at least the SBV is trying.

After the UNP got into power in 2015 the central bank, backed by IMF driven ‘monetary policy modernization’, started to inject money through other means than purchases of Treasury bills at auctions.

By this the public more aware of the effects of T-bill purchases, unlike in the 1970s.

From the last quarter of 2014, liquidity was injected by terminating repo transactions. Outright bill purchases started later.

With public opposition to direct purchases of Treasury bills, the central bank started to buy them from commercial banks through overnight and term repo transactions.

By this time, the Bills purchased through the term and overnight transactions – which was published from the time of Governor A S Jayewardena, had been removed from the daily released data of the Treasuries stock.

In 2018 money was also printed through dollar swaps to inject liquidity.

None of these printing was done to finance the budget. It is done to manipulate rates down to maintain a policy rate and to try to boost growth without working for it.

Now a new central bank law is being made. It is promised that there will be no direct purchases of bills from auctions.

But there is nothing to prevent bills from being purchases through other means like in the 2015 to 2019 period, where currency crises were created.

In the new law there is no such safeguards against mis-targeting of rates, just like there were none from 2015.

Soft-peggers are planning to set themselves a 5 or 6 percent inflation target. The rate is high enough based on the 2012-2019 experience to easily trigger serial currency crises

Moreover, the exchange regime is still a soft-peg or flexible exchange rate – the most dangerous monetary regime that is found in all basket case countries and not a clean float.

Under an IMF program it is impossible to operate a clean float because there is a foreign reserve target.

The new law will undoubtedly be passed by the parliament denying monetary stability to the public, just like the original soft peg law went into effect in 1950 forcing all subsequent economic plans to be made on a foundation of monetary instability.

The legislators will also probably pass the 5 or 6 percent, inflation – double that of stable countries – with no questions asked, just as they had passed the original law and subsequent amendments to print more money.

Politicians misled to control the people instead of the central bank

Legislators had also been misled by economists to pass exchange and import control laws, allowing the state to rob the economic freedoms of the people rather than control the open market operations and mis-targeted policy rates of the central bank.

With ‘fear of floating’ and ‘currency board phobia’ firmly entrenched in the minds of Sri Lanka’s policy makers the chance of escaping the monetary instability is almost zero.

IMF programs now are also contradictory with a high inflation target at odds with a reserve collecting target.

It took more than 50 years for realization to dawn about buying Treasury bills at auction.

Whether Treasury bills are bought directly from the Treasury to finance the deficit crediting the DST accounts of the two state banks, or whether they are bought in the secondary market from banks and other investors crediting accounts of private banks to generate 5 percent inflation, the effect on the balance of payments is the same as Goh Keng Swee explained many years ago.

With the inflation target conflicting with the net international reserve target, countries with IMF programs are now running into currency crises, output shocks before its 4-year program ends.

Pakistan and Argentina now, Sri Lanka in 2018 are examples.

Market access countries are defaulting like Latin America under aggressive open market operations. Until recently, South Asian and Africa did not have aggressive open market operations.

Hopefully it will not take another 50 years for the realization to dawn that the ‘flexible’ exchange rate ‘ is also another unstable soft-pegged regime which will be plagued by the same or worse problems than before, as seen in the last 7 to 10 years.

Sadly, many young people are not waiting to find. They are leaving the country to earn dollars or Euros or Australian dollars, without waiting to find out whether soft-peggers can be tamed or not. Maybe they are right.

Comments (2)

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  1. Shiran Mendis says:

    Excellent. I hope the President & Governor of Central Bank will read this.
    No point in forwarding to the other jokers. They will not grasp. So better not
    waste your time.

  2. Dr P Thilakawardhana says:

    The present problem is a long waiting to come, The most important fact is corruption has seeped into every aspect of Sri Lankan life, more so after MR and his family and dreadful friends came to power, un funded loans from China spurred this greedy crook to bankrupt the country. The very sad thing is he and his brothers ( the pea-brained Gota included) were allowed to have uncontrollable power over every aspect of the country. And the whole populace and a few generations to come will have to pay the price,

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Your email address will not be published. Required fields are marked *

  1. Shiran Mendis says:

    Excellent. I hope the President & Governor of Central Bank will read this.
    No point in forwarding to the other jokers. They will not grasp. So better not
    waste your time.

  2. Dr P Thilakawardhana says:

    The present problem is a long waiting to come, The most important fact is corruption has seeped into every aspect of Sri Lankan life, more so after MR and his family and dreadful friends came to power, un funded loans from China spurred this greedy crook to bankrupt the country. The very sad thing is he and his brothers ( the pea-brained Gota included) were allowed to have uncontrollable power over every aspect of the country. And the whole populace and a few generations to come will have to pay the price,

UNESCO DG to discuss archaeological endeavours in Anuradhapura, Sri Lanka: President

ECONOMYNEXT – Sri Lanka’s president has said that he will discuss initiatives for long-term archaeological endeavours in the Anuradhapura city with visiting UNESCO Director General Audrey Azoulay.

Azoulay will visit Sri Lanka from July 16-19 and take part at the celebration of the 75th Anniversary of Sri Lanka’s membership of UNESCO at the Nelum Pokuna Theatre in Colombo.

She will also travel to UNESCO World Heritage Sites around the island, the Ministry of Foreign Affairs said.

“I have invited the Director General of UNESCO to visit Sri Lanka and discuss initiatives for long-term archaeological endeavours in the Anuradhapura city. Several universities overseas have shown interest in supporting us for these activities, and we are moving forward with their collaboration,” Ranil Wickremesinghe said.

“Anuradhapura boasts a rich history spanning over a millennium, once renowned as a hub of trade and economics. Preserving and exploring this ancient city’s archaeological treasures remains a significant endeavour.”

“New archaeological efforts in the Anuradhapura district are now imperative,” Wickremesinghe said during a ceremony to inaugurate a 150-kilowatt solar power system installed by the LTL Group at the Sri Maha Bodhiya premises in Anuradhapura on Saturday (13).

Wickremesinghe pointed out that UNESCO has undertaken extensive archaeological projects in Angkor Thom in Cambodia, and Luang Prabang in Laos.

“However, we have not taken the necessary steps to implement these activities in Anuradhapura city. Therefore, I have advised both the Department of Archaeology and the Cultural Triangle to undertake these initiatives.”

These efforts are part of a comprehensive program aimed at establishing Anuradhapura as a globally renowned city, Wickremesinghe said.

While Sigiriya has gained international fame, Sri Lanka has not adequately highlighted Anuradhapura’s historical significance as a major trade and economic center in the past, the president pointed out.

“Cities like Tanjore (Thanjavur), Madurai, and Sanchipuram are often discussed, yet Anuradhapura, the fourth city, has been overlooked. Therefore, it is crucial to develop Anuradhapura city.”

As part of these initiatives, preparations are underway to establish new hotels in Anuradhapura, which will contribute significantly to its development, Wickremesinghe said. (Colombo/Jul13/2024)

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Government committed to improving living conditions in Jaffna: Sri Lanka PM

ECONOMYNEXT – Sri Lanka’s prime minister, who is in Jaffna “to monitor the progress” and “get a little feedback” has said the government is committed to improving living conditions of the people in the northern peninsula.

“This government is dedicated to improving the living conditions of the Jaffna Peninsula,” Dinesh Gunawardena told a Jaffna District Coordinating Committee meeting on Friday, according to a statement by his media division.

“In order to increase the living conditions, we have embarked on an increase in most of the expenditure needed by the departments, and also special allocations for rural and urban development in the local government area.”

Nationalist Gunawardena met with Tamil politicians at the Jaffna Divisional Secretariat Office and participated in the distribution of rice and egg incubators for low income families.

“A special privilege to be with you all, in order to monitor the progress made by all of you, as well as to get a little feedback where we stand today in relation to the reports given.”

Gunawardena joins a string of leading political figures who have visited the north ahead of upcoming polls.

The government was, he said, “committed to improve the services and living conditions, therefore, to provide the necessary infrastructure for developments, which means much to your area.”

The prime minister said he appreciated the efforts of farmers because “farmers are all private sector, I would say. Let us not forget, farmers are all in the private sector, either in the ownership or in the tenancy. They are private contributors to the national development of the economy.”

The poverty numbers are “fairly managed” in the country. Gunawardena said, pointing out that poverty was a key problems in any economy. “Any country, you would agree with me, the richest country, in the United States even, food stamps have been given. So all economies the world are going through difficult situations in relation to the poor.

“We have to look after the poor especially in these remote villages of the Northern Province…”

Minister Douglas Devanada, MPs M A Sumanthiran, Angajan Ramanathan, C Vigneshwaran, Dharmalingam Siddharthan, and other officials participated in the meeting. (Colombo/Jul13/2024)

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Sri Lanka leader’s presidential campaign faces dilemma over coalition: sources

ECONOMYNEXT – Sri Lanka leader Ranil Wickremesinghe’s presidential election campaign is facing a dilemma over coalition due to rivalry parties with different political ideologies, sources said.

President Wickremesinghe is yet to announce his candidacy for the presidential poll which is expected to be declared by the island nation’s Election Commission after July 17.

However, his close allies and some ministers in the current coalition government have already started a campaign to promote him assuming that President Wickremesinghe will declare his candidacy.

Three sources who spoke to EconomyNext said legislators from the main opposition center-right Samagi Jana Balawegaya (SJB) are ready to join, but they do not want to be in coalition with the ruling Sri Lanka Podujna Peramuna (SLPP).

“SJB members who want to join Wickremesinghe are bit nervous because people wanted to oust SLPP in 2022 for their past sins including corruption and wrong economic policies,” on source who is in a member in the core campaign strategy group told EconomyNext.

Another source said majority of nationalist party SLPP are with the president, but a few key SLPP leaders do not want to back Wickremesinghe because of his market-led economic policies.

“SLPP does not want to be seen as backing Wickremesinghe’s privatization moves. So a few leaders are worried to join the campaign and have different idea of fielding their own campaign,” the second source who is indirectly involved with facilitating meeting between Wickremesinghe and legislators said.

The SJB is leaned towards somewhat liberal economic policies and has ensured to treat all ethnic people equally, while SLPP has backed a state-controlled economy and has given priority for ethnic majority Sinhala Buddhists.


There is no formal and transparent survey to assess the popularity of possible presidential candidates.

However, an informal survey shows Opposition and SJB leader Sajith Premadasa is leading followed by Marxists Janatha Vimukthi Peramuna leader Anura Kumara Dissanayaka.

The same survey has shown a gradual gain for Wickremesinghe in the last three months.

“He is confident of winning, but he has to win most of the undecided voters for that,” a third source, who is in the campaign planning team, said.

“Still things are very fluid. Majority of the people still don’t understand the benefits of economic recovery and the country getting out of the debt default under the current president. We will have a clear picture by end of next month.”

Wickremesinghe was elected as the president in July 2022 by the parliament after his predecessor Gotabaya Rajapaksa fled the country in fear of his life amid mass protests and outside the presidential palace.

Wickremesinghe has implemented some tough economic reforms including raising taxes, imposing new taxes, freezing recruitments to state-owned companies, and privatizing loss making government-owned entities in line with commitments agreed with the IMF.


Those reforms have made him unpopulour mainly among government employees and lower income groups.

He has raised the salaries of government employees from April this year while has introduced a new transfer payment called Aswesuma for lower income and vulnerable groups.

Sri Lanka faced an unprecedented economic crisis with a sovereign debt default in 2022. But it has recovered faster than expected under Wickremesinghe administration with difficult and unpopulour reforms.

People protested against the SLPP-led government in 2022 and ousted then leader Gotabaya Rajapaksa and all his relatives from the key ministerial positions for their alleged involvement in corruption and wrong economic policies.

The SLPP which had more than two-third majority in the parliament after 2020 general election, is worried about its perception and electoral performance after the economic crisis.

Analysts say Wickremesinghe has a greater chance to win if he join with SJB than SLPP because of the SLPP’s negative perception.

Sources, however, said they are in discussions with both SLPP and SJB legislators to agree on a common programme for Wickremesinghe’s presidency.

Presidential election is likely to be held either in October first week or second week, Election Commission officials say.

Wickremesinghe lost the parliamentary election in 2020, but entered the parliament in 2021 using the solo seat his party won through the national list.  (Colombo/July 13/2024)

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