IMF reviewing Sri Lanka’s new exchange control law
ECONOMYNEXT – The International Monetary Fund is reviewing Sri Lanka’s new exchange control law which was aimed at further liberalizing the external sector, mission chief to Sri Lanka Jaewoo Lee said.
"Our legal has been reviewing in in terms of the standard obligations of each member country when they joined the IMF," Lee told reporters.
Sri Lanka’s monetary law, which set up a money printing central bank came into effect on August 28, 1950.
Sri Lanka joint the IMF, a day after, on August 29, 1950.
The then central bank was set up under heavy State Department diplomacy to join the failed Bretton Woods system of dollar soft-pegs abolishing a ‘sterling area’ currency board that kept the economy stable, inflation low and capital mobile.
Unlike a currency board where money printing is outlawed (all domestic reserve money is generated from foreign assets and the rates float) a soft-pegged central bank will print money to target rates, and also buy dollars to maintain a peg and build reserves, which are mutually contradictory.
The dollar soft-pegs were designed under the direction of Harry Dexter White, an interventionist senior US Treasury official – later found to be a Soviet spy – who knew that dollar soft pegs were inherently unstable, unlike a currency board.
The IMF was created to help countries that inevitably got into trouble due to targeting both the exchange rate and suppressing interest rates with printed money.
The intention of the US architects of dollar-pegs was to boost trade with the so-called ‘dollar area’ with which ‘sterling area’ countries had exchange rate trouble due to Bank of England money printing during World War II.
IMF obligations such as Article VIII was designed to keep the global trading system moving.
However countries that adopted dollar soft-pegs soon had exchange rate troubles with all countries and draconian exchange controls and trade controls followed.
In 1971-73 the Bretton Woods itself collapsed under the weight of US money printing, after the so-called Nixon shock of trade controls, which were reversed following a public outcry.
Sri Lanka’s exchange controls came rapidly from 1952, very soon after the Central Bank of Ceylon (through its domestic operations department) started to pump money into the banking system injecting artificial reserves for the banks to lend or the government to spend, de-stabilizing the country.
Sri Lanka tightened restrictions on exporter repatriation of dollar earnings in 2016, after the central bank created its most recent balance of payments crisis by releasing hundreds of billions of rupees of liquidity tied up in term repos, a disastrous rate cut in April 2015 and printing money outright by purchasing Treasury bills willy-nilly.
The IMF said it amounted to a capital flow measure (CFM) and urged its removal as soon as possible.
Sri Lanka’s forex controls criminalized the acts of citizens, who tried to protect their savings from the central bank’s currency depreciation, or take honestly earned money out of the country, by shifting to another denominator currency issued by a more prudent central bank calling them ‘exchange control violations.’
The new law aims to give more freedoms, and decriminalized what are essentially attempts by victimised citizens to protect their savings. However most of the restrictions of the old law has been re-gazetted under the new law. (Colombo/Jan15/2018 – Update II)