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Friday August 12th, 2022

Milton Friedman’s views on currency boards explained by Hanke amid Sri Lanka soft-peg crisis

ECONOMYNEXT – Milton Friedman, widely known for his work on taming floating exchange rates was also a supporter of currency boards or hard pegs which is also a consistent free market mechanism, Steve Hanke, a top US economist has said in a Sri Lanka interview.

Sri Lanka is now in a monetary meltdown after its soft-peg collapsed from 200 to 360 to the US dollar in the wake of two years of money printing and a failed float attempted with a surrender requirement (forced sales of dollars to the central bank by commercial banks), which pushed the peg down.

Rates have since been hiked to smash private credit and economic activity and reduce outflows in a bid to resurrect the soft-peg.

Economists including Steve Hanke have called for a currency board to bring back sound money to Sri Lanka and allow the country to grow and prosper without economic crises.

Hanke, a Professor at Johns Hopkins University in Baltimore, Maryland has called Milton Friedman one of his mentors. Friedman is known almost exclusively for his work on floating rates.

“That’s what most people think,” Hanke said in an interview with Sri Lanka’s Echelon Magazine.

“Friedman was for free market mechanisms to adjust the balance of payments, and there are two ways to do that.

“You either have a floating exchange rate, or you have a fixed exchange rate with a currency board.”

Sri Lanka’s interventionists got the ability to suppress rates with liquidity injections, create forex shortages and pressure the peg in 1950, though the original monetary law did not easily allow the rupee pegged at 1.99 grains to gold to be broken without parliamentary approval.

However after the 1980s inflationist-devaluations orthodoxy peddled to the third world (basket, band, crawl or BBC policy) by some Mercantilists based in countries with sound money, Sri Lanka experienced accelerated depreciation and social unrest.

Sri Lanka had a currency board from 1885 to 1950, initially pegged to the Silver Indian rupee. A currency board is a fixed exchange (has an exchange policy) with floating interest rates and no open market operations (no monetary policy) to create forex shortages.

Most East Asian nations that became export powerhouses in the 1970s and 1980s had true currency boards or strong pegs that mimic currency boards closely.

Friedman backed the currency board of Hong Kong in the early 1980s proposed by John Greenwood and also Eastern European currency boards in which Hanke himself was involved, he said.

“In Hong Kong in 1983, when they put the currency board back in, John Greenwood was the architect of that, and Milton Friedman was 100 percent behind it. He endorsed the thing,” Hanke said.

“In Estonia, Lars Jonung, Kurt Schuler and I wrote a book titled Monetary Reform for A Free Estonia: A Currency Board Solution.”

“It was published in Estonian and English. Who endorsed that book on its dust jacket? Milton Friedman. So, Friedman has always been for currency boards in developing countries and countries with weak institutions and unstable governments.”

“He knows that the hard budget constraint gets put into the system and the straitjacket gets put on the politicians, forcing them to more or less balance the budget if you have a currency board system.

“So that’s where Professor Friedman was on that. It looks like a contradiction, but it’s perfectly consistent. Pure floating exchange rates and a fixed exchange rate with a currency board are identical in the sense that they are free-market mechanisms for adjustments in the balance of payments.

“The floating exchange rate has a monetary policy but no exchange rate policy. The fixed rate delivered via a currency board has an exchange rate policy but no monetary policy.”

Related: Why the Sri Lanka rupee is depreciating creating currency crises: Bellwether

A currency board allows free trade and free capital movements, just like a floating rate, allowing a high degree of economic freedom.

Ex-Soviet States of Estonia, Latvia and Lithuania which were formerly closed economies under the unstable Ruble where smuggling and shortages were commonplace, later rocketed to the top of the list of countries with the most economic freedom in the world under currency boards.

Sri Lanka enacted increasingly draconian exchange controls after the creation of the soft peg in 1950, an import control law was enacted in 1969 and the economy was completely closed in the 1970s as the Bretton Woods soft pegs collapsed amid Arthur Burns stimulus.

Though the economy was re-opened in the 1980s monetary instability persisted amid depreciation, allowing closed economy advocates to discredit economic freedoms given to people.

New trade controls were also imposed after 2015 including on vehicles and gold as flexible inflation targeting with output gap targeting (stimulus) created forex shortages while borrowing heavily abroad to make outward payments.

The rupee was also depreciated in REER targeting, a version of BBC policy.

Money printing expanded in 2020 and even more severe import controls were imposed, depriving tax revenues on top of a tax cut for stimulus, and the country is now in a monetary meltdown with inflation at 60 percent, and the soft peg at 360 to the US dollar down from 4.70 during the currency board. (Colombo/Aug04/2022)

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Sri Lanka cancels visa of Scotswoman who documented anti-govt protests

ECONOMYNEXT – Sri Lanka’s Department of Immigration and Emigration has cancelled the visa of Kayleigh Fraser, a Scotswoman who had been documenting the country’s anti-government protests on social media.

Immigration officers had approached Fraser at her home on August 02 and confiscated her passport.

“This is what will happen if you raise your voice against state violence in Sri Lanka,” Fraser wrote on Wednesday August 10, posting a letter ordering her to leave the country by August 15.

“I am proud to have been a part of this. I am proud to have met so many of you. I have… so many social enterprises I want to work on here that I know will benefit so many,” Fraser said on Instagram.

“Deporting me is a massive, massive mistake for this country. The love I have for it and its people appears to be a threat to the current rulers. Does that sound right to you?”

Fraser posted that she was not prepared for the financial cost of flights and relocation, and that all her funds were in Sri Lankan currency, and that banks were not allowing foreign transactions.

Police spokesperson Nihal Thalduwa had told a privately owned news organisation that Fraser was sharing “negative content” about Sri Lanka via her social media.

“It is not right for a foreign national to be in our country and share such mass negative content. She is not a media personnel either, to cover the protests and GotaGoGama,” he has said.

Fraser has been vocal about state sanctioned violence against protestors.

News of Fraser’s deportation has caused a small riot on social media, with many protestors voicing out their support for the foreigner who documented and showed support next to them.

Seemingly indiscriminate arrests of protestors aided by an ongoing State of Emergency have both angered and frightened Sri Lankan protestors, and many active protestors have gone into hiding to evade arrest.

Some protestors said they were “taking a break” or “distancing themselves” due to continued harassment.

However, the authorities maintain that all arrests are in accordance with the law. The government has pointed to acts of retaliatory mob violence on May 09 and the forced occupation of government buildings by protestors on July 09.

“They are calling us terrorists for holding placards. This was such a peaceful protest, the only terrorism carried out was by the government against the people,” said an active protestor, who preferred not to be named.

Fraser wrote that Sri Lankans should not forget that they got to the streets for a system change.

“Live in such a way that your children will thank you for the world they inherit,” she said.

“It’s not over till it’s over. I have an unbelievable amount of high profile people fighting this order for me to leave.”(Colombo/Aug11/2022)



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Sri Lanka to acquire 35,000MT of petrol; unloading on Aug 12

ECONOMYNEXT-  Sri Lanka to receive a cargo of 35,000 metric tonns of petrol on Thursday August 11 with unloading scheduled for Friday, Minister of Power & Energy Kanchana Wijesekara said.

Wijesekara tweeted that the ship will arrive at the Colombo port Thursday night, and that the payment for the cargo had been completed with the support of the Central Bank by Wednesday.

The minister had said earlier on Wednesday that a separate cargo of crude oil is also expected on Saturday August 13, and from August 19 onwards, locally produced fuel is expected to be released to the market from the Sapugaskanda refinery.

Meanwhile, in an earlier report, Lanka IOC, a local unit of the Indian Oil Corporation (OIC), said a vessel carrying 30,000 metric tons of fuel for LIOC is scheduled to arrive between August 10 and 15.

Related: Three shipments of fuel to arrive in Sri Lanka by mid, end July, August: Lanka IOC

Meanwhile, Wijesekara said that 5.7 million people have signed up for the QR-code facilitated National Fuel Pass.

From July 21 up to now, Wijesekara said, a total of 54.9 million litres of fuel had been sold through 1,053 CPC fuel stations while 207 LIOC stations have sold 11.26 million litres of fuel. (Colombo/Aug11/2022)

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MPs nominated to Sri Lanka’s parliamentary committee on public finance

The sun sets over the Parliament at Shri Jayewardenepura

ECONOMYNEXT – Sri Lanka’s parliament has appointed members to its Committee on Public Finance, Speaker Mahinda Yapa Abeywardena said.

According to his announcement made in parliament on Wednesday August 10, in terms of the provisions of the Standing Order 121 of Parliament, MPs Bandula Gunawardana,  Vidura Wickramanayaka,  Nalin Fernando,  Anura Priyadharshana Yapa,  Vijitha Herath,  Duminda Dissanayake,  Shehan Semasinghe,  Premitha Bandara Tennakoon and Harsha de Silva have been appointed.

Indika Anuruddha Herath,  Siripala Gamalath, Seetha Arambepola, Suren Raghavan,  M A Sumanthiran,   Kavinda Heshan Jayawardhana,  Mujibur Rahuman,  Harshana Rajakaruna,  Chaminda Wijesiri,  Isuru Dodangoda,  Anupa Pasqual and  (Prof) Ranjith Bandara also have been appointed to serve as members in the Committee on Public Finance.

President Ranil Wickremesinghe tabled a proposed framework during his time as Prime Minister under President Gotabaya Rajapaksa for sectoral oversight committees in parliament with the objective of increased bipartisan parliamentary involvement in governance and policy-making.

Wickremesinghe told parliament on July 06 that under such a system, the entire parliament irrespective of party difference will participate in governance.

On July 06, he said he had approached former Speaker of Parliament Karu Jayauriya to formulate a proposal on activating the sectoral oversight committees.

Sectoral Oversight Committees shall function for the duration of Parliament and conduct its inquiries notwithstanding any adjournment or prorogation of Parliament, according to the parliament website.

The Committee of Selection shall determine the subjects and functions to be allocated to each Sectoral Oversight Committee.

The Sectoral Oversight Committees shall have the power to examine any Bill, any subsidiary legislation including Regulation, Resolution, Treaty, Report or any other matter relating to subjects and functions within their jurisdiction.

The Parliament, any Committee or a Minister may refer any matter to a Sectoral Oversight Committee having jurisdiction over the subject or function for its consideration and report. (Colombo/Aug11/2022)


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