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Thursday September 21st, 2023

Sajith promises Hayekian, Keynesian policy mix for Sri Lanka

ECONOMYNEXT – Sajith Premadasa, who is pushing to be the presidential candidate for Sri Lanka’s United National Party said he wanted to employ a mix of Hayekian and Keynesian economic policies.

“On one hand we have the Keynesian aggregate demand management model,” Premadasa said speaking at a think tank in Colombo.

“At the other end we have the Frederich Hayek new model. I believe we need a mixture of these models to have the major attributes of economic growth.”

Premadasa was perhaps the first senior level politician in Sri Lanka to publicly mention Hayek.

Hayek proposed classical liberal policies based on sound money that had earlier laid the foundation for the industrial revolution (gold standard at the time) protecting the incomes of the poorest of the poor, while keeping house prices low and affordable by preventing inflation and asset bubbles .

Housing bubbles and mal-investments generally come when central bank enforce rate cuts with printed money, leading to collapse of currencies and investment bubbles.

Keynes proposed a remedy to boost after a central bank creates a bubble, and causes depression.

Sri Lanka has generally followed Keynesian policies after US ‘New Dealers’ pushed a central bank on Sri Lanka to join the failed Bretton Woods soft-peg after World War II, breaking a classical liberal currency board.

Sri Lanka had been consistently following Keynesian money printing models except for a brief period when Central Bank Governor A S Jayewardene and Nivard Cabraal and with W A Wijewardene as Deputy Governor, analysts have said.

“We have to follow an export based economic model,” Premadasa said. “When it comes to growth I firmly believe the greatest value addition is to be achieved from growth based on manufacturing, this has been proven to be the case in the 80s and 90s.”

Premadasa’s father helped set up over 100 apparel factories using the multi-fibre agreement to push exports.

“If you observe the progress made by the Asian Tigers in the late 90s and early 2000s, manufacturing based industrial development for economic growth has been proven to be the most sustainable economic growth that can be achieved,” he said.

Singapore, which used Hayekian monetary policy, eschewed Keynesian ideas.

Goh Keng Swee, independent Singapore’s first finance minister and head of the currency board said money printing led to balance of payments troubles, inflation and political instability.

“When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down,” explained Goh Ken Swee, Lee Kwan Yew’s first finance minister and the economic architect of the country.

“Third, we wanted to indicated to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore.

“A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.”

Another export powerhouse Japan, saw inflation explode soon after World War II, under General Douglas McAurther due the influence of American New Dealers, who were Keynesian.

“To cope with output collapse and unemployment, the Japanese government printed money to finance subsidies while imposing price controls,” explained Konichi Ohno later in his book, Development of Japan.

“Clearly, this strategy could not be sustained for long. Monetization of fiscal deficits created triple-digit inflation from 1946 to 1949. Black market inflation was even higher, especially in the early period. This was the highest inflation that Japan ever experienced, before or since.”

General McArthur’s staff in Tokyo were also Keynesian New Dealers, who did not want big bang correction, Ohno said.

“But this debate within the US government was ended when Washington sent Joseph Dodge to Tokyo in early 1949. Dodge was the president of Detroit Bank and a strong believer in the free economy,”

Under the Dodge stabilization package the Yen was fixed at 360 to the US dollar. Sri Lanka’s rupee is 180 from around 4.70 after World War II.

Korea was not so lucky. It went to the IMF 18 times until the central bank was fixed in the early 1980s following disasterous real effective exchange rate targeting exercise and wage suppression that led to mass-strikes and protests.

Japan’s 360 to the US dollar was fixed until 1971 when the US dollar collapsed under President Nixon’s Keyensian ‘Great Society’ program when then-Fed Chairman Arthur Burns printed money to close an output gap. The Yen is now 105 to the US dollar.

The collapse of the Bretton Woods led to Sri Lanka’s closed economy of the 1970s. Following the economic and rise of unemployment to around 20 percent, in Sri Lanka Sajith Premadasa’s father became Prime Minister under J R Jayewardene.

Jayewardene, who set up the Central Bank after independence, did not reform it, leading to high inflation, finance companies collapses and political unrest in the 1980s, while Britain and US both stabilized and had low inflation under Thatcher’s Hayekina policies and Volker’s tight monetary policies.

The UK, the birthplace of John Maynard Keynes, where he was a Treasury official, suffered terribly. The UK went to the IMF 11 times suffering with rationing, exchange controls and Sterling crises, until Thatcher came stopped printing and abolished all controls.

In post-war Germany, Hayekian policies were implemented by Wilehm Ropke and Ludwig Earhard to implement the Federal Republic’s Social Market Economy creating the so-called German Economic Miracle overtaking UK which won the war.

“Stability is not everything,” Geman Economic Minister Karl Schiller once said. “But without stability, everything is nothing.”



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Sri Lanka government to develop Arugam Bay tourism sector

ECONOMYNEXT – The Arugam Bay Tourism Development Plan, which focuses on challenges to infrastructure development in the area and obstacles hindering the growth of the tourism sector, was discussed by government officials and key stakeholders yesterday (20).

Participants from heads of relevant organizations, the Police and district officers met at the Presidential Secretariat to discuss how each institution could contribute to finding solutions to these challenges, the president’s media division said in a statement.

The main tourism plan for Arugam Bay, prepared by the Urban Development Authority (UDA) was presented by chief of presidential staff, Sagala Rathnayaka.

904,318 tourists visited Sri Lanka from January to August 2023, an increase from the 719,978 tourists that arrived in the country during the whole of 2022, statistics provided by the Sri Lanka Tourism Development Authority show.
“A tourist will spend an average of 185 -195 dollars a day,” Sri Lanka Tourism Development Chairman, Priyantha Fernando, told EconomyNext.

Sri Lanka’s government aims to attract five million tourists a year, and has mooted the establishment of an Investment Infrastructure Corporation, a decision-making council and regional committees under provincial tourism boards. (Colombo/Sep21/2023)

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Sri Lanka gets 19.23 mn US dollar grant from USA

ECONOMYNEXT – The United States yesterday (20) announced the commitment of more than 19 million US dollars in additional funds to further the development of Sri Lanka.

The 19.23 million US dollar (6.2 billion rupees) is obligated through the Development Objective Grant Agreement between the United States Agency for International Development (USAID) and the Sri Lanka government.

“This development assistance will support economic growth and democratic governance activities and demonstrates the ongoing US commitment to its partnership with Sri Lanka and in building lasting people-to-people ties,” a statement by the Embassy of the United States of America read.

“This investment demonstrates the United States’ ongoing commitment to our partnership with Sri Lanka and our steadfast support to the people of this stunning, opportunity-filled country, as USAID Administrator Samantha Power and President Wickremesinghe discussed in New York,” said Gabriel Grau, USAID Sri Lanka and Maldives Mission Director.

“With these funds we’ll continue to work with the government of Sri Lanka to improve economic growth and democratic governance and advocate for vulnerable populations.”

USAID is an independent agency of the United States government responsible for administering civilian foreign aid and development assistance.

The United States has provided more than 2 billion US dollars (nearly 720 billion rupees) in assistance to Sri Lanka since 1956. (Colombo/Sep21/2023)

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Sri Lanka’s 2022 EPF returns falls to lowest, single digit in near two decades – CB data

ECONOMYNEXT – The 2022 annual average return on Sri Lanka’s largest contributory pension scheme, the Employees’ Provident Fund (EPF), has fallen to its lowest in nearly two decades, Central Bank data showed.

The annual average return in the last year fell to 9.52 percent from the previous year’s 11.40 percent, a central bank response to a Right to Information (RTI) request showed.

Returns on EPF has raised concerns among contributors after the government decided to include EPF investments in the government treasury bonds under the domestic debt optimization (DDO) process.

Last year’s lower return has been recorded despite market interest rates being more than 30 percent towards the end of the year. In contrast, the fund has given a double digit return in 2020 when the market interest rates hovered in single digits.

Analysts have predicted the returns to be further low with the central bank opting for the government’s DDO option.

A central bank analysis on DDO showed the return on EPF could fall to as low as 6.79 percent if the DDO option was not chosen within the next 12 years as against 8.02 percent if opted for DDO.

Trade unions and some politically motivated fractions opposed the government move to include the EPF investments under the DDO. However, parliament approved the move early this month.

According to the data made available from 2005, the central bank, which is the custodian of the EPF, has given the highest return of 16.03 percent in 2009.

The island nation’s largest pension fund has almost 21-million member accounts including 18.3 million non-contributing accounts due to some members having multiple number of accounts.

The 3.38 trillion-rupee ($10.6 billion) worth fund as of end 2022 is managed by the central bank, including its investment decisions.

As of end 2022, the central bank has invested 3.23 trillion rupees or 95.7 percent of the total EPF in government securities, while 84.1 billion rupees has been invested in listed companies in the Colombo Stock Exchange, the central bank said quoting the EPF audited financial statement. (Colombo/September 21/2023)

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