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Friday December 8th, 2023

Sri Lanka currency board will preserve rupee, impose discipline: Wijewardena

ECONOMYNEXT – A currency board for Sri Lanka will stabilize the rupee for the future and impose discipline on both politicians as well as monetary authority officials who want to print money, top economist W A Wijewardena has said.

Sri Lanka had a currency board from 1885 to 1950 until a Latin America style central bank was set up under American advice.

Second Coming

“Sri Lanka is no stranger to currency boards,” top economist W A Wijewardena told EconomyNext.

“With Ceylon’s decision to abolish the currency we lost was the discipline on politicians and the ability of the central bank to maintain the value of the currency.

“A currency board will also impose discipline on the leadership of the monetary authority.”

“As a result of the depth of the crisis we are facing there is no alternative but to establish a currency board.”

Under a currency board no money can be printed for open market operations and all interventions are unsterilized and short term rates fluctuate freely.

However there were several challenges to setting up a currency board at this time which has to be overcome, Wijewardene said.

One was that new capital was needed to match the domestic monetary base (MO) as the credibility of a currency board comes from being fully backed by foreign reserves.

If invested in safe securities of only one currency – the anchor currency – a currency board will make profits every year (seigniorage) which be used to set up an externally invested bank bailout fund.


Sri Lanka’s reserve money was 1,380 billion rupees by March 24 and was rapidly growing with the currency fall being fully accommodated at a 7.5 percent policy rate.

Commercial Banks were selling US dollars to customers at around 295 rupees by Friday.

At current exchange rates about 4.5 billion US dollars were needed to fully back the currency issue, he said.

“Central Bank’s assets were also negative by 3.2 billion dollars according to the latest data available,” Wijewardena said.

“That is a challenge.”

However there are options including taking the liabilities into a special purpose vehicle.

A currency board will prevent governments from destroying the value of money which the ordinary people earn though hard work, Wijewardena said.

During the long period of the Board of Commissioners of Currency, Sri Lanka did not have currency crisis. However because the rupee was silver it sometimes moved against Sterling which was gold, until the Indian rupee shifted to the more expensive specie.

Wijewardena’s comments came as US economist Steve Hanke tweeted that Sri Lanka should establish a currency board to end 72 years of monetary instability from the flexible exchange rate of soft-peg.


Sri Lanka should set up a currency board to stop rupee depreciation: US economist

It is not clear where the rupee will eventually stop with surrender requirements and low interest rates hampering a clean float.

Usually a currency board is set up in a crisis country under Hanke’s formula after a free float is established for several weeks and the effects of previous money printing is fully dissipated in the banking system.

Monetary Authority Under the rule of law

Most Sri Lankans alive first learned about currency boards from Wijewardena.

Wijewardene had for many years showed the virtues of a currency board, pointing out how Singapore’s economic architect Goh Keng Swee maintained the ‘Colonial’ currency board as its foundation to build a free trading low inflation economy without social unrest.

Goh said the country did not believe in Keynesianism which became fashionable after the US Fed triggered the Great Depression but believed in hard work.

Sri Lanka’s monetary policy had deteriorated rapidly after Wijewardene retired as Deputy Governor of the Central Bank shortly after the country went through a massive civil war in 2009 amidst the collapse of the Greenspan-Bernanke bubble.

Observers say a country cannot depend on the personality and knowledge of one person to maintain currency and rogue policy and un-anchored or dual anchor monetary policy (flexible exchange rate) must be constrained by law.

From the time of his retirement when the rupee was around 114 to the US dollar and it is now around 295 to the US dollar and counting.

But knowledge about currency board was lost and unusual beliefs about currency boards were propagated at key UK universities (except LSE) and so-called ‘saltwater universities of the US, where Keynesianism was adopted as a ‘new religion’ as the saying went.

Wijewardene had dubbed the unusually volumes of money printed in the last two years the ‘Lakshman’ shock.

Independence to print money

A key reason for abolishing the currency board was to give ‘monetary policy independence’ to central bankers to practice rogue policy.

A key reason for setting up a currency board is that the general public and legislators no longer believe economists who want to engage in open market operations and competitive exchange rate to give profits to businesses at the expense of workers.

The Hong Kong Monetary Authority which operates on currency board principles raised policy rates by 25 basis points on March 17 after the US Federal Reserve raised its own rates.


The UAE Monetary Authority which operates the Dirham on the principles very similar to a currency board (currency board like as dubbed by Hanke), also raised rates.

Interest rates in countries with currency board are very low and barely above that of the anchor currency which can be the US dollar or any larger country with a very good central bank. The US dollar is generally chosen because it is a large importer of goods and has open capital markets.

Without the legal powers to depreciate the currency, a currency board cannot inflate away peoples wealth and push interest rates up by destroying real capital.

Currencies that collapse steeply lead to spontaneous dollarization as people adopt foreign currencies to make transactions and demand dollar salaries from their employers.

A central bank usually imposes legal tender laws to prevent the use of alternative currencies and force people to use their bad depreciating money.

Sri Lanka is now in the middle of the Powell bubble where US rates are going up. (Colombo/Mar28/2022 – Corrected – MO data, exchange rate)

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SLPP enjoying “great demand” from potential presidential candidates: Namal

FILE PHOTO – President Gotabaya Rajapaksa with nephew Namal at the opening of the last part of the Southern Expressway/PMD

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) enjoys “great demand” from potential presidential candidates, and the party will have to take a call on working with incumbent President Ranil Wickremesinghe, MP Namal Rajapaksa said.

Speaking to reporters on Thursday December 07, Rajapaksa claimed several names have come up concerning the SLPP’s candidate at next year’s presidential election.

“There is great demand: entrepreneurs, businessmen, politicians, are all there. There are presidents too, ready to come forward with our party,” he said.

“Out of all these people, we will put forward on behalf of our party the candidate that can take the country forward while stabilising the economy,” he added.

Commenting on continued support for President Wickremesinghe, Rajapaksa said the while SLPP at present works with the former in the present government, the party will have to decide whether that relationship continues going forward.

“The matter of whether we work with the United National Party (UNP) in the future – this is not a politics dependent on individuals; the SLPP is a party. We will talk as a party with other parties, but no discussions will be held centred around individuals,” he said.

Rajapaksa noted that Wickremesinghe was the only member of parliament representing the UNP at the time of his election by parliament following the resignation of his predecessor Gotabaya Rajapaksa .

“If we are to collaborate with the UNP in the future, we’ll have to discuss that. Once the party has decided on that, we can get a start on those discussions. Today, we work with the president in the present government,” he said.

Last month, when asked to comment on President Wickremesinghe’s 2024 budget, MP Rajapkasa sounded rather sceptical of the president’s ambitions for turning the crisis-hit economy around.

“We must study the budget. He had presented a lot of these proposals in last year’s budget too. They don’t seem to have been implemented,” Namal Rajapaksa said, speaking to reporters after the budget presentation Monday November 13 afternoon.

Rajapaksa’s father and leader of the SLPP former president Mahinda Rajapaksa, however, spoke in favour of Wickremesinghe’s budget.


Sri Lanka’s “forward-looking” 2024 budget will instill fiscal discipline: MR

While not without its shortcomings, the older Rajapaksa said, the 2024 budget is a forward-looking one that aims to ensure fiscal discipline and put Sri Lanka on the path to recovery. (Colombo/Dec07/2023)

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Sri Lanka ruling party MP contradicts poll to claim his party is overtaking president’s

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) is rising from the ashes albeit at a slower than anticipated pace, while President Ranil Wickremesinghe’s United National Party (UNP) still commands only 1-2 percent of the vote, an SLPP legislator said.

MP S B Dissanayake, who is not a member of the cabinet of ministers headed by President Wickremesinghe, told reporters on Thursday December 07 that support for any major political party of the island nation is on a downward trend while the SLPP alone is gaining ground.

An independent poll by the Institute for Health Policy (IHP) however shows that this is decidedly not the case. Polling data for October showed that the leftist National People’s Power (NPP) had enjoyed support from 40 percent of likely voters, having dipped 2 percent from September, while the main opposition the Samagi Jana Balawegaya (SJB) stood at 26 percent, increasing four percent from 22 percent in September. President Ranil Wickremesinghe’s UNP’s support decreased marginally to 11 percent in October from September’s 13 percent. The SLPP also saw a decrease to 5 percent from the previous month’s 8 percent.

“You can’t gamble with elections. The election must be held. We always say electrons must be held. The presidential election must be held next year. There is no alternative,” said Dissanayake.

“Parliamentary elections can be called if needed. But that’s not how it is with the presidential election. Nominations for that will have to be called by September, October next year,” he added.

Asked by a reporter if the SLPP is ready for elections, Dissanayake acknowledged that support for his party had eroded, to nothing.

“We crashed to zero. We were turned to ashes. But we will rise from those ashes. We’re not where we thought we were. The 6.9 million [votes received at the 2019 presidential election] no longer applies. We’re at about half of that. But we’re rising, like this,” he said, gesturing upwards.

“As other major parties go in the opposite direction, we’re rising slowly. But the UNP is not. It’s still on the ground, and still at 1 to 2 percent,” he claimed.

“The SLFP is there too. Those who left us are the same. Even together they cannot form 1 percent. But we’re climbing,” he said. (Colombo/Dec07/2023)

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Sri Lanka president appoints main opposition MP advisor

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has appointed MP Vadivel Suresh as a Senior Advisor aimed at “fostering the integration of Hill Country Tamils into Sri Lankan society”, the president’s office said.

A statement from the President’s Media Divison (PMD) said Suresh’s “pivotal role will centre around overseeing the comprehensive integration of Hill Country Tamils, particularly focusing on the districts of Badulla, Nuwara Eliya and Rathnapura”.

“The Senior Advisor will play a key role in coordinating various initiatives related to the welfare of Plantation Companies, the promotion of women, safeguarding children, addressing disparities in Tamil schools and upgrading the delivery of health services,” the statement said.

In May this year, Suresh, who represents the main opposition Samagi Jana Balawegaya (SJB) in parliament and also serves as the general secretary of the Lanka Jathika Estate Workers’ Union, made headlines when he issued an ultimatum to opposition and SJB leader Sajith Premadasa, demanding an apology for a perceived slight on the Indian-origin Tamil community that Suresh represents. He also spoke favourably of President Wickremesinghe, hinting at a possible cross over.

Sri Lanka’s Indian-origin Tamils, most of whom have historically worked in the plantation sector and live in dire conditions on wages widely considered unacceptably low. Speaking at a May Day rally, the Badulla district MP said Premadasa must apologise to the estate Tamils for allegedly snubbing them at an event in Madulsima that he failed to attend.

“I would like to say to our leader, sir, do not take us for granted,” said Suresh.

“If you need us to stay with you, come right now to Madulsima and apologise to my people and then we shall restart our journey. Otherwise I won’t be part of that journey. There will be no Vadivel Suresh. If you don’t apologise to my people, I won’t be with the SJB,” he said.

Making matters worse, the MP also expressed a willingness to join President Wickremesinghe if he was able to raise the daily wage of plantation workers and resolve their grievances. He also said the president has been successful in containing the disruptions caused by the currency crisis.

“On this May Day, we say to both the opposition leader and the president, I and my people would join hands with a leader that worked to increase [estate workers’] wages and give them [access to the Samurdhi welfare scheme] and include them in national policy,” he said. (Colombo/Dec07/2023)

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