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Friday August 12th, 2022

Sri Lanka following John Law, rupee debauched in MMT: legislator

ECONOMYNEXT – Sri Lanka is treading on the path of John Law, an 18 century French Mercantilist who drove France to a monetary meltdown with an early central bank, in implementing so-called Modern Monetary Theory debauching the currency, an opposition legislator has charged.

Sri Lanka cut taxes sharply in December 2019 in a fiscal ‘stimulus’ and started printing in large quantities following several rate cuts in early 2020 in a monetary ‘stimulus’.

John Law Returns

“Look at the problems in fiscal policy. What was the benefit of cutting taxes?” opposition legislator Kabir Hashim questioned in parliament.

“Government revenues fell and prices of goods went up. Look at monetary policy. In 1700s in Britain there was a man called John Law. It is his policies we are following now, printing money and calling it MMT.”

Law fled his native Scotland to France over an incident in a duel, but had tried interest Scottish leaders in setting up a central bank and a national paper money.

Scotland had a series of free banks where a type of short term advances of printed money similar to ‘provisional advances’ found in Sri Lanka’s central bank law, called the ‘real bills doctrine’ which was in use to various degrees.

However he failed to persuade Scottish leaders including the Duke of Argyle of his scheme. Following his flight to France, Law cultivated a friendship with the Duke of Orleans, who was regent to King Louis of France.

In 1720 Law was appointed Controller General of Finance. A private bank set up by Law (Banque Générale Privée) was nationalized as Banque Royale and it bought government debt.

“He (Law) bankrupted France,” Hashim said. “The same thing is happening in Sri Lanka.”

Mississipi Stocks

Placing restrictions on free trade, Law created several companies with crony-Mercantilist monopoly powers including the Mississippi Company, driving up stock market prices with excess profits.

In Sri Lanka import restrictions are also driving up stock market profits of some so-called crony import-substitution companies, which exploit people with high prices benefiting from import duties and import controls.

However inflation soon followed and stock markets collapsed as people demanded gold in return for the paper money, in a similar way people demand dollars in return for printed money in a pegged exchange rate central bank.

Hashim said hundreds of billions of rupees had been printed in 2020.

“Where had his money gone?” he questioned. “There should be lots of money. Why is the government saying there is no money now?”

The money left country as a balance of payments deficit as the new money was redeemed for foreign reserves for trade transactions and for dollar debt repayment through the ‘convertibility undertaking’ of the peg.


Sri Lanka’s central bank buys bonds in new money printing phase

Sri Lanka sells US$76mn in August after liquidity injections

The BOP deficit started in late 2019 as the Yahapalana central bank bought bonds to target an output gap and lower interest rates artificially again ending a policy of mopping up inflows.

Excess Money Redeemed for Reserves

The BOP deficit in 2020 was 2.3 billion US dollars. In 2021 up to April the BOP deficit was over 900 million dollars.

“The rupee had been severely debauched (mus-ther barl-doo),” Hashim said. “Mahinda Rajapaksa hit the rupee over 100 to the US dollar in 2005. Gotabaya Rajapaksa hit it over 200 to the US dollar in 2020/2021.”

However the central bank in the administration in which Hashim was a cabinet minister also followed a milder version of MMT called ‘output gap targeting’, triggering currency crises.

Ironically the International Monetary Fund gave technical support to calculate a supposedly existing ‘output gap’.

Hashim’s administration also followed a more non-credible peg called the ‘flexible exchange rate’ involving vicious dual anchor conflitcs, which switched between floating and fixed rapidly, sometimes within the same day, due to refusal to convert to dollars very much smaller volumes of printed money and went sliding down.

The administration also made an attempt to institutionalize dual anchor conflicts by writing the ‘flexible exchange rate’ into the monetary law.

Printing money to target an output gap created a currency crisis in 2018 driving the rupee down from 153 to 182 to the US dollar forcing corrective policies to be implemented as the balance of payments was blown apart, in a so-called ‘stop-go’ policy. (Stop-Go policies of the political business cycle)

The central bank also jettisoned a ‘bills only policy’ trying to control long term yield curve, going beyond a short term ‘real bills doctrine’ to longer term permanent injections of money in the style of Banque Royale.

It was claimed that ‘inflation targeting’ was followed, despite operating the highly unstable pegged exchange rate called ‘flexible exchange rate’ with a foreign reserve target, which analysts warned would end in disaster.

The 2018 debacle was also significant since money was printed despite tax hikes and market pricing of oil, showing there was no fiscal dominance of monetary policy.


Sri Lanka may be heading for a triple anchor, ‘inflation targeting’ oxymoron: Bellwether

However the country does not have a floating rate to avoid a currency collapse when money is printed through open market operations.

Deteriorating Policy

After busting the rupee the central bank also controlled deposit rates, in an unprecedented double expropriation of the small man in favor of leveraged businesses and the state in another Mercantilist intervention.

The central bank also engaged in real effective exchange rate targeting resisting an appreciation of the currency in 2017 while buying up over a billion US dollars in reserves and also undoing dangerous swap deals.

Instead of letting the currency appreciate like in 2010 and 2011, the rupee was further depreciated by 3 rupees in 2017.

The then administration gave ‘central bank independence’ and allowed REER targeting, a blatantly Mercantilist strategy aimed at getting a short term trade advantage by destroying real wages of export workers.

The then-cabinet also did not objects to ‘output gap targeting’ to be implemented though no cabinet sanction had been given for such an action which went against the stability objective of the central bank.

A policy rate corridor was also narrowed from 150 to 100 basis points, and no action was taken.

MLA mandate for stability

Call money rate targeting was then started where large volumes of money was printed to target a rate below the ceiling of the corridor making nonsense of the idea of having a policy corridor in the first place which is to allow rates to go up automatically when a peg is defended.

Critics have pointed that the central bank only has a stability mandate and no growth mandate for any John Law type activity other than provisional advances for six months, and both output gap targeting and MMT violates Section 05 of the constitution of the central bank.

However even in 1950, an economist writing in The Banker magazine warned that the six-month limit was no protection as long at the CB could buy Treasuries and had many tools used in Latin America.

Sri Lanka’s central bank was one of several set up by the Fed in Latin America and Asia in the style of Argentina’s central bank.

In 2015 large volumes of money was injected initially to keep call money rates at the bottom of the corridor eventually driving the rupee from 131 to 151 to the US dollar by early 2017 in the first currency crisis in the last administration.

Analysts warned that the call money rate targeting would be a death-knell for the rupee and REER targeting would, trigger monetary instability and political unrest.

However MMT is much more dangerous.

Analysts have warned that MMT combined with swap deals could make the central bank insolvent, in addition to possible sovereign default and could trigger a monetary meltdown unless corrective action was taken to stop printing money.

History Repeats
The 2020 MMT exercise was done despite the experience of 2015 and 2018, where growth collapsed after the liquidity injections triggered currency crises.

In France, despite the experience of the John Law’s paper money, a currency called Assignat was printed after the French revolution. The assignat was printed not against Treasury bills but land seized mostly from the Church and ‘assigned’ against paper livres.

The currency soon lost value and trading restrictions and exchange controls were brought to maintain its value.


Sri Lanka tightens capital controls, outflows from forex accounts capped

In August, 1793, a law was passed punishing any person who sold assignats at less than their nominal value with imprisonment for twenty years in chains, and later a law making investments in foreign countries by Frenchmen punishable with death.

“On whom did this vast depreciation mainly fall at last?”,” questioned Andrew Dickson White in his work Fiat Money Inflation in France.

“When this currency had sunk to about one three-hundredth part of its nominal value and, after that, to nothing, in whose hands was the bulk of it?

“The answer is simple.

I shall give it in the exact words of that thoughtful historian from whom I have already quoted: “Before the end of the year 1795 the paper money was almost exclusively in the hands of the working classes, employees and men of small means, whose property was not large enough to invest in stores of goods or national lands.

“Financiers and men of large means were shrewd enough to put as much of their property as possible into objects of permanent value.

“The working classes had no such foresight or skill or means. On them finally came the great crushing weight of the loss. After the first collapse came up the cries of the starving.” (Colombo/July02/2021)

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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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