ECONOMYNEXT – Sri Lanka owed 1.9 billion US dollars to the Asian Clearing Union, an arrangement set up in 1974 after the break-up of the Bretton Woods system and forex shortages in many countries due to money printing, according to data released by the Finance Ministry.
The Reserve Bank of India deferred payments from Sri Lanka via the ACU at least up to June as the country suffered the worst currency crisis in the history of its intermediate regime (soft-pegged) central bank, allowing the agency to intervene and print more money and create balance of payments deficits.
Sri Lanka had voluntarily exited the mechanism on October 14, 2022, and banks in Bangladesh were told not to deal with the island through the mechanism.
Bangladesh Bank (central bank) told banks and authorized forex dealers “not to do any trade and trade related transactions with Sri Lanka through ACU mechanism,” following “self-motivated decision by the Central Bank of Sri Lanka (CBSL) to remain temporarily suspended” from the arrangement.
According to an external debt update released by Sri Lanka, the island’s central bank owed the ACU, 1.9 billion dollars. Sri Lanka also receives money from ACU member states and it is not clear whether any of its was settled after June.
Sri Lanka along with India, Iran, Nepal and Pakistan were founder members of the organization set up under the auspices of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), instead of restraining the independence given to central banks to print money.
In 1971, the US floated (refused to exchange gold for dollars like modern soft-pegged central banks suddenly depreciate or float, refusing to exchange dollars for domestic currency at the previous rate), after Fed Chief Arthur Burns printed money and fired a global inflation bubble and the agency lost large volumes of gold to sterilized interventions.
Sri Lanka completely closed the economy in the 1970s in a bid to hold the peg, instead of restraining macro-economists from printing money. After 1980 the currency was steadily depreciated instead of restraining the central bank from printing money. (Colombo/Nov04/2022)