ECONOMYNEXT – Sri Lanka’s poverty is estimated to have risen to 25 percent in 2022 from 13 percent World Banks’ Vice President for South Asia Region, Martin Raiser said as the country was hit by the worst currency crisis in the history of its intermediate regime central bank.
Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar after two years of money printing by macro-economists to mis-target rates and push growth up (stimulus or output gap targeting).
The island’s 12-month inflation which shot up to around 70 percent is being contained with the exchange rate anchored for the moment at around 360-370 to the US dollar with a ‘guidance peg’ backed by mostly complementary monetary policy.
“There are already now people in poverty,” Raiser told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.
“Poverty has doubled this year from 13 percent 2021 we estimate it is about 25 percent now.
“That is as large number of people that fall below what we would consider to be a threshold of poverty for a country like Sri Lanka.”
He did not specify the measure used, but there are definitions of income like one dollar a day or five dollars.
The people needed support but it had to be targeted, he said.
Sri Lanka has raised turnover and income taxes and is also planning some give some economic freedoms to the poor as well as non-poor consumers, by reducing import and other protection given to a few entrenched businesses.
Some of the businesses in the forum may be affected from reforms, Raiser said but if they became more competitive new jobs would be created giving a future to match the aspirations of young people.
“Sri Lanka ranks among the five most protected import markets in the world,” Raiser said.
“We know that the extent to which you are open to imports is the key factor in the competitiveness of your exports.”
In Sri Lanka no domestic business can hope to be export competitive. Firms in export zones however are allowed duty free imports. Services like information technology is mostly free from protection but forex transactions from credit cards are being taxed now to protect domestic taxi firms and some retailers.
Sri Lanka has got into forex troubles from shortly after a Latin America style central bank was set up in 1950 giving power to economists to print money to mis-target interest rates, leading to progressively draconian exchange and trade controls.
Import substitution and import replacement became catchwords to rob economic freedoms of the poor as macro-economists mis-used the central bank to mis-target rates and push central bank re-financed credit under ‘development economics’ and other then prevailing ideologies.
Though attempts were made to re-open the economy after 1978, from the 1980s in particular errors in mis-targeting rates were compensated by permanent depreciation (called basket band crawl policy or now a flexible exchange rate) leading to extended monetary instability, critics say.
A flexible exchange rate is neither a hard peg nor a clean float and leads to forex shortages and currency crises whenever rates are mistargeted even for a short term to target inflation (a domestic anchor) or for any other purpose (output).
Renewed monetary instability and serial currency crises was seen from 2015 under discretionary ‘flexible’ inflation targeting with the rupee falling from 131 to 182 up to 2018 and rest in the past two years in the current credit cycle.
One of the countries Raiser worked in was Turkey. A ‘first world’ Empire that controlled a significant portion of Europe and the Middle East during the gold standard period, the country now has arguably the worst central bank in Europe.
“The country went through a major foreign exchange and banking crisis in 2000,” Raiser said.
“And it adjusted very rapidly. It shifted from an inward looking model and a banking sector that was heavily exposed the public sector.
“For the subsequent 10 years led to a tripling of the Turkish economy in US dollar terms.”
“Since then some of the progress turkey made has been reversed. They are again facing external financial difficulties.”
Reserve collecting flexible exchange rates are generally able to maintain monetary stability for around two Fed cycles with external anchoring and then collapse as rates hiked in the first collapse come down over two cycles and soft-peggers are unwilling to raise them on time, analysts say.
“But looking at the decade 2001/2002 to 2010 Turkey’s experience shows that adjustment led to a rapid economic recovery and an unexpectedly stabilization of the fiscal situation on the back of higher economic growth, on the back of rapidly falling interest rates because the monetary framework is strong.
“That is a possible inspiration.”
Sri Lanka however is about to enact a new monetary law to legalize ‘flexible’ inflation targeting and ‘flexible’ exchange rate. (Colombo/Dec06/2022)