Sri Lanka President in push for large scale money printing, fiscal dominance: report

ECONOMYNEXT – President Maithripala Sirisena has opposed changes to Sri Lanka’s central bank law which aims to end wholesale money printing and keep finance ministry out of interest rate decisions, giving independence to monetary authorities, a media report said.

Draft changes to Sri Lanka’s monetary law, had proposed that the Treasury secretary be kept of the rate setting process to fiscal dominance of monetary policy, and the central bank no longer print large volumes of money to buy Treasury bills at auctions.

A memorandum to the cabinet has noted that the Treasury secretary should be in the rate setting committee "for co-operation between the Government and the CBSL," Sri Lanka’s Daily FT newspaper has reported.

The Treasury Secretary has in the past forced the central bank to print money and keep rates down, by a def facto veto of rate decisions, triggering balance of payments crises and high inflation.

Removing the Treasury from the central bank has been a key call of economists and analysts for many years.

The President had also raised objections to ending large scale money printing through the purchase of Treasury bills with central bank credit, the report said.

“The proposed MLA (Monetary Law Act) prevents the CBSL from purchasing any Government securities from the primary market. Given the global economic conditions, coupled with the impending large debt repayment, it could lead the country to defaulting on its debt," the Daily FT newspaper quoted the note to cabient as saying.

"The lack of contingency support could have significant repercussions in a middle-income economy such as Sri Lanka that also does not have a mature domestic capital market for financing its budgetary operation adequately.”

Analysts however had pointed out that direct interventions in Treasuries auctions with printed money is the most dangerous course for a central bank to take.

The additional liquidity generates foreign exchange shortages, which can lead to dollar sovereign default in the style of the Weimar Republic or Venezuela.

Story continues below
Advertisement
Story continues below
Advertisement

The 1970s economic crisis, trade and exchange controls were a direct result of the central bank purchasing most of the Treasury securities issued by the Treasury, analysts have said.

The President had also called for wider consultations on the changes to the monetary law act, the report said.

“I propose that the National Economic Council convene a committee of experts to study the provisions of the proposed MLA and submit a report to the Cabinet of Ministers for consideration," he said.

Critics had blamed most of Sri Lanka’s economic instability that emerged after independence from British rule on on the money printing powers of the central bank which came with the abolition of a currency board.

Countries like Singapore, Hong Kong and Malaysia on the other hand did not set up central banks allowing them to be stable economies.

The Bank of Thailand, analysts say was one of the most cautious central banks in the region. It mops up liquidity through three year central bank securities to build stable forex reserves.

The King of Thailand – under advisors of the classical style – had avoided setting up a central bank for many years. (Colombo/July12/2019)