ECONOMYNEXT – Sri Lanka has printed money for 75 years and has defaulted after borrowings surged to unsustainable levels, but the country has now been barred from monetizing, Trade Minister Bandula Gunawardana said.
Sri Lanka is now finding it difficult to pay salaries, pensions and other expenses with the tax revenues collected.
Sri Lanka has a bloated state due to giving pensionable employment to unemployed graduates on a policy propagated by Janatha Vimukthi Peramuna and appropriated by ex-President Mahinda Rajapaksa to defeat Ranil Wickremesinghe in a 2005 election.
“There is a big pressure on the people from taxes,” Minister Gunawardana said, after this week’s cabinet meeting, where President Ranil Wickremesinghe had asked all ministries to cut 5 percent of budgeted spending as economy was in a deep downturn.
“But expenses are higher. One can ask how it was done in the past. All government’s in history has done it by printing money. We printed money repeatedly, taken loans and 75 years after independence we have now defaulted because we cannot pay them back.
“Because we cannot repay the loans the International Monetary Fund and other lenders have prohibited money printing. They are not allowing money to be printed.
“It is in this background that we have to take the country forward.”
The Treasury was giving priority to salaries and pensions, he said.
The Treasury had earlier issued a circular prioritizing essential spending and settling of arrears.
Sri Lanka emerged from the second World War with no physical damage unlike countries like Germany, Japan or Singapore. The country also had no monetary damage due to the operation of currency board.
Singapore also suffered severe economic damage under so-called Japanese ‘banana money’ which helped the countries leaders – some whom including economic architect Goh Keng Swee were paid in banana money and left a lasting impression on their lives – to reject central banks and re-build its currency board.
West Germany built a new central bank and a new money (Deutsche Mark replacing the Reichsmark) shrinking its wartime money supply and prohibited money printing.
Japan experienced near 700 percent inflation after World War II ended due to central bank re-financing of a Recovery Financial Fund (fukkin) built by American Keynesian economic bureaucrats.
It was closed and the exchange rate fixed at 360 by Joseph Dodge, a US banker who had worked in West Germany and was involved in monetary reform (Dodge Line Stabilization), allowing Japan to become an export powerhouse like Germany.
Sri Lanka also built a central bank with extensive money printing and sterilization powers in the style of those in Latin America, with the help of an American money doctor and had to impose exchange and import controls, reducing economic freedoms and growth.
Sri Lanka’s central bank however generally triggers forex troubles by monetizing maturing debt from past deficits to suppress interest rates artificially, regardless of the actual defict, critics have said.
Though Sri Lanka’s soft-pegged central bank had multiple currency crises in the past and went the IMF 16 times, it had managed to avoid default due to not having market access.
Most defaulting Latin American nations were similar to so-called ‘first world’ countries and had a century or more of market access before the sterilzing central banks were built from 1935 onwards.
Widespread defaults came after 1980s under policies similar to ‘first line of defence’ after extensive money printing and sterilization of interventions to maintain a fixed policy rate.
Fixed policy rates were made possible by open market operations invented by the US Fed in the course of creating the Great Depression and roaring 20s bubble in the 1920s (Sri Lanka, world’s poor suffers from Fed’s accidental discovery: Bellwether)
Sri Lanka’s monetary instability worsened sharply under ‘flexible inflation targeting’ and targeting the middle of a policy corridor with excess liquidity especially after war making it difficult to settle foreign debt.
Under flexible inflation targeting the central bank was unable to collect reserves to match its reserve money and the currency collapsed rapidly as the policy errors were compensated by depreciation, under a policy called ‘exchange rate as a first line of defence’ instead of correcting monetary policy.
Critics says flexible inflation targeting is perhaps the deadliest soft-peg (impossible trinity regime) cooked up by Washington based policy makers and peddled to hapless third world nations without a doctrinal foundation in sound money. (Colombo/Jan10/2022)