ECONOMYNEXT – Sri Lanka’s Consumer Affairs Authority which creates shortages with price controls as the central bank prints money and triggers forex shortages, is likely to raise the controlled prices of several goods which have disappeared from shelves, report said.

A meeting of ministers with President Gotabaya Rajapaksa on Thursday night a decision was taken to remove the current price controls on LPG, wheat flour and cement and ask the price control agency to revise them.

The CAA had previously requested milk powder controlled price to be raised by 200 rupees a kilogram, a cooking gas cylinder by 550 rupee and a sack of cement by 50 rupees reports said.

However it is not clear whether these numbers are sufficient to cover the costs. The CAA usually decides on a price based on their own calculations and suppliers have previously not been able to buy the goods or find dollars.

Sri Lanka has severe foreign exchange shortages after interest rates were suppressed with printed money, creating foreign exchange shortages at a fixed price in the official market and depreciating the currency (dollar price rises like milk) in the unofficial market.

Money is printed also to pay state worker salaries who are on full salary, unlike private workers who are on pay cut amid a Coronavirus pandemic. State workers are therefore able to appropriate goods on the shelves before private citizens can.

“But as prices of goods begin to rise in response to the higher quantity of money, those who haven’t yet received the new money find the prices of the goods they buy have gone up, while their own selling prices or incomes have not risen,” explains Murray Rothbard, a US economist who played a part in taming the Fed and educating members of the public on the dangers of un-anchored monetary policy.

“In short, the early receivers of the new money in this market chain of events gain at the expense of those who receive the money toward the end of the chain, and still worse losers are the people (e.g., those on fixed incomes such as annuities, interest, or pensions) who never receive the new money at all. Monetary inflation, then, acts as a hidden “tax” by which the early receivers expropriate
(i.e., gain at the expense of) the late receivers.”

The US Fed is again running un-anchored policy printing large volumes of money to ‘create jobs’ firing what a Powell Bubble, pushing up food, oil, base metals prices.

Sri Lanka has a large public sector which is expanded every year with unemployed graudates, who cannot get a job in growth creating sectors and demand tax money to take home by engaging in fast in front of the main railway station in the capital Colombo.

Last year 53,000 graduates who have to be given 12.7 billion rupees as wages over 12 months which is about 63 million US dollars.

The money printed against Treasury bills operate like a invasion currency (military scrip) creating massive hardships for private citizens and for every one else as time goes on.

The Japanese issued occupation currency to buy food and other stuff in countries that they invaded in Asia creating food shortages and surges in rice prices. Occupation scrip known as Mickey Mouse Money in the Philippines and Banana Money in Malaya.

“Singapore’s first Finance Minister and Governor of the Monetary Authority was paid in depreciated Banana money during Japanese occupation,” says EN’s economics columnist Bellwether.

“In addition to his knowledge of classical economics having studied at LSE instead of Cambridge he had mentioned this to fellow leaders of Singapore. So he created created an currency board without a policy rate. instead of a money printing central bank as soon as Singapore separated from Malaysia.”

The British also honored previous money as soon as the Japanese were driven out.

New money created by the central bank and given to state workers or government contractors and their workers, go from the shop owner to the wholesaler, from the wholesaler to the Pettah import trader who then uses the rupees to buy foreign exchange and replace his depleted stock.

However because the new money had been created against Treasury bills bought by the central bank from failed bill auctions and not dollars bought into reserves, the central bank runs out of reserves on a net basis when convertibility is provided at the pegged rate.

Newly re-appointed central bank governor Nivard Cabraal has allowed interest rates to go up in a bid to reduce money printing and make the government borrow real savings using money already in the system.

However budget deficits are large after tax cuts, pushing up the clearing price for bonds.

Analysts and economists have called for central bank reform to curb its ability mis-used its independence and to print money to boost growth and create forex shortages and balance of payments crises in the process.

However there may be also be a possibility of prosecuting the Monetary Board for printing money to push growth considerations and violating its mandate under section 5 (a) of the Monetary Law Act without any changes to the existing Law.

Over several decades Sri Lanka’s parliament has undermined monetary stability by bringing ad hoc changes to the law including Section 88 subsections to undermine rule based monetary policy.

Fortunately the current administration did not enact a law brought by the last administration

The central bank has released 50 million US dollars to importers to clear several hundred containers stuck at port Governor Cabraal has said.

To enforce an overnight policy rate at 6.0 percent the central bank has to print money (about 12 billion rupees) after releasing the money (sterilize the intervention) preventing the credit system from adjusting to transfer of real wealth out and replacing with new paper money.

The overnight policy rate is also a price control, which is enforced with unlimited creation of paper money, leading to dollars shortages or ‘rationing of dollars’.

To stop the exchange rate from collapsing the central bank has to allow liquidity to decrease when dollars are sold, which is known as a unsterilized foreign exchange sale.

In other worlds to provide dollars for every rupee that hits the forex market (provide convertibility) at the promised exchange rate (convertibility undertaking) the monetary authority has to limit its note issue (reserve money).

If it wants to control reserve money at its discretion with a policy rate usually by pegging to an inflation index (inflation targeting) it has to suspend convertibility of the existing rupee money supply (float the rupee) and not give dollars for imports.

However it will also only work if bond auctions do not fail and Treasury does not overdraw state banks with central bank re-finance money. (Colombo/Oct08/2021)