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Friday December 9th, 2022

Sri Lanka should set up a currency board to stop rupee depreciation: US economist

HARD PEG: In a currency board money printing is outlawed and it is impossible to depreciate the currency as seen in the operating diagram of the Hong Kong currency board above. However Post World War II economists who have studied Keynesianism relentlessly oppose credible pegs as they cannot do ‘stimulus’ and trigger BOP problems.

ECONOMYNEXT – Sri Lanka should set up a currency board to stop further currency falls, US economist Steve Hanke has said as the island’s currency collapsed from 203 to 290 to the US dollar in an attempt to float the currency which has not yet succeeded.

“Since January 1st 2022, the Sri Lankan rupee has depreciated ~26% against the USD. #SriLanka’s severe balance of payments crisis and recent fuel price hikes are sinking LKA,” Hanke, who is professor of Applied Economics at Johns Hopkins University in Baltimore, said in a message.

“To ease the crisis, LKA needs to install a currency board, like the one it had from 1884 until 1950.”

Sri Lanka – then Ceylon – set up the currency board after the Ceylon Rupee issued by the Oriental Bank Corporation stopped exchanging silver for rupee notes, technically called a suspension of convertibility.

A modern day central bank attempts a float also in a similar fashion, though the bank is not closed.

A currency board is easy to set up and will end balance of payments trouble for ever, insulating the public and also politicians from Keynesians who print money to manipulate interest rates.

Currency boards have very low interest rates just about 50 basis points higher than the anchor currency by automatic tightening to prevent imbalances from building up.

The anchor currency for the currency board can be the US dollar, Euro, Swiss Franc, Swedish Kroner or Singapore dollar, which is among countries with the best monetary policy in the world.

Find out HOW TO SET UP A CURRENCY BOARD here Currency_Boards_for_Developing_Countries-1

Hanke has prepared a handbook on how to set up a currency including measures for war torn countries where the monetary authority could be incorporated abroad to prevent any warlord from getting hold of reserves.

In 2018 Sri Lanka was put on the extraordinarily situation of a ruling politician, then-Minister Harsha de Silva, pleading with central bank in public, to raise rates in a bid stop money printing, after giving it full operational independence to inject liquidity.


Sri Lanka’s Dr de Silva re-kindles debate on Ricardo’s evil and Penelope’s web of Dr Smith as rupee falls

At the time taxes raised taxes to reduce the deficit and a political costly price formula or fuel was set up, but money was printed to create balance of payments trouble by so-called ‘call money rate targeting’.

Money was also injected through dollar rupee swaps of the style used to bust East Asian pegs during the crisis by speculators (Soros style swaps). Speculators could not break the Hong Kong currency board during the East Asian currency crisis, but instead made massive losses on swap costs.

In 2020 the policy of call money rate targeting with excess liquidity, was taken several steps ahead by crippling bill and bond auctions with price controls. Now the rupee has been hit by a surrender rule, analysts have warned.

Analysts have called for strict laws to block the ‘domestic operations’ of the central bank through which balance of payments troubles are created, or set up an orthodox currency board.

When the Oriental Bank Corporation shut its doors in 19th century Ceylon, the Mercantile Bank which also issued notes provided convertibility at par.

Oriental Bank Corporation ran out of silver reserves following bad loans. A modern day central bank runs out of dollar reserves due to direct government financing of deficits, re-financed credit schemes such as for Covid and sterilized interventions.

Sterilized interventions involve giving reserves for imports and then printing money to maintain the policy rate.

The Central Bank of Sri Lanka today holds over two trillion in Treasury bills. a part of which was taken back from banks in the course of private sector finance to maintain a policy rate or price controls on Treasuries autions.

Sri Lanka’s currency board, which had kept the island safe through two World Wars and a Great Depression was replaced with a Latin America style central bank under US technical advice in 1950.


Why Sri Lanka’s rupee is depreciating creating currency crises: Bellwether

Sri Lanka should prepare to float, and promote parallel dollarization: Bellwether

Almost all such central banks set up by Fed experts have led to social unrest and some have collapsed and led to spontaneous dollarization.

Analysts have warned it may happen in Sri Lanka as well, if the float is not established.

Currencies are depreciated by Keynesian interventionists for ‘competitive exchange rates’, which critics say is a merciless a zero-sum policy of transferring wealth from the working class to shareholders of export or import substitution companies by destroying real wages.

The advantages to businesses remain until workers go on strike demanding higher wages and until utility prices such as electricity, power or water rates are raised.

Knowledge of currency boards have been lost to most post World War II ‘economists’ who relentlessly favour depreciating currency central banks, through which they try to boost growth with ‘stimulus’ create balance of payments trouble, starve the poor, create social unrest, boat people, and bring down governments.

The rising world food and commodity prices hurting are the poor around the world while strengthening the hands of authoritarian leaders of natural-resource rich countries after the US and ECB printed vast amount of money is the latest example analysts say.

Steve Hanke was one of the few economists in the world who correctly warned that Fed’s Jerome Powell would set off an inflationary spiral.

Hanke has helped set up several currency boards including in Eastern Europe.

Currency boards have neutral policy and are still in use in East Asia. However most East Asian pegs including Vietnam are tighter than currency boards and collect forex reserves exceeding the monetary base.

Sri Lanka used to have a 1 to 1 currency boar with the Indian rupee (which was originally silver) along with Mauritius and other South Asian nations.

Before the Reserve Bank of India was nationalised to print money for Nehru’s Gosplan-style programs, the Indian rupee was also used in the Middle East countries like Dubai.

The only person who opposed Nehru’s planners was a lone classical economist, BR Shenoy who issued a note of dissent on the plans which were to be financed with central bank credit. The nationalized Reserve Bank of India however printed money, and the rupee was dumped by Gulf countries and India itself descended into a ‘License Raj’.

Bhutan still retains its one to one peg with the India rupee which has been unbroken for many decades. Nepal has also kept a 1.6 peg with the Indian rupee for more around 40 years. The Indian rupee is however a depreciating currency and neither country benefit much, except for avoiding currency crises.


Vietnam REER ignored by IMF buoying US Mercantilists as Sri Lanka rupee falls

The IMF supports the Maldives peg with the US dollar but encourages stimulus, open market operations and depreciation in larger countries like Sri Lanka and Vietnam which is believed to be due to a mis-understanding about pegs held by the US Treasury.


State Bank of Vietnam however is resisting and its central bank chief following a discussion with Janet Yellen (who has greater monetary knowledge) has managed to overcome false charges of currency undervaluation for the moment.

US retracts Vietnam ‘currency manipulation’ claim, repeats lie on ‘one sided’ interventions

Vietnam promises US it will not devalue, dreaded Sri Lanka style ‘monetary modernization’ looms

Vietnam REER ignored by IMF buoying US Mercantilists as Sri Lanka rupee falls

The IMF and US Mercantilists used a so-called EBA method to make false charges that the Dong was ‘undervalued’ despite the currency being supposedly severely over-valued due to a Real Effective Exchange Rate index, which is also popular among Mercantilists. (Colombo/Mar25/2022)

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Sri Lanka bond yields end higher, kerb dollar Rs370/371

ECONOMYNEXT – Sri Lanka bonds yields ended up and the T-bills eased on active trade on Friday, dealers said.

The US dollar was 370/371 rupees in the kerb.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

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Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

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India smogs out Sri Lanka’s China tower observers


ECONOMYNEXT – Sri Lanka’s Chinese-built Lotus Tower has halved visitors to its observation deck an official said as dirty air flowing from India triggered air quality warnings and schools in the capital closed.

“Masks are mandatory at the observation deck and roughly around 50 to 60 can go up to the observation deck at a time, time limits have not been altered and still persists at 20 minutes for observation,” the official told EconomyNext.

Prior to the smog, 120 observers were permitted at once to the deck.

However, even after limitations the Lotus Tower has continued to draw visitors, and revenues are coming in, the official said.

The tower built with a Chinese loan by the cash rich Telecom Regulatory Commission has been described by critics as a white elephant that eats the money earned from telecom operators mainly as spectrum fees.

Sri Lanka’s National Building Research Organization (NBRO) said India air heavily polluted with particulate matter was flowing across the island into a depression in the South West Bengal Bay. (Colombo/Dec09/2022)



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