ECONOMYNEXT – Sri Lanka should stop money printing and go to the International Monetary Fund to fix monetary policy instead of invoking emergency laws to control food prices, which will create black markets, opposition legislator Rauff Hakeem said.
Sri Lanka has been printing unprecedented volumes of money to finance the deficit and keep interest rates down triggering forex shortages and currency depreciation as the newly created money pushed up imports.
Liqudity injections has also made it difficult to for the government to find dollars to repay debt, eating into foreign reserves, which have dropped by around 5 billion US dollars as about a trillion rupees were printed since early 2020.
“Your monetary policy has to change,” Hakeem told the parliament debating an emergency laws to seize food stocks kept by traders and millers and sell them at controlled prices.
“You need to stop printing money to control this problem and instead of taking the country further into problem by increasing inflation by printing money.
“You have to resort to the lender of the last resort that is nothing but to ask the IMF for a bail out. That is the only solution to resort this problem.”
The International Monetary Fund usually asks money printing central banks to raise interest rates so that bonds are bought by the public instead of the central bank with newly created money. Last Friday about 40 billion rupees were printed as a Treasury bill auction failed due to price controls on yields.
The IMF also and also asks the government to cut spending and raise taxes so that the total borrowing requirement goes down and keeps the required interest rate to re-balance the external sector as low as possible.
The IMF also gives some reserves to the central bank to shore up reserves and show better numbers and arranges with the World Bank and Asian Development Bank to give some budget support loans to keep the corrective interest rate lower than it would have otherwise been until confidence is restored.
A debt repayment plan also helps keep the corrective interest rate less than it would have otherwise been.
The IMF may also ask for a float of the exchange rate to make the monetary base inconvertible and stop the erosion of further reserves for trade transactions.
Sri Lanka’s rupee had fallen from around 182 to the US dollar in December 2019 when the current administration came to below 230 now.
Hakeem was a minister in the previous administration when the central bank also printed money to target an output gap and a call money rate and brought the currency down from 131 to 182, leading to trade controls, strengthening rent seeking import substitutes and its free agenda being shattered.
However import controls have now been ratcheted up to levels seen in the 1970s, when the central bank also buying Treasury bills and printing money and creating balance of payments troubles.
In 2016 when the central bank was also printing money, driving the rupee down from 131 to 153 to the US dollar economist Razeen Sally, who said he was a ‘failed advisor’ to the then administration, warned against price controls which were imposed by the Consumer Affairs Authority. Sri Lanka resorting to ‘supreme idiocy’ of price controls: Razeen Sally
“There has been the supreme idiocy of imposing price controls, which I thought was something we had left behind in 1977,” Sally said.
“The government by creating inflation and by having import protection puts burdens on consumers and then puts burdens on producers and entrepreneurs with price controls.”
Amid monetary instability the then administration lost the ability to settle foreign debt and borrowed heavily in international market taking outstanding sovereign bonds from 5.0 billion US dollars to 14 billion from 2015 to 2019, while real effective exchange led to capital flight from rupee bond markets.
Hakeem said the government had brought multiple gazettes in the past, but they have failed to control prices.
“Now you are blaming the hoarding by the middlemen and mill owners,” he said. “What is happening is you are arbitrarily determining something and determining a price against the market forces.
“Now why are you trying to do it? Obviously because the foreign exchange crisis you have brought the country into.”
“You are trying to cover your inefficient economic management and through which you have plunged the country into such a terrible situation, and finally internationally we are becoming a laughing stock.”
He said if the case was as the government had said the state trading agency should have been able to import and compete.
Hakeem warned that the price controls would not work and the authorities were simply enacting dramas for public consumption and militarizing the society.
A military major general had been appointed as the commissioner general to carry out emergency raids and seizures of private property.
“You are now staging various dramas,” Hakeem said. “People are going; the Consumer Affairs Authority officials are going. The army is going. Police are going and surrounding stores.
“And you are showing everyday dramatics acts being displayed for people to think that the government is catching hoarders. And some of these are bonded stores.”
Hakeem is not an economist but a lawyer.
In the UK where money printing by Keynesian economists got the country into repeated balance of payments trouble after World War II (Sterling crises) 40 years of exchange controls were ended by overhauling monetary and fiscal policy under Chancellor of the Exchequer Geoffrey Howe, a lawyer.
Instead of fixing the Bank of England, Keynesians also tried to suppress wages claiming inflation was due to ‘wage spiral inflation’ (cost-push) leading to trade union protests.
Global commodity, metals, and energy have also moved up due to Federal Reserve money printing which has weakened the US dollar in a so-called Powell Bubble.
When central banks print money and effectively counterfeit large volumes of money de-stabilizing the economy it is a time honoured practice to target businesses, classical economists have said.
“Government paper, as pernicious as it may be, is a relatively straightforward form of counterfeiting,” explains US economist Murray Rothbard, in his work ‘The Case Against the Fed.
“Obviously, too, it is to the interest of the counterfeiters to distract attention from their own crucial role by denouncing any and all other groups and institutions as responsible for the price inflation.
“But since there is an inevitable time lag between the stock of money increasing and its consequence in rising prices, and since the public has little knowledge of monetary economics, it is all too easy to fool it into placing the blame on shoulders far more visible than those of the counterfeiters.”
“..[B]ecause few people understand the processes of money and banking, and because it is all too easy to blame the rising prices, or “price inflation,” caused by the monetary inflation on greedy capitalists, speculators, wild-spending consumers, or whatever social group is the easiest to denigrate.”
Hakeem said the price controls and rationing would only create black-markets and shortages.
“See the amount of queues that are there in front of the CWE stores (state retail shops where rationed foods are given at controlled prices) all over the country.
“Now you are creating a black-market in the country basically. You go and see how many people can go and avail themselves of this facility.”
The CAA has in the past created black markets in tinned fish and lentils and shortages of milk powder and gas through its price controls.
“Now I heard some of the minister saying there was enough sugar stocks up to March next year. I beg to differ. The stocks that are there are going to be depleted very soon. And you will be compelled to import sugar.
There had been speculation that Sri Lanka is importing excessive amounts of sugar after an import ban on ethanol and it is going to make artificial toddy and ethyl alcohol.
Ethanol imports were banned to give high profits to an expropriated state sugar firm which was making losses and the state the state has lost revenues from ethanol taxes as a result.
Hakeem also said there were provisions to establish a National Disaster Management Council including opposition to face a crisis, there were provisions in Part II, section 17 of the public security ordinance to deal with food instead of invoking Part II where trade union actions and protests could be suppressed. (Colombo/Sept06/2021)