ECONOMYNEXT – Sri Lanka is planning to fine traders who sell rice above a controlled price 100,000 rupees (about 500 dollars at current official exchange rates) as money printing triggered import controls and drove up prices.
Sri Lanka’s Ada newspaper quoted trade minister Bandula Gunewardene as saying that 75 amendments would be brought to Sri Lanka’s Consumer Affair Authority, the main price control agency to expand its powers to enforce price controls.
Sri Lanka’s rice prices have soared in recent months ahead of the minor Yala harvesting season amid money printing and import bans.
Sri Lanka’s food prices rose 11.3 percent in the year to June 2021 according to inflation data compiled by the state statistics office.
Some of the earliest known price controls Edictum de Pretiis Rerum Venalium, or Edict on the sale price of goods was issued in the year 301 by Roman Emperor Diocletian when precious metal coinage was debased by cheaper (base) metals, similar to modern day money printing.
Sri Lanka’s central bank has printed over 700 billion rupees over the past 15 months and lost over 3 billion US in the resulting balance of payments deficit and the currency non-credible peg has also fallen from 182 to 200 to the US dollar.
The usual claims that ‘traders are hoarding rice’ are being made. Sri Lanka however has an oligopoly of rice millers that buy up rice and store them.
Price controls create blackmarkets.
Gunewardene said in June that 100,000 tonnes of rice would be imported to bring down prices.
However the proposal was axed over foreign exchange shortages.
Minister Gunewardene had said earlier that the salaries and pensions of state workers had consumed most of the tax money paid by the people to the rulers.
“When 1,052 billion rupees out of the 1,373 billion in revenues go to pay salaries and pensions of state workers only 321 billion rupees is left,” he told parliament in June.
In 2020 over 500 billion rupees was printed by the central bank generating a 2.3 billion US dollar balance of payments deficit.
Monarchs and empires usually debased money to pay soldiers salaries, while modern day central banks which create hyperinflation also print money usually for state workers and soldiers.
Sri Lanka’s price control agency had issued a Diocletian style edict placing a maximum price of 94 rupees on Samba last year.
According to central bank data Samba is now at 141 rupees a kilo.
The CAA had earlier issued edict asking them to report stocks of rice held by millers and traders in a another dramatic move.
Inflation hit the Byzantine empire as coinage was debased (the silver Denarius was debased from around 4.5 to 3.0 modern day grams and then finally struck in bronze taking all restraints off).
Roman-Byzantine Emperor Constantine, carried out monetary reform and made the Solidus, a gold coin at 72 to the pound, the key medium of exchange stabilizing the system.
Diocletian, who is known for persecuting religious minorities like Christians, had also attempted monetary reform with the Aureus coin at 60 to the pound.
The central bank primarily prints money by issuing an edict on the maximum yield on 12 month Treasury bills and enforcing it by printing money to buy the balance at the auction.
In Sri Lanka no attempt had been made to stop money printing up to now.
Analysts and economists have been calling to abolish the central bank in favour of a currency boardh
Sri Lanka began a dangerous path to monetary instability by narrowing a policy corridor and starting call-money-rate-targeting in the past five years with an highly unstable peg called the ‘flexible exchange rate’ involving conflicting external and domestic monetary anchors.
It has now been expanded to so-called Modern Monetary Theory.
Analysts in the past had suggested reforms to domestic operations of the central bank to bring back monetary stability.
However now forex reserves have fallen to low levels making it very difficult to set up a currency board except at a steeply depreciated level. (Colombo/July01/2021)