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Tuesday May 21st, 2024

Sri Lanka’s controversial new central bank law certified by speaker

ECONOMYNEXT – Sri Lanka’s Speaker Mahinda Abeywardana had certified into law a new central bank law, the parliament said, which controversially allows inflationists to print money to boost growth (target potential output) with discretionary policy.

The law also legalizes money to be printed to target inflation, under a so-called “flexible inflation targeting” regime, despite the lack of a clean floating exchange rate.

Analysts have warned that cutting rates with open market operations, claiming inflation is low, after private credit recovers, will lead to missed IMF reserve targets and will invite renewed external instability, as had happened in previous programs in Sri Lanka in the second year of operation.

With IMF reserve targets it is not possible to operate a clean floating exchange rate, which is required for inflation targeting.

Flexible inflation targeting and similar regimes with anchor conflicts (where the balance of payments clashes head on with a domestic anchor for money) are found in central banks that go to the International Monetary Fund repeatedly as well as in countries that run into external default.

Critics have warned that the new law incorporates and legalizes the monetary policy errors involving aggressive ‘macro-economic policy’ that drove a country at peace into a series of currency crises, forex shortages over the past decade and eventual default.

Targeting potential output with easy money, a nakedly Keynesian strategy, though practiced after the International Monetary Fund taught the country to calculate it, was illegal under the earlier law, economists have said.

RELATED Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena

The earlier law only had a stability objective following reforms by then Governor A S Jayewardena, though observed in the breach, in the course of operating a policy rate.

The belief that inflation, rather than hard work and de-regulation (reforms) can boost growth is an ideology that took firm hold in Anglophone universities in the US and UK (except London School of Economics) in the wake of the Great Depression and intensified after World War II backed up by econometrics.

The belief led to the collapse of the Bretton Woods (which was also flawed) and the Great Inflation by ‘independent’ central banks that came in its wake.

Successful East Asian and German speaking countries in Western Europe, Switzerland, and France after 1960 rejected the idea and avoided going to the IMF with balance of payments troubles.

That money printing can boost growth is a belief promoted by inflationists since the days of classical Mercantilism (John Law and others) but was not taken seriously until the advent of Cambridge-Saltwater economics backed by econometrics.

“It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized,” wrote F A Hayek, an economic philosopher whose ideas helped guide the policies that eventually ended BOP troubles in UK, under Margarat Thatcher.

“The chief root of monetary troubles is the scientific authority the Keynesians gave the superstition that increasing the quantity of money can ensure prosperity and full employment,”

“The superstition was fought successfully by economists for two centuries of stable prices during the age of modern industrialism and the gold standard.”

Potential output targeted with monetary policy is in line with John Law’s belief articulated “as the additional money will give work to people who were idle and enabled those already working to earn more, the output will increase and industry will prosper.”

Hayek warned however that the opposite will happen and easy money driven growth will end up in more job losses, which he called the ‘manufacture of unemployment.’

Large number of Sri Lankans are now employed abroad, compared to a country which imported labour before central banking.

Hayek warned that inflationism would continue to give trouble despite temporary understanding of its flaws as independent central banks temporarily came under the leadership of those who rejected easy money after the 1970s.

“Yet I fear the theory will still give us a lot of trouble: it has left us with a lost generation of economists who have learnt nothing else,” Hayke wrote.

“One of our chief problems will be to protect our money against those economists who will continue to offer their quack remedies, the short-term effectiveness of which will continue to ensure them popularity.”

Sri Lanka legislators could still beat inflationists by denying them goal independence of a 5 percent inflation target, using provisions of the new law, analysts have said.

READ MORE: Sri Lanka legislators should deny high inflation goal independence to the central bank

At an inflation target of around 2 percent, it will be more difficult for the central bank to deny monetary stability to the country as it had done in the past 73 years.

Until the late 1970s Sri Lanka’s inflation was broadly the same as developed nations due to the monetary anchor being the same (gold and the US dollar in parallel), though  injections (for rural credit and or to sterilize interventions) from central banking led to balance of payments troubles (Colombo/Sept15/2023)

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  1. Saleem Salih says:

    Your headline ideally should have stated “CBSL money printing machines legalized powered by flexible inflation rates.”

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  1. Saleem Salih says:

    Your headline ideally should have stated “CBSL money printing machines legalized powered by flexible inflation rates.”

Sri Lanka declares May 21 as National Mourning day over Iranian President’s death

ECONOMYNEXT – Sri Lanka declared a national mourning day on Tuesday, May 21 in view of expressing its solidarity with Iran after sudden death of Iran President Ebrahim Raisi following a helicopter crash.

President Raisi and eight others including Iranian Foreign Minister Hossein Amir Abdollahian were killed in the crash when the helicopter had a “hard landing” reportedly due to adverse weather conditions with heavy fog. However, President’s two convoy helicopters reached the destination safely.

“The Sri Lankan government has declared a national mourning day on tomorrow (May 21) on behalf of the sudden death of Iranian president Mr. Ebrahim Raisi,” the Department of Government Information said in a statement.

It also urged all the state institutions have to hoist the national flag half mast.

Raisi was in Sri Lanka on April 24 to launch the Uma Oya dam on a one-day official visit amid tight security. His helicopter crashed when he was returning to Iran after launching a dam in the Azerbaijan border.

President Raisi is seen as a hardliner and a potential successor to Supreme Leader Ayatollah Ali Khamenei.

Earlier this month, Sri Lanka’s Foreign Minister Ali Sabry said the island nation will deal with Iran for investments and trade without being caught into the United States-led sanctions.

Sri Lanka was unable to receive $450 million from Iran for a recently opened Uma Oya multipurpose project started before the sanctions.

Sri Lanka now exports tea to Iran for no dollar payment. Instead, Sri Lanka tea producers are paid by the state-owned Ceylon Petroleum Corporation (CPC) in rupees for the pending crude oil import payments for Iran.

President Ranil Wickremesinghe expressed his condolences on the tragic incident.

“Sri Lanka is deeply shocked and saddened by the tragic death of President Ebrahim Raisi, Foreign Minister Amir Abdollahian and other senior Irani official,” he said in his official X-platform.

“I express my deepest sympathies and sincere condolences to the bereaved families, the government and the people of Iran.”

Raisi, a Muslim jurist, served as the eighth president of Iran from 2021 until his death. (Colombo/May 20/2024)

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Sri Lanka helps launch Global Blended Finance Alliance

ECONOMYNEXT – Sri Lanka has joined a group of nations led by Indonesia which aims to mobilise capital to achieve carbon neutrality, Minister of Water Supply and Estate Infrastructure Jeevan Thondaman said.

The Global Blended Finance Alliance mooted by Indonesia in 2018, was formally launched at the World Water Forum in Bali today.

Among the other founding members are Fiji, France, UAE, Kenya, Luxembourg and Canada.

“Through our collective efforts, the Global Blended Finance Alliance aims to mobilise both public and private capital to help nations achieve carbon neutrality and the SDGs,” Thondaman said on social media platform X (twitter).

“The world has a USD 2.5 trillion funding gap to achieve the Sustainable Development Goals (SDGs) by 2030,” he said.

Blended finance is the strategic use of development finance, such as public and/or philanthropic funds, for the mobilisation of additional commercial finance towards sustainable development in developing countries. (Colombo/May20/2024)

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Sri Lanka rupee closes slightly stronger at 299.60/75 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee appreciated slightly to close at 299.60/75 to the US dollar on Friday, from 299.70/80 the previous week, dealers said. Bond yields were up.

A bond maturing on 15.12.2026 closed up at 10.15/35 percent from 10.05/15 percent.

A bond maturing on 15.09.2027 closed up at 10.45/55 percent from 10.25/40 percent.

A bond maturing on 01.07.2028 closed at 10.80/90 percent.

A bond maturing on 15.01.2030 closed at 11.70/80 percent.

A bond maturing on 01.10.2032 closed up at 11.90/12.05 percent from 11.85/12.00 percent. (Colombo/May20/2024)

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