An Echelon Media Company
Sunday September 24th, 2023

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)

Comments (1)

Your email address will not be published. Required fields are marked *

  1. Saleem Salih says:

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

View all comments (1)

Comments (1)

Cancel reply

Your email address will not be published. Required fields are marked *

  1. Saleem Salih says:

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

Sri Lanka India industrial zone around Trinco, maritime links mooted

ECONOMYNEXT – Sri Lanka’s Ports Minister Nimal Siripala de Silva had highlighted the desire of both the Governments to work closely to develop the industrial zone at Trincomalee, after accepting an invitation to participate in a maritime summit.

The Global Maritime India Summit (GMIS) will be held in India from October 17-19, 2023 at Mumbai where Sri Lanka has been invited at a partner country.

At a curtain raiser event on September 22, India’s High Commissioner in Colombo, Gopal Baglay had said both countries were working on enhancing sea connectivity according to a vision document launched during a recent visit of the President of Sri Lanka to India.

Minister de Silva will lead a delegation from Sri Lanka to the summit.

Secretary to the Ministry of Ports, Shipping and Waterways, Government of India, T K Ramachandran said the Global Maritime India Summit aims strengthen the Indian maritime economy by promoting global and regional partnerships and facilitating investments.

The event will give an opportunity to the Government of Sri Lanka to attracting greater investment from India in development of its maritime infrastructure, Ramachandran said.

It will also facilitate greater business to business interactions. (Colombo/Sept24/2023)

Continue Reading

Sri Lanka brings back import para tariff on milk

ECONOMYNEXT – Sri Lanka has brought back an import para tariff called the Ports and Airports Levy, to several grades of milk powder.

Milk powder has been removed from a list of PAL exemptions, making them liable for a 10 percent tax.

The PAL para tariffs are also a contentious issue in terms of export competitiveness, and the government has previously given undertakings that they will be eliminated.

Trade freedoms of the poor figure in an IMF/World bank reform program with the governments.

Milk is a protein rich food, in a country where children of poor families are facing stunting and malnutrition.

Economic nationalism is seen at high levels in food, with several businessmen are pushing for trade protection, amid an overall autarkist (self-sufficiency) ideology, going directly against policies followed in East Asia, which the same as hold up as examples.

Sri Lanka keeps dairy product prices up ostensibly to bring profits to a domestic dairy company and farmers.

Sri Lanka also keeps maize prices up, ostensibly to give profits to farmers and collectors. (Colombo/Sept22/2023)

Continue Reading

Sri Lanka govt warns liquor manufacturers: pay defaulted tax or lose licence

ECONOMYNEXT – Sri Lanka government which is struggling to raise the state revenue despite   higher taxes, has warned liquor manufacturers to pay defaulted taxes or lose their licence.

The government is now getting tough with past tax defaulters amid concerns over falling short of this year’s revenue target agreed with the International Monetary Fun (IMF).

“Liquor manufacturing firms owe us 660 crore rupees (6.6 billion rupees),” Siyambalapitiya told  reporters on Thursday (21).

“Most of this or around a third is the only excise tax amount to be paid. The rest is penalty. If a liquor manufacturer does not pay on time, we impose a penalty of 3 percent per month This means 36 percent (penalty) per annum,” he said.

“We have given them deadline to repay the basic excise taxes. If they don’t pay, we will cancel their licence.”

President Ranil Wickremesinghe’s government committed an ambitious revenue target among many other reforms to the International Monetary Fund (IMF) in return to a $3 billion loan package.

However, the revenue could face a short fall of 100 billion rupees, State Finance Minister Ranjith Siyambalapitiya has said.

A new Central Bank Act also has legally prevented the government of printing money at its discretion as  in the past.  (Colombo/September 24/2023)

Continue Reading