An Echelon Media Company
Monday November 28th, 2022

Sri Lanka’s triple shackles converge to slam economy in Coronavirus crisis: Bellwether

ECONOMYNEXT – The three fetters that shackle Sri Lanka’s economic growth, peace and general happiness; monetary instability, regime uncertainty and dehumanizing nationalism have converged to slam into the country during the Coronavirus pandemic.

The economy is not some mysterious amorphous mass that only ‘economists’ understand. It is the actions that individuals and firms take in their journey to produce, earn profit or salaries and consume and invest.

If bureaucrats try to control this behaviour, many of which can be seen in markets, based on their ideologies and beliefs and desires to impose their will through coercive means individuals will have to spend time and waste resources in circumventing such actions as well as the inevitable unexpected fallouts.

As a result, the entire country will ‘miss the buses’ that other countries are seemingly getting on effortlessly. Some countries not only get on buses but aircraft.

Leg Shackle No 01 – Monetary Instability

Though there have been several records about monetary instability and currency debasement in Sri Lanka’s history, from the ancient to the more recent history, nothing may compare with what has happened after 1950.

It was not an occasional bubble that hit the country, but a continuous, debasement through REER targeting, currency collapses and import restrictions that sapped the life out of the resident of what used to be called a resplendent isle.

The British printed Rix dollars and undermined what was a strong, silver pegged money, trading above its specie value against the Madras Star Pagoda. The 1848 uprising was fired amidst the economic hardships and higher taxes and burst commodity bubble that came in the wake of the credit boom known as the British railway bubble.

The collapse of Oriental Bank Corporation in 1884 (a note-issuing free bank which issued silver-backed Ceylon Rupees), amid burst commodity bubble silver and gold price changes, led to the creation of a currency board and the government took over the function.

But in 1950 a central bank was set up with the assistance of an expert from the Fed, John Exter. Since then the currency had fallen from 4.70 to 185 to the dollar.

All the central banks set up by the ‘experts’ of the Latin American unit of the Fed after the Great Depression, brought disastrous results.

Bank of Korea had the Hwan collapsing from 60 to 1350 to the dollar, and per capita gross domestic product collapsing to almost nothing. Ecuador set up by another expert is now dollarized. Cuba went to the communists.

Philippines central bank went bankrupt and it went to strongmen. The list goes on.

Open Market Operations, which moved central banks out of a market determined two-way discount rate followed by the Bank of England for centuries, which had allowed it to keep a gold peg was invented almost by accident at the Fed during when Benjamin Strong headed the New York Fed.

So were ‘operation twists’, both of which also so effectively helped trigger currency crises in Sri Lanka after the end of a 30-year civil war.

Open Market Operations helped trigger that roaring 20s bubble, which then led to the Great Depression. In a little over 20 years since its creation, the dollar collapsed from 22 to 35 dollars an ounce. Less than 40 years later the Gold Standard was dead. The Bank of England had kept it for over three centuries.

If Sri Lanka had a policy corridor and more restrained central bank which did not target a call money rate and recklessly inject liquidity the country’s sovereign bonds would not be trading at steep discounts.


The question has been asked what if the central bank had not printed money in March and April as cash demand grew? Nobody asked central bank not to accommodate a cash demand, what they are saying is not to generate excess liquidity to manipulate interest rates artificially?

Sri Lanka bonds would not be trading at steep discounts.

Sri Lanka would be like Vietnam, where there is a two-way cash auction with a wide policy corridor to protect the currency. The 2024 international bond would be trading at an 11 cent premium on the dollar.

If no money is printed and dollar bonds are trading at a premium, a country can borrow abroad for stimulus, or bite the bullet and see it through. When the US prints money, pegged nations with monetary stability can use it. Or if there are reserves they can be used directly.

This is what the New York Federal Reserve did to Sri Lanka. The same department sent a mission to South Vietnam. South Vietnam is history now.

Far from promoting demand, Sri Lanka’s economy is now in a trade lockdown killing even the normal economic activity.

Leg Shackle 02: Regime Uncertainty

The second leg shackle on the economy is regime uncertainty, sudden policy reversals and explicit and implicit expropriation of citizens, non-citizens and businesses.


Sri Lanka battered by unceasing ‘regime uncertainty: Bellwether

2020 started with tax cuts, reversing two years of hard-fought value added tax reforms. The income tax hikes was a mistake that was better corrected. High direct taxes kill jobs and growth. Indirect taxes are the way to raise money.

The US has high direct taxes but hardly any sales taxes or import duties. Sri Lanka has value added taxes and high import duties and to raise income taxes to high levels was wrong. Income tax should be kept at 15-17 percent. To depend too much on income taxes is also bad, since direct taxes are highly susceptible to economic cycles.

Regime Uncertainty worsened with a vengeance during the crisis. Tinned fish and dhal disappeared as the Consumer Affairs Authority slammed price controls.

Regime uncertainty is also closely linked to monetary instability. The high taxes that come during IMF programs are also due to currency collapses, which bring the IMF program in. The UNP regime whatever its faults, passed them all through the parliament with adequate notice to the public.

The destructive import controls also come from money printing. So does price controls. The Import and Export Control Law along with the Department should be abolished. The midnight gazette makes taxes a fluid comedy. They should all be abolished to restore the rule of law. The price control authority of the CAA should also be taken out and junked.

Leg Shackle 03: Nationalism

Monetary instability not only triggers import controls but also import substitution.

Little wonder Raul Prebisch the architect of Argentina’ central bank was a supporter of import substitution. Sri Lanka is paying the supreme price today by being slaves to such illiberal nationalist ideas.

Some of the central banks in Latin America was set up with Prebish’s help.

In fact, at least one ‘expert’ of the LatAm department who went around setting up disastrous central banks had expressed his admiration for Prebisch, whose destructive ideas brought misery to millions and kept countries in the third world and worse.

Nationalism also came in other ways. The bodies of Muslims who died from Coronavirus were cremated. This is despite the Director General of Health Services initially saying they can be buried under certain rules according to World Health Organization guidelines followed by other countries.

India, the Hindu bastian from where cremation spread to many countries with Indianized cultures, allowed burials.

Sri Lanka does not have a public sector that treats everyone equally, there is no just rule of law. Selective political directions rule. The independent public service with permanent secretaries was an institution of liberty. But many institutions of liberty were dismantled after self-determination from the British and arbitrary rule promoted.

The British brought the birth certificate which made it impossible for people to switch their ethnic origins as had happened during the time of ancient kings.

Tamil (so-called) mercenaries became Sinhalese, persons of Kalinga origin became ‘Sinhala Kings’. Sinhala king married Tamil wives. They also married Muslim wives according to the latest story that is now doing the rounds.

But after Western rule, birth certificates cast people’s names and origin in stone or at least in paper. The registrar general’s documents were copied in two places, at the district register and in Colombo. The citizenship was another western appendage fully embraced by the indigenous ruling class after self-determination.

The immigration law was enacted in 1949 in a parliament set up by colonial rulers.

It stopped naturalization – which was a basic phenomenon under all Sinhala kings – perhaps for the first time in the long history of the island and people who came to work in the plantations were deported despite being born in this country. The same immigration law and its visa regime are now keeping the country from gaining knowledge and moving to new sectors.

But Sinhala kings (also Tamil kings for that matter), allowed kinds of agricultural workers to come and stay and inter-marry and work, ranging from toddy tappers to cinnamon workers to elephant trappers to fishermen.

The central bank law came in 1950. The Sinhala only law came a few years later.

Foreign Ideas

Chauvinism exists, especially among the religious in all countries but it is nationalism in practice when laws are enacted based on their ideas through a parliament inherited from Colonial rulers. It is the popular vote (illiberal democracy) that gives the incentive to mistreat minorities. Kings, who did not identify directly with commoners, had no such incentive.

The people of Sri Lanka are still being fed revisionist history, based on dehumanizing nationalism, just like it happened in Eastern Europe. When economic hardships worsen minorities in many countries – who happen to be trading communities – are targeted for being rich. Monetary instability is rife, sovereign default is looming which is not good for minorities.

A hopeful sign is that there is broad agreement that default is wrong, which is as good as a law. In Sri Lanka expropriation happens because there is no knowledge that it damages investment. In fact, politicians who passed the expropriation law were laughing in parliament as they spoke in favour of it.

If Sri Lanka has to progress, the country has to be freed from the grip of these three shackles.

Sound money should replace monetary instability, which will bring back free trade and prosperity and stop rent-seeking import substitution, rent-seeking businesses from exploiting consumers poor or otherwise.

The greed of the import substituting, domestic producer Mercantilists, the blood profits of food producing landowners, who trade on the hunger of the poor, will end as they will not have a leg to stand on if the rupee stops depreciating.

Regime uncertainty should be eliminated, expropriated firms returned, and taxes fixed for long periods, preferably for a decade or more.

If there is monetary stability frequent tax changes would not be necessary. If the central bank is reformed Sri Lanka would not have to go to the IMF for balance of payments support and become a top customer.

IMF also helps with default workouts. It is possible to default with even dollarization.

It has happened to countless US firms, and also Panama. Greece which a Euro nation also went into a debt crisis. If markets lose confidence it can happen.

While nothing much works without monetary stability (Stability may not be everything, but without stability everything is nothing as Federal Republic Economy Minister Karl Schiller once said) the reverse is not true.

If the policy framework is bad, with import substitution, putting tax money into loss-making state enterprises, sudden tax hikes, policy changes, re-nationalization and a large public sector, growth will stall, which is bad for a country with 50 percent or more foreign debt.

A recovery from default may be more prolonged than a currency crisis. The sooner these three shackles are junked the better for everyone’s money.

This column is based on ‘The Price Signal by Bellwetherpublished in the August 2020 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here(Colombo/Aug26/2020)


Comments (1)

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

  1. Libertarian Capitalist says:

    Laymen terms and watered down compared to previous articles, BW, but great nonetheless.
    As usual, only weather will change, nothing else. Good read.

View all comments (1)

Comments (1)

Cancel reply

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

  1. Libertarian Capitalist says:

    Laymen terms and watered down compared to previous articles, BW, but great nonetheless.
    As usual, only weather will change, nothing else. Good read.

Anwar: Not Malaysia’s Mandela, but something more

ECONOMYNEXT – Something extraordinary happened in Malaysia this week. After a bitterly fought general election with no clear winner, the King had the wisdom and the courage to appoint Datuk Seri Anwar Ibrahim as Malaysia’s 10th Prime Minister.

To those observing from the outside, it was a remarkable sight. So, one can only imagine the gravity of the moment from the point of view of Malaysia’s new Prime Minister.

Anwar Ibrahim travelled to Istana Negara for the ceremony on Thursday from Sungai Long with his wife, the accomplished and independently remarkable Datuk Seri Dr Wan Azizah Wan Ismail, who for 24 years, has taken her husband’s crusade against corruption and bigotry in Malaysia and made it her own. When Anwar was imprisoned, she stood in for him and embodied his cause with an authenticity and ferocity that saw her become Malaysia’s first ever female opposition leader.

When they arrived at the ceremony, one of the many dignitaries assembled for Anwar’s swearing in was Malaysia’s Chief Justice, Tun Tengku Maimun Tuan Mat, the first woman to hold that office, who herself has long stood out as a judge with little patience for corruption or abuse of power. Whether in the 1MDB appeals or in holding firm against other powerful special interests, she has embodied the kind of judicial independence for which Anwar has fought.

As Anwar, the Prime Minister in waiting, took the instrument of his appointment into his hand and began reciting his oaths, he must have felt the weight of every word he swore of the pledge he has long dreamt of taking. Perhaps no Malaysian politician has distinguished himself on the world stage as Anwar did as Malaysia’s finance minister between 1991 and 1998.

His outstanding performance in transforming the Malaysian economy and navigating the perils of the 1997 financial crisis, while lauded across the globe, threatened entrenched interests, leading not just to his sacking and repeated imprisonment, but to a systematic 24-year long campaign to tear him down, destroy his name, and vanquish the causes of good governance and egalitarianism that he stood for. It was a campaign that was almost comical in its corruption.

Beginning in September 1998, every time it ever looked like Anwar was raising his head and might score a major political victory, either an arrest, a court ruling, gerrymandering or some other element of state machinery interceded to intercept him and keep him from power.

His multiple imprisonments on what the world agrees are trumped up charges are well known, as is the black eye bestowed on him by the fists of Malaysia’s chief of police. However, it is often forgotten that his Pakatan Rakyat won a 51.4% majority of the popular vote at GE13 in 2013, “losing” the election in practice only because of the first past the post electoral system by which the votes were apportioned. Whatever else Malaysia’s elite entrenched special interests disagreed about, they all seemed to agree on one thing: stopping Anwar at all costs.

Most of those who sacrificed their conscience and integrity over the years to keep Anwar down are now out of the spotlight, shunned by the electorate, recognized for their crimes by the judiciary, or cast aside by their political handlers once their utility expired. None were present in the corridors of power at the royal ceremony last Thursday to witness the totality of their failure.

It was heartening to see the local markets react to Anwar’s appointment with the biggest rally they have shown in two years, and to see the world market respond through the Ringit seeing its best day in the currency market since 2016. As Anwar prioritizes tackling the skyrocketing cost of living for ordinary Malaysians in the backdrop of a looming global recession, these signals of confidence are a promising sign.

As he begins to combat poverty while forming his cabinet and steering a fragile coalition, the new Prime Minister will have to grapple with bringing about good governance, combatting corruption and ensuring judicial independence. With corruption as deep-rooted as Anwar himself has charged, he should expect and be prepared to combat the fiercest opposition and subterfuge. To those who live on graft, this is not just a matter of policy. They stand to lose everything, their livelihood and their liberty, if he succeeds.

It is difficult to argue against anti-corruption initiatives or transparency in government, so his opponents will try, as they did throughout his time in the opposition, to paint Anwar as an outsider, unpatriotic, anti-Malay, anti-Islam. It will be up to Anwar and those around him to ensure that from the bully pulpit of the Prime Minister’s office, he can show a larger swath of Malaysians who he is and unite them.

Anwar has the most essential quality of a unifying politician, in that he is a “we” politician and not a “me” politician. Notwithstanding the formidable cult of personality that has been built around him, he is quick to redirect any personal praise or flattery by sharing credit with others and putting them in the spotlight and doing so with a humility and sincerity that endears him to other leaders.

While Anwar Ibrahim is fond of calling himself a ‘village boy’ due to his affection for the simplest pleasures of life, there is nothing simple about his pedigree. He was born with UMNO in his blood, with an UMNO parliamentarian for a father and political organizer for a mother. He is accused of being anti-Malay for his egalitarian politics, even though his entire undergraduate education was devoted to the study of Malay culture, history and literature. The idea that he would oppose the legitimate interests of Malays is unthinkable.

So it is important that he succeed as Prime Minister where he failed as a candidate, in persuading more Malay people that they have nothing to fear from him. In fact, their interests are better served by a level playing field that would enable them to thrive and compete not just in the shelter of the cosy, subsidized affirmative action bubbles that other parties have tried to woo them with, but in the world at large.

Anwar’s in-depth study of the Bible does not make him any less devout a Muslim, but a stronger, more confident one. An unapologetic ally of the Palestinian people, Anwar’s opposition to the suffering imposed by Israelis on Palestinians is only sharpened, not blunted, by his assertion of Israel’s right to exist. He is confident in who he is. Even torture, and years spent in the darkest depths of solitary confinement in a gruesome prison cell were not able to make him waver in his values or political principles.

It is already evident that Anwar’s appointment has raised Malaysia’s standing in the world. Several governments who either vocally or privately protested the way he was treated over the last quarter century have responded to his appointment with a new vigor and eagerness to engage with Malaysia and deepen political and economic ties with the country. Anwar demonstrated in opposition that he has a gift for advocating for Malaysia on the world stage. As Prime Minister, this is a gift that will serve him in good stead.

Wherever they sit on the political spectrum, no Malaysian could deny the sincerity that Anwar brought to his first press conference on Thursday following his appointment. He means to do the job, and do it well, responding thoughtfully and obediently to the King’s direction to form a unity government. He has clearly taken to heart the words of the monarch that “those who won did not win everything, and those who lost did not lose everything.”

The lesson in that message for every politician is that Malaysians are sick and tired of political knife fighting, of “moves”, from Kajang moves to Sheraton moves. No doubt some confederacy of politicians are already plotting the next creative ‘move’ to bring Anwar down, but they may find themselves outmatched by history.

Pundits have quipped that Anwar’s journey this week was one of “prison to palace”, forgetting that he earned that particular honor on 16 May 2018, when he was released from prison and had to deal with the dizzying experience of being driven directly to the palace for an audience with then Yang di-Pertuan Agong Muhammad V. He has been dubbed Malaysia’s “Nelson Mandela” as both men were imprisoned for their politics and came to power soon after. But such reductions do little service to Anwar, whose time in prison, as horrific as it was, is not what defines him or best qualifies him to govern Malaysia in such perilous times.

Prime Minister Anwar was born Malay and has always been a devout Muslim. Unlike the African Mandela in white apartheid South Africa, Anwar was born to power. And he was not directly elected to his office by a clear majority as Mandela was, but instead, Anwar was appointed Prime Minister after no one won a majority. He is not Malaysia’s Mandela, or Malaysia’s Barack Obama. But history has examples more fitting of Anwar’s pedigree, principles and intellect.

There was another politician once, who, like Anwar, had the privilege of sailing into politics through an established political party. That politician too, like Anwar, was from the majority community, but over time grew to vocally oppose discriminatory policies and helped form a new political party. That politician too, like Anwar, was an accomplished orator and compelling communicator. And he did not directly win nomination for the American presidency in May 1860. Instead, he was selected following much debate after no candidate secured a clear majority. And just like Anwar will have to do in the coming days, President Abraham Lincoln had to assemble a broad coalition, a team of rivals, to get his country through the most perilous of times.

Prime Minister Anwar shares other qualities with America’s most revered President. Lincoln too was known for having little patience for pettiness, and to extend a hand of friendship to sworn rivals. The American President’s devotion to his children was also legendary. Anwar rarely responds to questions about his ordeal in prison without sharing his anguish that his five daughters and only son had to endure in watching their father suffer and be persecuted.

Having either taught or studied at schools of the calibre of Oxford, Georgetown and Johns Hopkins, an astute student of history such as Prime Minister Anwar has no doubt already drawn some of these parallels and knows how to take the right pages out of Lincoln’s book to thread the political needle and form a stable government. As a battle-tested politician, there is little doubt that if any Malaysian can rise to the challenge and hold together a team of rivals, it is Anwar Ibrahim.

For Anwar to truly succeed, he will have to transform Malaysian politics and bring about the paradigm shift in Malaysia’s political culture that his supporters have rallied behind for so long. Anwar may be the first Malaysian Prime Minister since independence who does not plan to leave behind a legacy for his children of titles, property, monuments or fortunes.

Anwar’s own oldest daughter, Nurul Izzah Anwar, in her congratulatory message to her father, said that the legacy she expects to be left for the next generation is not a material one, but one of “ideals, principles and values that cannot be bought or sold.” Over the last 24-years, Anwar, his family, his party, and their supporters have braved unimaginable odds to take this simple message to Malaysians.

Whatever policy compromises Anwar may have to make to assemble a stable coalition government, he, like Lincoln, will be defined by whether he is able to remain true to his core principles while governing effectively. After so many years of struggle, so many years of trying to awaken Malaysians to the future that could await them if they unleashed the potential of all Malaysians and empowered grassroots industries and businesses to thrive, Anwar will finally get a chance to show them through deeds instead of words.

Continue Reading

Sri Lanka contemplating law to limit grace period offered to state university students

File photo of IUSF protest

ECONOMYNEXT —  Sri Lanka plans to introduce legislation limiting the grace period offered to undergraduate students at state universities to complete their degree to no more than one and a half years, an official said as student unions cried foul.

State Minister of Higher Education Suren Raghavan told reporters on Monday November 28 that said discussions will be held with university students and student leaders in this regard, even as the Inter University Student Federation (IUSF) expressed vehement opposition to the move.

“Some students who were selected to the degree programme, are doing anything but the degree,” the state minister said.

If the proposal becomes law, students following three-year and four-year undergraduate programmes at state universities will be able to take only up to four-and-a-half and six-and-a-half years respectively to finish their studies.

Raghavan said the grace period is generally offered to students who need more time to complete their degree due to health reasons, problems at home or social issues in the country at large.

“We will discuss this with students and student leaders. I think the time given is sufficient,” he said.

IUSF Acting Convenor Terance Rodrigo was quoted by a daily English-langauge newspaper as saying that the student body is holding internal discussions on their position on the government decision but it is already of the view that the move is an attempt to stifle the political activism of student unions.

The IUSF played a leading role in Sri Lanka’s youth-led Aragalaya protests that ousted ex President Gotabaya Rajapaksa over his and his government’s handling of the worst currency crisis in decades.

IUSF convenor Wasantha Mudalige is currently in detention after being arrested under provisions in the controversial Prevention of Terrorism Act (PTA). Mudalige has been an undergraduate student for nearly a decade, with his politics and student activism purportedly getting in the way of his education.

Incumbent President Ranil Wickremesinghe, who has been criticised by human rights defenders and opposition lawmakers for an alleged crackdown on the Aragalaya protests, insinuated in a speech in parliament last week that Mudalige is no university student as he has still hasn’t finished his studies.

Wickremesinghe is not alone in this sentiment, however. Critics of the IUSF and even some sympathisers have spoken critically of what they call Mudalige’s “state-funded overstay”. Others, however, have defended him and other student leaders as those doing important and necessary work by fighting in the trenches to protect and uphold the people’s rights. (Colombo/Nov28/2022)

Continue Reading

Sri Lanka shares end at two-week high; turnover highest since Oct 13

ECONOMYNEXT – Sri Lanka shares closed at a two-week high and the market generated the highest turnover over six-weeks on Monday on speculation interest rates fall in line with the inflation and Expolanka’s expansion plans, brokers said.

The market witnessed a turnover of 2.4 billion rupees, slighty less than this year’s daily average turnover of 2.9 billion rupees. This is the highest turnover generated since October 13.

“Bourse commenced the week on a positive note and continued to see strength for the second consecutive day as investors speculate interest rates to continue to fall in line with inflation in the upcoming months,” First Capital Market Research said in it’s daily note.

“Moreover, bullish sentiment continued on EXPO since last week following the announcement of a possible acquisition of logistic companies.”

Central bank governor said the market rates should eventually ease despite the fears of a domestic debt restructuring as inflation falls, increased liquidity in dollar markets, and the inter-bank liquidity improves.

The main All Share Price Index (ASPI) closed 1.99 percent or 161.88 points higher at 8,309.94, highest index gain in since November 14.

Previously analysts said the market is moving in a bull-trap with short-lived buying and selling sentiments because investors are not confident in market sustainability.

In the past sessions, the index continued to fall on the speculation of a local debt restructuring although no proper decision has been taken so far.

State Minister for Finance Shehan Semasinghe told parliament during the budget debate on Wednesday that Sri Lanka will continue to pay its domestic loans and no local debt restructuring has been discussed.

The budget saw policies that will increase the cost of doing business across the board, but relieve the government from depending on excess money printing, analysts say.

The market saw a foreign outflow of 146,403 rupees, bucking an inflow trend in the last eight straight sessions.

The total net foreign inflow stood at 18.29 billion rupees so far for this year.

The more liquid index S&P SL20 closed 2.94 percent or 74.58 points higher at 2,612.76.

The ASPI has fallen 3.3 percent so far in November after losing 13.4 percent in October.

It has lost 32 percent year-to-date after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

Expolanka pushed the index up to close at 11.6 percent to 182.3 rupees.

Other top gainers were Browns Investment gained 19.6 percent to close at 6.10 rupees and LOLC gained 8.2 percent to close at 368.3 rupees.(Colombo/Nov28/2022)

Continue Reading