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Sunday June 16th, 2024

US inflation rises to 7.5-pct as Sri Lanka hits 14.2-percent

ECONOMYNEXT – The US Fed generated 7.5 percent inflation in January 2022 from 7.0 percent in December as Sri Lanka’s central bank created 14.2 percent adding to the inflation from the dollar to which the rupee is loosely pegged.

US Fed chief Jerome Powell for many months claimed that inflation was ‘transitory’ and is continuing to print money at least until March despite later admitting that the word should be dropped.

In America, used cars and truck prices rose 40 percent in the 12-months to December 2022.

In years with monetary stability, used car prices go down with depreciation. In Sri Lanka in the 1980s when the currency collapsed every year, people could buy a car and sell the ‘depreciated’ asset at a higher price than they bought.

Now with import controls, used car prices in Sri Lanka have gone up faster, but with actual and expected currency depreciation, car prices would anyway have gone up to some extent.

US economist Steve Hanke has warned that even if the Fed tightens monetary policy now it will take 12 to 24 months for results to show, indicating that US inflation will be 6 percent or higher in 2022 and 2023.

Last year Hanke, Professor of Applied Economics at Johns Hopkins University in Baltimore, accurately predicted 6 to 9 percent inflation for 2021 based on earlier money supply growth.

Money supply measured by M2 is still growing over 12 percent on a year over year basis.

“And to actually hit their inflation target of 2 percent a year they will have to bring it down to about 5 to 6 percent,” Hanke said in an recent interview.

“That is about half of what it is now. Let’s assume they do that right away. We will have inflation over 6 percent over 2022 and 2023 and into 2024.”

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US inflation likely to stay high in 2022, 2023 even if Fed tightens now: Steve Hanke

He said the Federal Reserve is usually forced to act when the public no longer accepts their alternative explanations for high inflation.

Fed Chief Jerome Powell’s favorite explanations have been ‘transitory’ and ‘supply chain disruptions’.

Politicians in particular do not talk about money supply because they do not understand it, Hanke said.

Central banks avoid talking about it because they want to avoid responsibility for their actions.

“As a result they want us to to talk about a lot of ad hoc irrelevant causes for inflation because the politicians do not want to get nailed for inflation,” Hanke explained.

“Certainly the Fed does not want o get nailed as the bad guys.

“So what do they do? They spin a yarn. And the yarn is inflation is a transitory thing. It is caused by all these odd ball things: supply chain problems, port plug ups, the weather, meat prices going up because the supply of cattle is unusually low, monopolies.

“The latest thing in the US is that they want to engage the Department of Justice in raising Cain about anti-trust violations,” Hanke said. “So the monopolists are causing inflation.

“That is pure propaganda. Everything you are reading is pure propaganda. The press of course goes right along with it.”

In countries like Sri Lanka without a floating exchange rate, printed money hit the currency peg fast, usually in four to six weeks analysts say.

If printed money is given for energy subsidies it hits the currency peg even faster.

Sri Lanka’s central bank also has a history of giving various excuses and printing money to keep rates down.

The favorite in the past has been rise in “administered prices”. No mention is made in earlier months when administered prices keep the index down and money is continued to be printed. Supply constraints in another.

The false claim that ‘budget deficits’ cause inflation has been long time favourite, though deficits simply transfers money from the public to the government creating no change in aggregate demand as long as money is not printed to keep rates down.

Lately it had jumped of Fed’s ‘transitory’ bandwagon.

“Supply side factors remain the key driver of domestic price pressures amidst the possible signs of demand pressures,” Sri Lanka’s centarl bank said in January as inflation soared to 14.2 percent.

“Inflationary pressures in the domestic front continued to be fuelled by supply side disruptions, upward adjustments to administered domestic prices, and the strengthening of underlying demand conditions in the economy as reflected in the rise in core inflation.

“Such supply driven price pressures are expected to be transitory, although the possible build-up of demand driven inflationary pressures may compel the adoption of proactive monetary policy measures, which will also help in managing inflation expectations.”

Eventually rates are raised when foreign reserves fall and inflation has gone to very high levels. When the US eventually tightens, Sri Lanka’s currency peg collapses.

Sri Lanka is currently printing money to sterilize interventions after giving reserves for imports and also to give an addition eight rupees to expat workers for their remmittances which will result in further reserve losses. (Colombo/Jan11/2022)

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Sri Lanka car import relaxing roadmap given to IMF: State Minister

ECONOMYNEXT – Sri Lanka has submitted a roadmap on relaxing vehicle imports to the International Monetary Fund, State Minister of Finance Ranjith Siymabalapitiya said as the country recovers from the worst currency crises in the history of its central bank.

The import relaxation will allow vehicles for public transport, goods transport, then motor cycles and cars use by private individuals and after that, luxury cars, Minister Siyambalapitiya said.

Luxury cars however attract the highest taxes for each dollar spent on imports.

Economic analysts have characterized vehicle import controls as a ‘cascading policy error’ that follows inflationary rate cuts, which then deprive taxes to the state and triggers more money printing and more forex shortages, requiring even higher corrective interest rates and a contraction of economic activities to save the rupee.

According to the latest IMF report car import controls may have led to revenue losses of 0.7 to 0.9 percent of GDP.

Sri Lanka started controlling imports few years after a central bank was set up in 1950 and also tightened exchange controls progressively, so that macroeconomists using post-1920 spurious monetary doctrines taught at Anglophone universities could print money through various mechanisms to suppress rates.

Sri Lanka is working with the IMF as a guide on many issues and the roadmap was submitted to the agency on June 14, Minister Siyambalapitiya said.

The IMF in an economic report released last week the plan was expected to be submitted by June 15.

Whatever the IMF’s faults, which some wags have called ‘progressive Saltwaterism’, the agency does not advocate import controls as solution to balance of payments problems, despite a Mercantilist fixation with the current account deficit in countries with reserve collecting central banks, analysts say.

Import controls have the same effect as import substation on the balance of payments, which is none, classical economists have pointed out and is now mainly a problem associated with macro economists and economic bureaucrats of so-called basket case countries.

Any pressure on the currency or missed reserves targets in the IMF program has come in the past only if the central bank printed money to suppress rates as credit growth picked up from car imports.

Sri Lanka had 3,000 items under import controls when rates were suppressed with printed money from 2020 to 2022 but eventually ended up with the worst currency crisis triggered by macro economists in the history of the country and eventual external default.

A committee made up of the Department of Trade and Fiscal Policy of the Finance Ministry, the Department of Registration of Motor Vehicles, the Central Bank and two associations representing vehicle imports were appointed to come up with the roadmap, he said. (Colombo/June15/2024)

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Chitrasiri Committee presents draft constitution for Sri Lanka Cricket

ECONOMYNEXT – A draft constitution for Sri Lanka Cricket, the governing body for cricket in the island, prepared by a committee headed by retired Supreme Court judge K T Chitrasiri, was presented to President Ranil Wickremesinghe today (15).

The Sri Lanka team were ignominiously knocked out of the Men’s T20 World Cup tournament this week, sparking renewed criticism of the team and the governing body.

Last November, a cabinet sub-committee was appointed to address challenges faced by Sri Lanka Cricket and provide recommendations after consecutive losses became a hot topic in parliament.

After parliament decided to remove the administrators of the sport, the International Cricket Council (ICC) Board suspended Sri Lanka Cricket’s membership.

Based on the sub-committee’s recommendations in its report, the Cabinet then appointed an expert committee to draft a new constitution for Sri Lanka Cricket.

The committee headed by judge K T Chitrasiri includes President’s Counsel Harsha Amarasekara, Attorney-at-Law Dr Aritha Wickramanayake and Chairman of the Sri Lanka Chamber of Commerce Duminda Hulangamuwa.

Deputy Solicitor General Manohara Jayasinghe, and Shamila Krishanthi, Assistant Draftsman representing the Legal Draftsman’s Department, and Loshini Peiris, Additional Secretary to the President were also on the committee. (Colombo/Jun14/2024)

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Sri Lanka’s Cable Solutions in Rs605mn IPO

ECONOMYNEXT – Sri Lanka’s Cable Solutions Limited will make an initial public offering of ordinary voting shares on the Diri Savi Board of the Colombo Stock Exchange (CSE).

The CSE had approved, in-principle, an application submitted by the company, for the listing of its ordinary voting shares by way of an offer for subscription and an offer for sale.

For subscription, 14,666,600 shares would be offered at 7.50 rupees a share.

For sale, 66,120,000 shares would be offered at 7.50 rupees a share.

The opening of subscription list is July 23. Copies of the prospectus would be made available to trading participants on July 9. (Colombo/Jun15/2024)

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