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Tuesday May 30th, 2023

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.”


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 rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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