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Monday June 24th, 2024

What went wrong; Sri Lanka’s illiberal economics and unsound money : Bellwether

ECONOMYNEXT – Sri Lanka’s United National Party has well and truly lost its reputation for economic management during three and a half years of coalition politics with President Maithripala Sirisena, who stopped reforms, but most of its troubles were of its own making.

Pushed by outside activists, the administration had lofty ideals of good governance but both Prime Minister Ranil Wickremesinghe and President Maithripala Sirisena were legacy politicians from the 1980s and 1990s and went about their arrogant and partisan ways.

Sirisena got bogged down in party politics after taking over chairmanship of the Sri Lanka Freedom Party and Wickremesinghe arrogantly protected his friends in the bondscam and went about cynically counting on a collective amnesia of a voting public.

Constitution of Liberty

Sri Lanka’s main problem is not the lack of democracy, but the lack of appreciation of liberty by the people, and the lack of knowledge on the mechanics of how to ensure freedom.

Freedoms are preserved by institutions of liberty.

The main idea behind constitutions which were developed in Western Europe was to restrain the state and provide absolute guarantees of equality to the people.

In Sri Lanka the 1979 constitution was written to build a strong presidency and a strong state, which went against the basic principles of liberty. It was not a constitution of liberty.

That was the problem with both the constitution and the presidency.

The people who wrote the US constitution, also managed to get through a sentence that everyone is born equal, despite the existence of slavery in which eventually helped everyone get freedom, even non-citizens inside the US.

The 19th amendment to Sri Lanka’s constitution, despite there being diluted by the likes of Dinesh Gunewardene, an expert filibusterer, had served its purpose in terms of restoring the independence of the judiciary.

An independent judiciary is a key institution preserving the freedom of the people. Liberty comes from rule of law and an independent judiciary will ensure it.

Freedoms are robbed mainly by two sections of society. It is the armed state, and armed robbers who will trample the freedoms of ordinary citizens.

The constitution will restrain the armed state and rulers, ensuring the liberty of the people. Democracy (popular vote) does not ensure freedom, neither does self-determination from Kings or Emperors.

Citizens of a nationalist state, which will get freedom from a King or Emperor will inevitably suffer far more horrors as Eastern Europe and also Sri Lanka has shown.

The elected ruling class is inherently more prone to sow injustice than a king or emperor, since nationalism is the easiest path to power.

Institutions of Liberty

An independent public service is another institution of liberty.

Sri Lanka got an independent public service from British liberals, who transferred the institution from their home country.

The British Civil Service was a product of the learning from their possessions in Asia. The British East India Company learned it from China.

The civil service came on to its own with the Northcote-Trevelyen report of 1854. In Sri Lanka the President and Prime Minister are appointing ministry secretaries as if they are contract workers. Interstingly both Northcote and Trevelyen had served in India and saw some of the problems in the existing system to which they suggested remedies.

It can be safely said that a Grama Sevaka has more security of tenure in Sri Lanka than a ministry secretary who is no longer permanent.

It is significant that when the Northcote-Trevelyen report was presented, Queen Victoria was against it, just like Presidents and Prime Ministers of independent Sri Lanka.

Without security of tenure, no secretary can stand up to what is right. Those who did, ended up in the pool. Like some of the Rajapaksa-era judges, those who remained had to be willing to do the wrong thing.

A bigger danger of the system of impermanent secretaries was that relatives could be brought in.

Gotabhaya Rajapaksa, was effectively the head of the military when his brother was President.

Economic Freedom

In Sri Lanka the third cog in the freedom robbing triangle is the central bank.

The administration had high hopes of a ‘social market economy’ but lacked the basic tool make it work; which is sound money.

The central bank started busting the currency as soon as the new administration came in. The first Governor under Arjuna Mahendran claimed that the rupee was overvalued as soon as he started to print money and lost control.

But later he got some wisdom, that money printing has to stop for the rupee to stop falling. From where the wisdom came it is not known.

This is what the President Commission report on a ‘bondscam’ said later.

“In this connection, Mr. Rodrigo (Head of Domestic Operatins of the Central Bank) said that the “Governor telephoned me in the morning, and said to immediately stop conducting of reverse REPO Auctions.”

“When the Commission of Inquiry asked the witness why Mr. Mahendran had issued such instructions, he said, that Mr. Mahendran had mentioned that the CBSL had earlier increased the Statutory Reserve Requirement in an effort to reduce Liquidity and that the intention of the CBSL was to “drain liquidity.”

“Mr. Mahendran had said that, in this background, Liquidity should not be injected into the market by CBSL and that the CBSL wanted Interest Rates to move up.”

This is exactly the opposite of what happened in November 2018, when the central bank lost 500 million dollars in reserves.

The current Governor Indrajit Coomaraswamy went about his task with the deliberate intention of busting the currency. According to public statements he wanted to target it along a path to keep the Real Effective Exchange Index at 100.

However he did not have a currency board (floating interest rate) to target the exchange rate at any percentage.

Unsound Money

President Sirisena claimed in public statements that Wickremesinghe had extreme neo-liberal strategies. But in a fact check does not find much evidence to support this.

This deliberate destruction of the rupee was perhaps the most vicious illiberal policy of the current administration.

Then the central bank went about robbing economic freedoms done in the form of trade controls just like it had done in the past.

After printing massive amounts of money to keep interest rates artificially low, Sri Lanka is now in the midst of a balance payments crisis, with one credit downgrade already in.

Sri Lanka was recovering in the first quarter of 2018. All the central bank had to do was to mop up the inflows that were still coming in February with a little higher interest rates.

But that was not done. Instead rates were cut and money was printed. Is this neo-liberal?

Instead of the economy recovering, steadily in 2018, the credit system was pushed into a crisis. The currency collapsed.

Is soft-pegging a free market or liberal economic system? A free floating regime is free market. A hard peg is free market.

But a soft-peg is a contradictory mish-mash of interventions where free trade, which is the foundation of liberalism is not possible.

The central bank is the third institution that has to be built and restrained either through a floating rate and a low inflation target, or a hard peg.

The lack of freedom of the people, and the criticism of ‘neo-liberalism’ whatever that is, is symptomatic of the statolatry or Stockholm syndrome that is prevalent among the urban intelligentsia of the country.

That certain people who get benefits from state worship, lucrative posts, contract commissions and they like it is understandable. But why do other people believe all this?

Unsound money in the form of permanent currency depreciation, robbing real of savings of the poor, was the foundation of economiic illiberalism under this administration.

The 1980s reforms failed for the same reason and people went to the streets to get a living wage.

But there was a litany of others.

Economic Illiberalism and the 2015 budget

Ravi Karunanayake’s 2015 budget was a textbook document of vicious illiberalism. The demand from the people was not for subsidies but good governance.

State sector salaries were hiked forcing taxation and austerity on the rest of the population.

Fuel prices were cut willy-nilly, losing a chance for market pricing. Kerosene prices were cut below cost helping large industry and triggering massive mis-use, which had to be fixed a huge political cost, with fishermen protesting.

The worst were the retrospective taxes and revenge taxes on casinos and the Rajapaska TV station. It was true that the TV station was an emblematic institution of shameless patronage. But it has to be dealt with by law, not taxes.

Are retrospective taxes neo-liberal or classical liberal? If there are ill-gotten gains taxes cannot be slapped willy-nilly on everyone. It has to be dealt with by law.

The Rajapaksa’s also slammed revenge taxes on the media targeting Sirasa dubbed programs. This administration increased it.

No foreign investor will come when retrospective and revenge taxes are slammed.

The 2015 budget raised state worker salaries and taxes ordinary people. Is this neo-liberal? It is blatant statism.

The minimum wages were raised. It that neo-liberal?

Then sugar taxes were raised. Is this neo-liberal? This is vicarious desires of European style social engineering, practiced by rich countries.

In a bid to stop rich kids who get chauffeured about in cars from consuming sugar, taxes are slammed on the poor, and those that get exercise because they walk home after getting off the bus.

Like any food tax or import duty, any sales reductions come from the poor, not the rich.

In fact Rajapaksa cut the tax during the so-called coup period.

Under a new foreign exchange law, barriers against foreign investors starting trading companies have been raised. It is a shame on the administration.

What Neo-liberal where?

Is progressive taxation of individuals neo-liberal? Rajapaksas had a 16 percent proportionate person tax. This is a liberal tax regime that many in the West are calling for.

Is charging value added tax on health care neo-liberal? No liberal western country charges VAT on health care.

Are price controls neo-liberal? Ravi Karunaynayake slammed price controls even on tea.

An entire price control agency was set up by Rajitha Senaratne, for drugs while a central bank that is depreciating the currency as a declared policy was committed to making drugs more expensive. Is this neo-liberal?

Is giving purchase guarantees for pharma companies with the peoples’ healthcare budget instead of calling for open tenders neo-liberal?

Karunanayake slammed import permits on cars. Is this neo-liberal?

After calling for private investment into the East Terminal, which was certainly a liberal move (container terminal investments are risk capital, where the investor is bound to pay minimum royalties to the port unlike deals like LNG terminals where the state agency bears the risk).

But that was stopped, apparently it now seems on the wishes of the President. Is this neo-liberal?

After bids were called for international private players to run a bunkering operation in Hambantota it was suddenly stopped. Is this neo-liberal?

The entire Hambantota Port was then sold to a Chinese state corporation not a private investor. Is this government-to-government deal neo-liberal?

There were also bids called for Mattala. That was also stopped. Is this neo-liberal?

When Bank of Ceylon tried sell some shares to a Japanese investor, Wickremesinghe, Karunanayake and Kabir Hashim screamed from the rooftops and stopped it. Is this neo-liberal?

Air Asia asked for license to start a budget airline. It was not given. Is this neo-liberal? Vietnam has since given it a license.

Not a single privatization was done. Is this neo-liberal?

An LNG power plant and terminal is being pushed where there is no pure-risk capital but purchase guarantees are sought from the state agency. Is this neo-liberal? And were only Wickremesinghe cronies behind this as claimed by some?

What about ship purchases when the US is giving ships gratis?

A whole bunch of small taxes were slammed, after promising to reduce the total number of taxes. Is this neo-liberal?

Price controls were put on fertilizer, after giving cash handouts generating shortage. Is this neo-liberal or simple stupidity in policy contradictions?

Is taxing gold imports neo-liberal?

Is hiking letter of credit margins on car imports neo-liberal?

Is placing credit restriction on the import of three wheelers neo-liberal?

It may have been liberal to eliminate tax holidays and try to tax all companies equally. It was also liberal to cut import duties on foods and essential goods like footware, which helps the poor.

But currency depreciation took away the benefits of import duty cuts. Is this neo liberal?

Is appointing incompetent or corrupt cronies to cabinet and other offices neo-liberal?

Is delaying elections – partly at the behest of the president according to some – neo-liberal?

Malik Samaraweera’s ministry has re-gazetted pages and pages of import permits. Is this neo-liberal?

The tourism authority imposed mandatory star ratings. Is this neo-liberal?

Other than cutting import duties and reducing the budget deficit, whose benefits were also negated by currency depreciation, there seems to be very few liberal moves by the administration on the economic front.

There was however major advancements in civil freedoms. People are no longer disappearing.

There is a more open society, where people can speak freely, social media is free. The only net censorship has come from President Sirisena where an agency under him appeared to have blocked

If there was liberal policy, where the exchange rate was strong, either via a true floating rate or a East Asia style consistent peg, this country would now be on a recovery path in 2018. If state firms were privatized, investors would have been excited and come into other sectors as well.

Not even Sri Lankan airlines was privatized. Instead a cronies were stuffed into it. Is this neo-liberal?

If shipping was liberalized, if warehousing was liberalized, this country would now be logistics hub for the region, may be even

If Air Asia was given a license, Sri Lanka would be making the first steps to being a budget airline hub. If the East Terminal was given to Maesk or MSC or CMA CGM, the stranglehold on Sri Lanka’s shipping sector would not exist and other private FDI would also have come in.

This administration’s economic program went belly up, not because of freedom, liberalism neo or classical, but due to the lack of it.

This column is based on ‘The Price Signal by Bellwetherpublished in the January 2018 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.

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Support for central bank swaps is symptomatic of Sri Lanka’s IMF return tickets

By Bellwether

ECONOMYNEXT – Sri Lanka’s central bank has been playing with swaps for some time and the agency’s 778 billion rupee forex loss in 2022 was directly related to swaps and other borrowings, which allows it to maintain an artificial policy rate.

Central bank swaps along with other doctrines like portfolio balance channels, are the foundation of modern age-of-inflation forex crises, default, outmigration and sudden soaring poverty.

As part of steps to prevent the next sovereign default by macro-economic policy, outlawing forex swaps will be a key measure that legislators can take.

The Nick Leeson style losses came not only from swaps but also IMF borrowings taken during an earlier flexible inflation targeting crisis and borrowings from India through the Asian Clearing Union, which have since been converted to a term facility.

A central bank is supposed to have foreign reserves, but with the invention of the policy rate, modern central banks engage in ‘macroeconomic policy’ or try to boost growth through money printing to suppress the policy rate and run out of reserves.

At least before swaps, macroeconomists were forced to allow market rates to go up to stop the currency from depreciating further after a central bank ran out of reserves.

But after the invention of the swaps by the Federal Reserve when it started aggressive macroeconomic policy in the 1960s, a modern central bank can continue to print money by sterilizing non-existent reserves and promote investment and imports essentially re-financing private sector activity.

The People’s Bank of China, bless its communist heart, at least stopped the macroeconomists in Sri Lanka from busting the proceeds after gross foreign reserves fell below three months of imports.

Otherwise, the central bank would have used the swap, printed more money to suppress rates, private imports would have gone up some more and instability would have continued and people would have suffered more, like they did due to the misguided ACU loans India gave.

The entire doctrine of ‘reserve adequacy metric’ of the IMF’s statistics is completely flawed as central bank reserves cannot be used to make private sector imports, which is enabled by liquidity injections made to sterilize outflows.

Any use of central bank reserves must result in a rise in market rates and a fall in rupee reserves in banks (a real outflow of funds) to maintain external stability.

Where and when did this perfidy start?

The Federal Reserve was the culprit behind the swaps which allowed macro-economists to suppress rates on borrowed money.

The Fed during the Bretton had a lot of gold reserves, but it did not have a lot of foreign exchange, unlike other central banks.

When the fed printed money for ‘macroeconomic policy’ (boost employment) and continued artificially low interest rates it had to get foreign exchange from somewhere to redeem the dollars that boomeranged on itself. The Fed then went shopping in Europe, from the Bank of International Settlement, France and Germany.

The initial ad hoc swaps started with Swin National Bank in 1960.

Charles Coombs, head of the foreign exchange desk at the New York Fed was the perpetrator who built swap facilities with counterparty central banks on a standing basis and eventually helped in the collapse of the Bretton Woods.

Swaps also helped worsen currency crisis in Sri Lanka and also does in countries by giving another tool to policy rate-obsessed macroeconomists to delay rate corrections and end up with a 700 billion rupee loss in 2022.

When Fed printed money in excess of its gold holdings it was obliged to exchange them for gold (as were free banks in the old days through the clearing system) under the Bretton Woods agreement. To prevent the dollar boomeranging on itself, the Fed hit upon the idea of the swaps.

The fx taken from the swaps could be used to buy back the excess dollars from Germany or France or Belgium or whatever bank that did not print money.

Governor Brunet of Banque de France cottoned onto the trick and reportedly Bank of England the “thought that the American idea of organizing swap facilities around Europe for large sums indefinite
in time was wrong in principle” because it allowed the United States to avoid going to the IMF to resolve “deep seated difficulties” with the dollar.

The ‘deep seated’ difficulty was of course the bureaucratic policy rate which had done so much harm to Sri Lanka in the recent past.

France had greater monetary knowledge unlike the Anglophone macro-economists with the French Franc recently being fixed by Jacque Reuff into the New France, who had argued with Keynes as far back as the 1920s on current account deficits, and failed to convince him.

France was right since the dollar and the Bretton Woods eventually collapsed against gold like the rupee collapsed against the dollar in 2022.

Swaps were wrong in principle in 1960s and they are wrong in principle now.

Assuming Risk.

One of the reasons that European banks agreed to swaps was that it acted as a forex hedge. When the Fed got Deutsche Marks and exchanged them for excess US dollars instead of giving gold, the Deutsche Bank was left with exactly the same volume of dollars as before.

However, this was under the swap and any dollar devaluation (against gold) will not affect the more prudent French, Swiss or German counterparty central bank.

The Fed eventually browbeat Deutsche Bank into accepting part of the forex loss.

In 2022 when the rupee collapsed steeply Sri Lanka’s central bank made a 720 billion rupee loss on its forex operations and it was deeply in debt.

Fast forward to 2024.

What did the IMF say in support of the swaps?

This is what an IMF official told reporters in Colombo in response to a question about the central bank’s predilection for swaps.

“Rebuilding reserves is a very important component of the IMF supported programs.“One, is what we call organic purchases by the central bank in the foreign exchange market. The other one is rebuilding reserves for engaging with swaps. This can either be swaps with domestic banks, but also swaps with other central banks. The latter is a very important part of both global and regional financial safety nets.”

To be fair to the lady, Fed swaps of recent origin, including during the collapse of the housing bubble it fired, were aimed at giving dollars to other central banks as markets froze and everyone held on to cash of all kinds.

But what the Sri Lanka’s central bank did and is doing by engaging is buy/sell swaps are the 1960s style transactions, assuming enormous forex risks which eventually end up as losses like in 2022 when the currency eventually collapse from the impact of reverse repo injections or standing facilities.

Swaps with domestic banks simply allows them to convert dollar deposits (or foreign credit lines), lend them as rupee loans and the central bank will end up holding the baby when the ‘flexible exchange rate’ rears its ugly head.

What can be done?

From the foregoing it can be seen that swaps are deadly in multiple ways.

One: Central bank swaps allow macroeconomists in Sri Lanka to cut rates through open market operations and liquidity facilities and keep them down, making the eventual crisis worse.

Two: It creates a forex risk and losses to the central bank and the people since it is a state agency

Three: It creates a moral hazard for private banks as it allows them to dump the forex risk on the central bank and lend in rupees to customers or the government.

Four: In the language that modern inflationist macro-economists understand – or should understand – swaps are a threat to the credibility to its monetary policy.

As banks are sitting on large dollar balances at the moment, the temptation for Sri Lanka’s central bank must be irresistible to either swap them or borrow them and show dollars as ‘reserves’ to all and sundry and the IMF. And that has happened to some degree already.

Sri Lanka’s politicians can move and amendment to the central bank’s new inflationist and output targeting monetary law to ban forex swaps, as part of measures to prevent a second default.

Or legislators can draw up an outside law like the classicals did with the Bank Charter Act of the UK, and impose restrictions on the central bank through a second law notwithstanding its inflationist output targeting IMF-backed monetary law.

That will make it less easy for macro-economists to drive the country into a default in the future.

Once a country has defaulted, others tend to follow swiftly unless the centra bank is restrained through tight laws on its ability to mis-target rates.

Through swaps, a central bank can mis-target rates without buying Treasury bills. In fact the central bank can print money and destabilize the country without contravening the ceiling on domestic assets in the IMF program, just like the Fed did in the 1960s as it went about busting the Bretton Woods.

Argentina’s central bank also ended up with negative foreign assets due to its dollar borrowings. It also issued dollar securities.

Same Story – All geographies, all centuries

For several years this columnist had warned that swaps would result in enormous losses for the central bank when the currency collapsed.

Though examples abound, the IMF dependent central banks continue to use swaps and get into trouble again and again.

The Central bank of the Philippines had to be recapitalized.

The Bank of Thailand got dollars from speculators and hit its own goal in .

So did the Bank of England in the ERM crisis.

More recently Lebanon’s central bank borrowed dollars (took deposits) and eventually collapsed itself.

All this happens due to the policy rate of course. The swaps simply allow artificially low rates to be continued until the swap proceeds are lost.

Sri Lanka also has a history of this type of forex risk going back to a note issue bank before the current central bank.

The Eastern and Oriental Bank, one of two note issue (Chartered) banks that issued rupees in Ceylon closed its silver door in 1884 just like the Fed closed its ‘gold window’ and floated in 1971.

The Oriental Bank rupee collapsed 50 percent overnight but the Madras Bank’s rupee held according to surviving accounts of what happened in 1884.

The problem with the Oriental Bank was the same as Sri Lanka’s central bank.

Modern Saltwater/Cambridge central bank borrows dollars, sells them in the forex market, and then prints large volumes of money to sterilize the intervention by repurchasing Treasury bills from banks, worsening the credit cycle, leading to an eventual collapse of the currency.

The Eastern and Oriental Bank borrowed in Sterling and loaned in Silver. The rupee was Silver backed or silver denominated.

In fact, researchers who went into to 19th century ledgers of the Bank of England found that Oriental Bank was a top borrower at its sterling lending window.

That is why this column advised that removing counterparty limits for borrowing through the standing facility or reverse repo auctions was a mistake.

The imposition of the counterparty limit was a key prudential move by the current management of the central bank.

The Oriental Bank closed its doors not only due to a parity problem between Silver and Gold.

It is unfortunate the in almost 150 years we have learned absolutely nothing.

Plus ça change, plus c’est la même chose

The Eastern and Oriental Bank did not just collapse due to exchange risk, but also because of its clients, the plantation companies were hit by falling prices (as a commodity bubble deflated) and could not repay loans.

The central bank which used Sri Lanka Government paper as collateral to print money into the banking system also ended up with ‘bad loan’.

The restructure of Sri Lanka government debt had left it with hefty losses.

It must be noted that except when foreign debt is repaid with a reserve appropriation, or some deficit is being monetized through provisional advances (which was supposed to conform to the bills only policy), most of the money printed by a central bank targeting the potential output gap or policy rate has nothing to do with the government.

Government securities already in the balance sheets of commercial banks (from previous deficits) are taken to the central bank to conduct overnight term or outright reverse repo injections.

Before the Fed, central banks did not discount government paper but discounted actual trade bills (banker’s acceptances) from various fairly good companies.

The BoE researchers found that in the past, when some of the bill brokers or banks went down, the Bank of England did not actually have much losses, as the paper it took was from strong companies.

Violating bills only Policy

Either way the large mark-to-market losses of Sri Lanka’s central bank is from violating another classical central banking principle, the bills only policy.

This prudential practice was also violated in Sri Lanka in the general deterioration of policy after the end of the war, eventually ending in sovereign default.

Violating the bills only policy which was seen during the Yahapalana regime which was ousted amid currency collapses and low growth from stabilization program, allows inflationists to mis-target rates deeply into the yield curve, create forex shortages and bust the rupee.

In defence of the central bank it must be said that it took a hit on its balance sheet in 2023, so as to protect the government securities market and the move has helped bring down rates faster.

There are banking practices that must be observed in running banks.

There are even more stringent prudent rules to be observed when running a note-issue bank or a bank that can create its own reserve money or circulating medium as the classical greats used to say.

IMF has weak knowledge of operational frameworks of note-issue banks, in keeping with general saltwater doctrine, that is why its patient keep going back with increasingly worse symptoms and diseases.

The doctrine of the ‘portfolio-balance channel’ is laughable at best.

If the central bank is mis-used to target potential output, or if the domestic 5-7 inflation anchor rears its ugly head, a second default is not too far away.

A peaceful country, which overcame a civil war, was driven to a default with flexible inflation targeting/potential output targeting, the latest spurious monetary doctrine of the Saltwater/Cambridge inflationists.

Sovereign defaults hit the world like a Coronavirus pandemic after the IMF’s Second Amendment to its articles in 1978 led to severe monetary instability as the restraint from external anchoring was taken away from reserve collecting central banks.

Nothing of the ideology has changed, as can be seen with IMF endorsement of central bank swaps. That is why IMF dependent keep going back to the agency, again and again and sovereign default within 10 years of getting market access.

If legislators and the public want to end a second sovereign default, outlawing swaps should be a key rule in a law that should be brought to restrain the central bank or revise the current law into a true central bank constitution and not a law that gives it discretion to create 5 percent inflation and run exchange rate policy on top.

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Sri Lanka central bank appoints two Deputy Governors

ECONOMYNEXT – Sri Lanka’s central bank said Assistant Governors A A M Thassim and J P R Karunaratne were promoted to the post of Deputy Governor.

The full statement is reproduced below:


In terms of the provisions in the Central Bank of Sri Lanka Act, No. 16 of 2023, Hon. Minister of Finance, as recommended by the Governing Board, has appointed Mr. A A M Thassim, Assistant Governor and Secretary to the Governing Board, and Mr. J P R Karunaratne, Assistant Governor, as Deputy Governors of the Central Bank of Sri Lanka with effect from 20.06.2024 and 24.06.2024, respectively.

Mr. A A M Thassim

Mr. A.A.M. Thassim has over 31 years of service at Central Bank of Sri Lanka (CBSL) in different capacities in the areas of Supervision and Regulation of Banking Institutions, International Operations, Communication, Payments and Settlements, Employees Provident Fund, Finance, Risk Management, Deposit Insurance, Security Services and Information Technology.

He has served as the Director of Bank Supervision (DBS), Director of International Operation (DIO) and Director of Communications (DCM) and has contributed towards strengthening the legal framework, governance, implementation the Basel 3 international guidelines for capital and liquidity and adoption of International Financial Reporting Standards (IFRS) 9 to the banking sector, thereby strengthening the resilience of the Financial Sector.

Further, as the DIO, Mr. Thassim was responsible for the investments and management of foreign reserves of the country and exchange rate management. Mr. Thassim has also gained experience and knowledge in the field of payment systems and was involved in the implementation of the Cheque Imaging and Truncation System. In addition, he has also served on several high-level internal committees including in the areas of monetary policy, financial system stability and international reserves.

Prior to the appointment as the Deputy Governor, Mr. Thassim held the position of Assistant Governor and was in charge of several key departments including the Bank Supervision Department. He also served as the Secretary to the Governing Board, Monetary Policy Board, Audit Committee, Board Risk Oversight Committee, Ethics Committee and Financial Sector Crisis Management Committee.

At present, Mr. Thassim is a board member of the Sri Lanka Export Credit Insurance Corporation and the Vice Chairman of the Institute of Bankers of Sri Lanka (IBSL). Further, he has also served as a board member of the Credit Information Bureau of Sri Lanka and LankaClear (Pvt) Ltd.,

Mr. Thassim is an Associate member of the Chartered Institute of Management Accountants (ACMA) United Kingdom and possesses a Masters in Business Administration (MBA) from the Postgraduate Institute of Management (PIM), University of Sri Jayewardenepura (USJ). He has also completed a programme on Gold Reserves Management from Hass School of Business, University of California, Berkeley, USA.

He is also an Alumni of Harvard University, USA having successfully completed the executive programme on Leaders in Development conducted by the John F. Kennedy School of Government.

Mr. J P R Karunaratne

Mr. J P R Karunaratne has over 33 years of service at the Central Bank of Sri Lanka in different capacities in the areas of supervision and regulation of Banks and Non-Bank financial institutions, Currency management, public debt, Secretariat, Finance, policy review and monitoring. He has served as the Director of Supervision of Non-Bank Financial Institutions (DSNBFI) and the Superintendent of Currency (SC) and has contributed towards strengthening the legal and regulatory framework in the Non-Bank Financial Institutions sector and has played a prominent role in the consolidation of the Non-Bank Financial Institutions sector. Prior to the appointment as a Deputy Governor, Mr. J P R Karunaratne held the position of Assistant Governor and was in-charge of the Department of Supervision of Non-Bank Financial Institutions, Finance Department and the Facilities Management Department.

As an Assistant Governor Mr. Karunaratne has previously overseen several other departments namely, Macroprudential Surveillance, Resolution and Enforcement, Foreign Exchange, Currency, Regional Development, Legal and Compliance, Risk Management, Center for Banking Studies, Security Services and Staff Services Management.

He has also served as the Secretary to the Monetary Board, Secretary to the Board Risk Oversight Committee, Monetary Board Advisory Audit Committee and the Ethics Committee. Further, He was on release to the Ministry of Defence, where he served as a Financial Advisor. He was also appointed as the Chief Operating Officer for the Secretariat of Committee of Chartered Accountants appointed by the Supreme Court in 2009.

He has served as the Chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board and has been a Council Member of the Certified Management Accountants (CMA) of Sri Lanka. Mr. Karunaratne was awarded the CMA Sri Lanka Business Excellence Award at the CMA Sri Lanka National Management Accounting Conference 2023 in recognition of his service to the profession. He has also received “Long Service Award” of the IBSL in 2019 in recognition of his long career and contribution as a resource person at IBSL.

He was the Project Team Leader of the South East Asian Central Banks (SEACEN) Malaysia, research project on “Implementation of Basel III Challenges and Opportunities in SEACEN Countries” and SEACEN published the research in 2013. He serves as a member of several internal and external committees at present.

Mr. Karunaratne holds a Master of Commerce Degree in Finance from the University of New South Wales, Australia and a Postgraduate Diploma in Applied Statistics and a Bachelor of Science (Physical Science) Degree with a First class from the University of Colombo. He is a Fellow Member of the Chartered Institute of Management Accountants (CIMA), UK and a Chartered Global Management Accountant (CGMA). Further, he is an Associate Member of the CMA Sri Lanka.

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Sri Lanka opposition questions claims that IMF housing tax is only for kulaks

ECONOMYNEXT – Sri Lanka’s opposition has questioned claims made by government spokesmen that a tax on housing proposed in an International Monetary Fund deal is only limited to rich people but if as promised by President one house is exempt, it is welcome, legislator Harsha de Silva said.

Sri Lanka President Ranil Wickremesinghe made a promise in parliament that the first house of a citizen will be excluded from the property tax.

Related Sri Lanka to exempt one house from imputed rent wealth tax: President

But opposition legislator Harsha de Silva pointed out that the IMF program documents clearly says taxes will be levied on owner occupied houses on ‘imputed taxes’, not second houses.

Under current inland revenue laws, actual rent income from a second house is already captured as part of taxable income.

The IMF document mentions a threshold value from which taxes will be exempt but not that a whole owner-occupied primary residence will be exempt.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution,” IMF staff said in their report.

“A similar tax was previously included in the Inland Revenue Act. No. 10 of 2006.

“Under this regime, primary residences were exempt and the assessed values for rating purposes were used to determine the base.

“Given the broad exemption and the use of outdated and downward biased annual values, the tax generated hardly any revenue.”

Meanwhile Sri Lanka has promised to impose the housing tax from April 01, 2025.

“…[W]e will introduce an imputed rental income tax on owner-occupied and vacant residential properties before the beginning of the tax year on April 1st, 2025,” the memorandum of economic policies agreed with the IMF said.

“An exemption threshold and a graduated tax rate schedule would make this tax highly progressive.

“The full revenue yield from this tax is estimated at 0.4 percent and would materialize in 2026 (with a partial yield of 0.15 percent in 2025).

“This yield would still fall short by 1 percent of GDP relative to the expected yield of 1.2 percent of GDP from the property tax envisaged for 2025 onwards.”

Presidential Undertaking

“Whatever the President said the IMF agreement says owner occupied house,” De Silva told in parliament.

“It is not the second house that is mentioned in the agreement.

“But there is one thing. I am happy as Samagi Jana Balawegaya, that we have been able to save the middle class in society from a massive tax that was to be imposed.”

In Sri Lanka there is a belief that the most productive citizens are fair game for excessive or expropriationary taxation, just like kulaks were targeted in the Soviet Union for actual expropriation, critics say.

Wealth taxes have had disastrous effects on some US cities like Baltimore, leading to falling populations and dilapidated houses.

Sri Lanka is currently facing a brain drain due to high income tax after on top of depreciation from severe monetary debasement from a flexible exchange rate, which is neither a hard peg nor a clean float.

Sri Lanka has imposed a wide range of taxes on the people to maintain a bloated state, after inflationists engaged in extreme macro-economic policy (tax and rate cuts) glorified in Saltwater-Cambridge doctrine to boost growth, throwing classical economic principles and monetary stability to the winds and driving the country into external default.

The IMF itself gave technical assistance the central bank to calculate potential output inviting the agency to cut rates to close the perceived econometric ‘output gap’.

In the run up to the default, rate cuts triggered multiple external crises, leading to output shocks as stabilization programs were implemented.

Macro-economic Policy

Macro-economic policy as known now was devised by Cambridge academic J M Keynes in the wake of the Great Depression triggered by the Federal Reserve after it invented open market operations and policy rates in the 1920s and also popularized by Harvard academic Alvin Hansen among others.

Macro-economic policy started to de-stabilize countries in peacetime in the interwar years and after World War II it led to the collapse of the Bretton Woods system.

The Great Depression was also a peacetime collapse of what was later known as the roaring 20s’ monetary bubble.

“They have blithely ignored the warnings of economists,” classical economist Ludwig von Mises wrote of European nations which got into trouble from rate cuts and Keynesian stimulus, which brought currency depreciation and protectionism in its wake from the 1930s.

“They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies…”


In Sri Lanka however there is some understanding of the role played by macro-economists in the most recent crisis.

There are rumblings of unhappiness about ‘central bank independence’ given to an agency to create 5 to 7 percent inflation and currency debasement under a flexible exchange rate and its constitutional status relating to parliamentary control of public finances.

Sri Lanka’s central bank’s current flexible inflation targeting (inflation targeting without a floating rate) regime as well as its 1980s money supply targeting without floating rate has busted the national currency for decades and made it impossible to run budgets, made it difficult for people build houses which are now to be taxed, and also for millions to live and work in the country of their birth.

Fiscal metrics deteriorate each time rate cuts drive the country into currency crises and new taxes are brought in stabilization programs, ousting reformist governments and leading to policy reversals.

Sri Lanka’s citizens have suffered for decades from the privilege given to a few macroeconomists to print money to cut rates with inflationary open market operations and trigger forex shortages.

Related How Sri Lanka’s elections are decided by macro-economists and the IMF: Bellwether

Critics have pointed out that since 1954 in particular, central bank rates cuts which drive the country into external crises and the stabilization programs that follow, have been the main determinant of elections in the country and election of fringe political parties. (Colombo/June13/2024)

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