ECONOMYNEXT – Sri Lanka should stop money printing earlier than indicated in a statement by Prime Minister Ranil Wickremesinghe, opposition legislator Harsha de Silva said, though legislators have already given extensive powers to the agency engage in liquidity injections.
“Prime Minister Ranil Wickremesinghe talked about money printing,” de Silva told parliament.
“He said, the inflation is going up and the printing should be stopped. But he also said it can only be stopped by the end of 2023 or in early 2024,” Silva said.
“It cannot happen like that and you have to take a decision right now. We all must understand that if nothing is being done, the inflation will go up until 100 percent from the predicted 60 percent.”
Silva the country has already become an unlivable place for the general public and according to the CBSL data, the food inflation of the country has risen up to 80.1 percent in June, 2022.
Sri Lanka’s central bank has now created the worst currency crisis in its 72-year history giving soft-peggers the ability to trigger currency crises and high inflation abolishing a currency board where money printing was outlawed.
Sri Lanka’s intermediate regime central bank was set up as a fundamentally flawed Latin America style agency with dual anchor conflicts in 1950 by US money doctor, but with no active open market operations in the initial stages.
A reserve collecting peg collapses when the central bank prints money to keep rates down. Sri Lanka’s central bank repeatedly prints money whenever domestic credit picks up, regardless of whether state or private credit is picking up including when the US hikes rates under pseudo monetary policy independence, with devastating consequences on the people.
However after 2015 with flexible inflation targeting the rupee was hit with extreme open market operations, to target an output gap (printing money to push growth up) creating currency crises and pushing growth down in their wake and impoverishing the people with rupee depreciation.
Under ‘flexible’ inflation targeting a reserve collecting peg was repeatedly bombarded with liquidity injections to manipulate rates down (call money rate targeting) until the currency collapsed.
The currency was depreciated under real effective exchange rate targeting including in 2017 when there was not credit pressure and the rupee was facing upward pressure and large volumes of inflows were sterilized, as growth and private credit slowed.
There is nothing politicians in Sri Lanka can do, whether in power or in opposition when the countries central bank decides to print money to drive interest rates down.
“I don’t know whether you can take that decision now because Nandalal Weerasinghe has been appointed as the CBSL governor,” de Silva told Prime Minister Wickremesinghe perhaps in a reference to central bank independence.
In 2018 as credit recovered, de Silva pleaded with the then leadership with of the central bank in vain to allow rates to go up as the currency was hit with liquidity injections, after giving ‘central bank independence’, to the agency during the ousted ‘Yahapalana’ administration.
Fiscal dominance including de facto fiscal dominance was removed by the Finance Minister Mangala Samaraweer raising taxes, bringing the deficit down and market pricing fuel.
The central bank printed money anyway ignoring political pleas and busted the currency from 152 to 182 and drove away foreign investors in rupee bond by undermining the credibility of the peg.
Over 7 years three currency crisis were created in rapid succession with the 2020-22 one the worst crisis where 2.6 trillion rupees were printed and the rupee has now fallen from 200 to 360 to the US dollar with soft-peggers impoverishing both wage earners and the elderly.
In the 2020-2022 crisis, the banking system was pumped with excess liquidity of up to 200 billion rupees under modern monetary theory up from around 60 billion rupees under call money rate targeting and output gap targeting, which is a milder version of MMT.
The entire world is now suffering from liquidity injections made by the Federal Reserve under its dual mandate which is being conveniently blamed on Russia and Ukraine.
“Due to the current inflation, the depreciation of the rupee has reduced the value of the money in the Employees’ Provident Fund and the Employees’ Trust Fund by 50 percent and the real value of pensions has also decreased by 50 percent,” Prime Minister Wickremesignhe said.
“Think about how this situation affects our senior citizens. Poverty is spreading among all of them. The value of the money they receive has decreased by 50 percent.
“Their purchasing power has decreased by about 50 percent. Presenting positive ideas is easy. But it is difficult to find answers to these problems.”
“What is the solution to this? Stabilizing the rupee as soon as possible, strengthening the rupee without letting it fall. For that purpose, we have implemented a plan to limit the printing of money in the future.
“In 2023, we will have to print money with restrictions on several occasions. But by the end of 2024, it is our intention to stop printing money completely.
“We aim to reduce the inflation rate to between 4 and 6 percent by 2025.”
The central bank, driven by REER econometrics in part and interest rate manipulation mostly, had been engaging drip-drip depreciation for 70 years busting the currency from 4.70 to the US dollar to 360 so far in the worst record among South Asian soft-pegs.
The leadership of the central bank around 2019 had also developed a draft Monetary Law to legalize the flexible exchange rate and flexible inflation targeting, institutionalizing dual anchor conflicts – having both an exchange rate and monetary policy.
Sri Lanka has gone to the IMF 16 times so far due to soft-pegging (operating both an exchange and money policy to create balance payments trouble) and is now going for the 17th IMF bailout.
Though there have been expectations of the country moving to inflation targeting, failed attempts were made to target inflation by continuing to operate a flawed peg (now called a flexible exchange rate) instead of floating rate.
The current law was revised by then-Governor A S Jayewardene taking away ‘exchange rate policy’ or the mandate to maintain the external valued of the currency if there was a decision to go for true inflation targeting.
But the draft monetary law attempts to institutionalize dual anchor conflicts by bringing back monetary and exchange rate conflicts.
Article 7 (1) (a) of the draft law is to “determine and implement monetary policy”
Article 7 (1)(b) of the draft law is to “determine and implement exchange rate policy”
Article 7 (1) (c) is to “hold and manage official international reserves of Sri Lanka”
Analysts have warned that unless parliament brings strict law to curb soft-pegging and supporters of soft-peggers outside the agency who have turned their backs on classical economics and sound money the country will have no future.
The IMF generally does not stop soft-pegging because soft-pegging is required for an net interational reserve target and for its own loan to be repaid.
Unlike in earlier IMF programs involving reserve money targeting, current ones have a monetary policy consultation clause, allowing a soft-peggers to easily create currency crises within a program (2018)and soon after an IMF program ends leading to yet another bailout. (Colombo/ July 05/2022)