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ECONOMYNEXT – The United Nations Population Fund (UNFPA) with support from China provided over 300,000 packs of essential medical equipment and supplies worth 800,000 US dollars to Sri Lanka’s Family Health Bureau through the Ministry of Health.

A UNFPA statement said the donation aims to ensure frontline health workers in Sri Lanka have adequate means to safely respond to patients during public health emergencies such as COVID-19.

The statement quoted Chinese Ambassador to Sri Lanka Qi Zhenhong as saying:“Since the onset of the COVID-19 pandemic, frontline healthcare workers have been placing themselves and their families at grave risk to care for those in need of their service. We believe the equipment provided today will go a long way in protecting frontline workers, especially amidst the prevailing socio-economic crisis that is endangering access to such protective equipment.”

The need for such equipment has also been further amplified by the prevailing socio-economic crisis that has prompted the Ministry to cut back on protective equipment requirements for frontline staff, the statement said.

“The 328,660 packs of protective gear handed over today will specifically bridge the gap in medical equipment for health staff working on maternal and child health across the island and strengthen the ministry’s agility in responding to public health emergencies in the future,” said.

Noting that public health workers are stretched thin when it comes to responding to the needs of the public and carry a double burden of physically exposing themselves along with the mental stress of working and coping with emergencies, the UNFPA said the initiative is a scale-up of 3,000 scrubs previously provided to public health midwives in May, through funding from the government of China, to ensure midwives were able to safely deliver community-level maternal and child healthcare. Although the Government has lifted the lockdown, the UNFPA said, the risk of infection remains a reality for health workers.

Health Minister Keheliya Rmbukwella was quoted as saying: “Healthcare workers have been stretched thin with the risk of infection faced in carrying out their duties during public health emergencies. The personal protective equipment (PPE) provided today will help the ministry ensure the safety of our staff as they serve the people of Sri Lanka and strengthen our ability to respond to such emergencies in future.”

The statement quoted UNFPA Representative Kunle Adeniyi  as saying that the healthcare needs of women and girls must be prioritised during times of crisis.

“It is crucial that frontline workers are equipped to respond to their needs.” (Colombo/Jun15/2022)

ECONOMYNEXT – In Washington DC along Constitution Avenue and 20th Street sits the Marriner S Eccles building, named after one of the greatest central bankers of all time, who went against the prevailing economic religion that would have destroyed the US like Sri Lanka in 1951.

Marriner Eccles was instrumental in freeing the Fed from the US Treasury and the President, and later led to ideas about central bank independence.

It is not just deficit financing that leads to collapse of exchange rate pegs, but also open market operations which was invented by the Fed, and also ‘stimulus’ promoted by interventionist economists.

It through open market operations that money is printed to mis-target interest rates in Sri Lanka or in any other country with currency troubles and high inflation.

The Fed is also to blame for creating the Great Depression with open market operations with no deficit financing whatsoever and then giving a chance for Keynesian stimulus to take over the world like a ‘new religion’.

The Bretton Woods system of soft pegs collapsed in 1971 as the Fed printed initially to target an output gap, but later to sterilize interventions through open market operations as central banks in Europe and Japan demanded gold in exchange for the money it was printing.

Like the US dollar in Sri Lanka today, the price of gold – the then reserve asset – was soaring at the time, and the Fed was running out of gold to give, like Sri Lanka’s forex reserves.

The Fed then suddenly floated, reneging on the Bretton Woods commitments and floating rates were born shattering a 300 year old gold standard.

Fed would have suspended convertibility in 1951 nor 1971

The Bretton Woods could have collapsed in 1951, almost before it was fully operational had it not been for Marriner Eccles.

At the time the Fed was monetizing World War I debt, by purchasing them from the secondary market under pressure from the US Treasury, to keep a yield ceiling and maintain their prices.

The US was not running deficits at the time but also surpluses from time to time.

Government securities acquired through open market operations to sterilize interventions is not done to finance the current year deficit but to actually inject reserves into the commercial banks, though it is later classified as debt monetization, misleading people into thinking the deficit was involved.

It is done due the obsession of the central bankers themselves to control interest rate.

The problem cannot be solved by giving the Central Bank independence but by changing its governing law to prevent domestic operations and rate obsessed and central bankers with stimulus ideology from engaging in the practice after private credit picks up.

This is what stable pegs, orthodox currency boards (Hong Kong, Brunei) and currency board like systems (UAE, Oman, Saudi, and Kuwait) have done and Germany and Japan did during the Bretton Woods to keep the peg and in the case of also appreciate the currency.

The two countries eliminated labour unrest with low inflation and strong currencies and became export power houses.

A banker runs a state central bank

Unlike the academically qualified ‘economists’ who ultimately broke the gold standard with output gap targeting and created monetary mayhem in the US and elsewhere, Eccles was not a professional economist corrupted by a Mercantilist university and still had his powers of reasoning intact.

He was a banker with high school education.

He was more in the style bankers who ran privately owned central banks like the Bank of England and Reserve Bank of India which kept inflation down for two centuries or more – sometimes under severe public pressure – before they were nationalized and stuffed with academic Mercantilists steeped in interventionist dogma.

When the Fed created the Great Depression by printing money in the 1920s, Eccles saved his banks in 1931.

Following a Congressional testimony on the crisis, President F D Roosevelt appointed him Chairman of the Fed. Or Governor as the position was then known. He restructured the Fed and eliminated the ex-officio membership of the Treasury Secretary as India did after the 1991 currency collapse and there are calls to do it in Sri Lanka as soon as possible.

He also represented the Fed at the Bretton Woods conference.

Eccles also advocated policies which could be called Keynesian, but with the full knowledge of their limitations as a banker. In a depression (negative private credit) they can be used, but in in an economic recovery, such policies lead to disaster.

In 1948 he stepped down as Chairman and was replaced by Thomas McCabe. But he continued to serve on the Board.

During World War II the Fed kept interest rates on government securities. In 1951 US inflation hit 7.9 percent up from 1.1 percent a year earlier and private credit was soaring.

Fed Independence

At the Fed was creating global inflation much like it is today through the Powell Bubble.

It was printing money through price controls on Liberty Bond yields; much like Sri Lanka did with yield controls on Treasuries auctions in 2020 and 2021 and the outright purchases of Treasury bonds from the market until 2019.

There are many parallels to today’s Sri Lanka. Price controls were slapped on items like cars, selective credit controls had been put in place, but with liquidity injections continuing nothing was working. More price and wage controls were planned.

Fed minutes at a now historic meeting on February 08, 1951 show that it was Eccles who gave the intellectual backing to allow interest rates to rise as the economy recovered and defied the Treasury and President Truman to raise rates and protect the poor from inflation and the collapse of the dollar.

He made it clear that what the Fed did in the past in 1941 during the war for example could not be done in 1951. The budget was not the source of the trouble. New taxes were also planned.

It is important to know when the stop the press. He was a banker and knew the problem of banks and bank reserves.

The way they acted shows a deep understanding of banks and not just based on ideology as followed by Keynesians today.

He pointed out that the inflation was not due to the Korean crisis the situation was opposite of what happened during World War II.

Eccles said the Fed was already too late. And the inflation was rising and action was overdue.

“We cannot wait to act,” he said. “I say action is long overdue.”

The Fed sent a letter to the President, saying among other things that what he had told the press was not correct and the Open Market Committee was not in favour of purchasing government bonds and it undermined confidence in the securities.

That this is true was seen in Sri Lanka when yield controls drove investors of bond markets.

Sri Lanka’s bond markets are now working, though there are concerns about future rates with rising inflation. It is difficult to sell 12 month bills. Most are buying three month bills expecting inflation and interest rates to go up.

People also bought stocks expecting as an inflation hedge expecting the currency to fall.

Similar expectations were also seen in the US in 1951.

Image:fully important

That a central bank needs independence from the Treasury is true if political or Treasury authorities want to print money and the central bank does not, like in this case.

Around this time Sri Lanka’s newly set up Central Bank, by John Exter a Fed official, was also losing reserves as it tried to resist rate increases. Sri Lanka also got into further trouble after rates were hiked.

The Fed eventually won the battle and the Fed Treasury Accord was signed, partly because of the intervention of Deputy Treasury Secretary William McChesney Martin.

By this time the Fed was already under a ‘dual mandate’ due to the Employment Act of 1946, which compromised its independence later and was used by Jerome Powell to create the current inflation crisis in the world.

The open market committee in 1951 however had not paid any attention to that. Alan Greenspan also ignored the law in keeping inflation down. So did Paul Volcker.

Eccles landmark comments saw that, rather than knuckling down to such ideas, he was ready to seek a stronger mandate from congress to maintain monetary stability.

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Had he done that, the gold standard may not have broken in 1971. Latin America would not be in the trouble it is today and the widespread misery seen from currency collapses would not have happened and the legitimacy given to pump priming may not be there.

Both Eccles and Chairman McCabe resigned shortly after.

McChesney Martin took over. If President Truman expected him to print money he did not.

Unusually his first degree was from Yale, in English and Latin and he later went to work in the stock broking firm, and New York Stock Exchange, and gained stature in the immediate depression years.

Martin had later studied economics at Columbia but had not earned a degree. He turned out to be the longest serving Fed Chief who also kept the Bretton Woods peg system going despite some hiccups.

He was sacked by President Nixon in 1969 in conditions similar to 1951 and replaced by Arthur Burns and the dollar collapsed in 1971 ending a 300 year monetary system after output gap targeting and open market operations.

In fact the Gold Standard which allowed free trade and kept domestic stability may have also helped reduce wars in the 19th century under the so-called Pax Britannica, which ended with German nationalism triggering the First World War in 1914.

The Fed had got involved in interest rate fixing in the years before it created the Great Depression.

Sri Lanka’s problem and many other crises in Latin America come from open market operations.

Open market operations were also invented the by the Federal Reserve and led to the creation of the Great Depression without any real deficit spending.

How it all started

The Bank of England influenced interest rates directly by purchasing private bills – bankers acceptances. It was not intended to influence economic growth as Keynesians now do and create economic mayhem.

The Fed also copied the practice.

Then came Benjamin Strong, Governor of the New York Fed, who made extensive use liquidity injections via government debt.

The move to extensive use of government securities as open market operations had come around 1923, about 8 years after the creation of the Fed system.

“The real significance of the purchase and sale of Government securities was an almost accidental discovery,” writes Randolph Burgess in Reflections on the Early Development of Open Market Policy.

Burgess joined the New York Fed in 1920 as a statistician and saw with his own eyes what happened,

“During World War I member banks borrowed heavily from the Federal Reserve Banks, and the interest from these loans brought the Reserve Banks substantial earnings,” he says

“But, due to the deflation of credit in 1921, a substantial return flow of currency, and heavy receipts of gold from abroad, the banks were then able to pay off a large part of their borrowings.

“Hence the Reserve Banks found their income cut to a point where they had difficulty in meeting their current expenses. So a number of the Reserve Banks went into the market in 1922 and bought Government securities to eke out their earnings.

“Then they made two important discoveries. First, as fast as the Reserve Banks bought Government securities in the market, the member banks paid off more of their borrowings; and, as a result, earning assets and earnings of the Reserve Bank remained unchanged.

“Second, they discovered that the country’s pool of credit is all one pool and money flows like water throughout the country. When Government securities were bought in Dallas, the money
so disbursed did not stay in Dallas, but flowed through the whole banking system and reappeared in New York or Chicago or Kansas City, and vice versa. These funds coming into the hands of the banks enabled them to pay off their borrowings and feel able to lend more freely.”

“Two obvious conclusions followed from these results: first, the effect of open market operations had to be carefully studied as it was not what it appeared on the surface and, second, operations had to be treated as System policy, rather than as separate policies for each Reserve Bank.

The US in the 1920s was able to print money without creating forex or gold reserve for itself as key as the Bank of England was also keeping rates while trying to resume the gold convertibility and was losing gold.

Alan Greenspan later claimed that the Strong had printed money to help out the Bank of England. Whatever the cause, it seems to have led to a belief in the US that liquidity could be injected into the system without blowing the balance of payments apart.

“There were no substantial historical precedents for this new venture in central banking,” Burgess explained.

“The Bank of England had seldom used the term “open market operations” as applying to Government securities, and when they did so they meant purchases or sales in small amounts for short periods for the purpose of market stabilization.

“Their funds reached the market mostly through the bill market; and the principal policy instrument was the discount rate at which bills were bought, and that was used mostly in response to changes in their gold reserves.”

Reserve Restraint

Gold standard central banks had to hit the brakes as soon as they started to lose reserves and raise the discount rate. That is how the peg was kept.

That knowledge was lacking in the US. It may have led to the later conclusion that ‘independent monetary policy’ was possible while keeping a peg which led to the creation of the failed Bretton Woods.

Certainly the lack of external trouble in the early years may have led to conclusions by John H Williams and others that similar to the Sterling Area, it would be possible to have the gold backed US dollars as key currency while engaging in sterilization.

From the 1960s however as the US became increasing integrated with the world like UK in the past, it turned out differently and led to severe gold losses and the float of the US dollar.

The countries that have low inflation, stability, free trade, internal peace and prosperity are those that realize that the ideology of stimulus and the obsession with low rate are eventually going to result in very high inflation and interest rates.

Mere central bank independence does not solve problems, if the central bank mis-uses that independence to maintain artificially fixed low interest rates thorough open market operations and to sterilize interventions as is done in Sri Lanka.

ECONOMYNEXT – Sri Lanka will provide about 50 percent of the fuel demand in the next few weeks but giving priority for electricity and transport, and credit line with India is expected to supply fuel for another four months, Prime Minister Ranil Wickremesinghe said.

“The curent stocks can be used for 7 days,” Prime Minister Wickremesinghe said in a video statement.

“On the 16th a ship with 40,000 metric tonnes is coming. There are two ships, a petrol and diesel ship to come till the end of the month. For the next month we are taking action to get two more ships.”

He said attempts were being made to speed up a credit line with India.

“When we sign the Indian credit line we can get fuel for four months,” Wickremesinghe said. “All these will be given at 50 percent basis.

“From India we expect to sign a 500 million agreement for oil quickly. Our ambassador is going to India quickly to finish these matters.”

Sri Lanka is experiencing severe forex shortages from operating a soft-peg (targeting an exchange rate and simultaneously printing money to keep rates down or sterilize reserve sales).

“When we try to get fuel, we have to find dollars, there was no rupees at the Gank of Ceylon,” Wickremesinghe said.

“So I went to cabinet I got permission to print money, to give petrol. That is the situation with the economy. This is an example.”

Sri Lanka’s banks are facing liquidity shortages maturity mis-matches with the central bank injecting overnight rupees after intervening in forex markets to give dollars for imports or debt repayment.

The continued printing of money allow banks to give more credit without raising real deposits triggering forex shortages. Most private banks are also running overnight shorts re-financed by the central bank now.

Only a few foreign banks are not contributing to the forex crisis, analysts say.

The central bank is also borrowing money from India and getting deeper into debt. (Colombo/June14/2022)

ECONOMYNEXT -Sri Lanka Tourism Development Authority (SLTDA) expects to attract around 800,000 tourists for the rest of the year, with an estimated revenue of 800 million US dollars with Prime Minister Ranil Wickremesinghe instructing to attract Indian tourists amid a worsening economic crisis.

“The Prime Minister has instructed officials to prepare a plan to attract tourists from India for the next six months,” the Prime Minister’s office said in a statement after a meeting between Wickremesinghe and SLTDA officials.

“He also requested the relevant authorities to make arrangements for the resumption of operations of the Palaly Airport,” it said referring to the airport in the former war zone of Jaffna. Palaly airport is expected to attract Indian tourists into Sri Lanka’s culturally-rich North and East.

Sri Lanka witnessed the arrivals of 378,521 foreign visitors to the island nation in the first five months of this year. The Covid-19 pandemic hit 2021 saw 194,495 tourists for the full year.

The tourism industry started to boom in March this year, but the arrivals hit by economic crisis and protest-led political crisis.

Tourism accounted for 5 percent of the GDP in 2018 with 4 billion US dollar earnings, but  fell in 2019 due to the impact of Easter Sunday attack and later due to the Covid-19 pandemic. It has brought 680.7 million US dollars in the first five months of this year.

Sri Lanka is targeting around 2.5 million tourists by 2025 with an expected revenue of $ 3.5 billion and the Prime Minister urged all stakeholders to formulate long-term plans to attract around 1.5 million high-level tourists.

“The Prime Minister also instructed the relevant stakeholders to engage in youth awareness programs as many employees in the hospitality sector have already left for other locations and the number of new recruits to hotel schools in the country has come down drastically,” the prime minister’s office said.

“The Prime Minister also discussed the possibilities of organizing cultural festivals which will provide a unique opportunity to create new employment opportunities and allow the tourists to immerse themselves in the local cultures.”

Meanwhile, Minister of Tourism Harin Fernando said that he had already held discussions with the diplomatic community to compel the relevant countries to lift the existing tourism restrictions on Sri Lanka. (Colombo/June 14/2022)

ECONOMYNEXT – Sri Lanka’s state workers would be given five years of no-pay leave to go abroad or work elsewhere with no reduction in their seniority or pension rights, the state information office said, as the country suffers the worst currency crisis in the history of its central bank.

Sri Lanka’s state workers are now allowed 5 years of no pay leave to go abroad or study but many do not make use of it because they lose seniority and pension rights.

However Sri Lanka is now facing difficulties from raising taxes from the people amid a severe currency crisis which had depreciated the rupee from 200 to 380 to the US dollar.

Money printed to pay state worker salaries are also creating further foreign exchange shortages.

“Considering the prevailing economic situation in the country,” the Cabinet of Ministers approved the proposal by Public Administration Minister Dinesh Gunewardene to allow state workers to take five years of no-pay leave without affecting pensions or seniority, a government statement said.

A new circular would be issued giving effect to the proposal.

Sri Lanka has about 1.5 million public sector workers and about 86 percent of taxes collected from the people went for salaries in 2021 after a ‘fiscal stimulus’ which reduced state revenues.

Taxes are now being hiked and government bonds are being sold at 20 percent to avoid printing money. (Colombo/June14/2022)

ECONOMYNEXT – Amid Sri Lanka’s worst economic crisis and an impending debt restructuring, Ambassadors of China and the United States met on Monday (13) to discuss topics of mutual interest, the Chinese embassy said.

The meeting took place as the island nation struggled to face the impact of dollar shortages including reduced supply of essentials like fuel and medicines.

Sri Lanka has already announced it will not pay foreign debts as it has run out of currency reserves. The country is facing long queues for essentials including fuel, cooking gas, and kerosene. It’s also facing lower imports of wheat and medicines due to the dollar shortage after the central bank’s excess money printing and its removal of a soft peg.

Chinese Ambassador Qi Zhenhong met with US Ambassador Julie Chung at the Chinese Embassy and “had a friendly discussion on broad topics of mutual interest”, the Chinese Embassy said on its official twitter platform.

“China and the United States could work together to help Sri Lanka (to) overcome current difficulties (sp).”

China has lent the largest amount of commercial loans to Sri Lanka as a bilateral lender. Beijing has been hesitant to restructure Chinese debt claiming it would then have to do the same for other debtor nations.

Debt restructuring is crucial for Sri Lanka to reach a deal with the International Monetary Fund (IMF). Sri Lanka has already hired France-based Lazard as financial advisor and London-based Clifford Chance LLP as legal advisor to support the country in debt restructuring.

The Chinese Ambassador told the media that Beijing will wait to finalize a 2.5 billion US dollar loan to crisis-hit Sri Lanka until the IMF loan deal due to debt restructuring.

Both China and the U.S. have pledged their support to Sri Lanka in facing the worst financial crisis in its history. (Colombo/Jun13/2022)

(ANI): Indian External Affairs Minister Dr. S. Jaishankar will brief the Parliamentary Consultative Committee on External Affairs on June 18th over the ongoing crisis in Sri Lanka. Apart from Jaishankar, India’s Foreign Secretary and other MEA officers will be present at the meeting at the ministry office at 11 am. During the meeting, the Indian government Jaishankar to brief India’s MEA Consultative Committee on Sri Lanka crisis

ECONOMNYNEXT – Sri Lanka’s imports fell 0.5 percent from a year earlier as interest rates were raised and investment goods and telecom equipment imports, outpaced an increase in oil costs, official data showed.

Sri Lanka’s fuel imports went up by 96 million dollars in April 2022 to 510 million US dollars, while investment goods imports fell 87 million US dollars or 24 percent to 266.3 million Us dollars.

Building material imports fell 22 percent to 75.6 million US dollars in April and non food consumer goods imports fell 43 percent to 87.9 million dollars.

Sri Lanka’s exports also fell 18.5 percent to 969.8 million US dollars.

The trade deficit narrowed to 729 million US dollars from 889 million US dollars a year earlier.

Sri Lanka is hit with the worst currency crisis triggered by the island’s soft-pegged central bank.

The rupee has collapsed from 200 to 370 levels in a float botched by the surrender rule. (Colombo/June12/2022)

ECONOMYNEXT-Sri Lanka’s power situation will remain precarious for the next 3 to 4 years if the officials do not diversify energy generation methods and bring in renewables, the island’s utility regulator has warned.

Speaking at a media briefing on Thursday (09) Janaka Rathnayake, Chairman of the Public Utilities Commission of Sri Lanka said that Sri Lanka can continue with 3-hour power cuts till December this year with the existing resources.

The island would have to import around 500 million US dollars worth of fuel if it is to go till December with no power cuts, he said.

Sri Lanka uses a mix of hydropower, thermal energy and a small amount of wind power to generate energy.

A period of drought compounded by a forex crisis that left the country unable to import fuel for power generation resulted in the ongoing power cuts that once lasted up to 13 hours long.

Rathnayake warned that if a similar drought occurs in February to April next year, the situation would be dire for the next 3 to 4 years, as Sri Lanka does not have the foreign reserves required to purchase fuel.

The nation is currently surviving on Indian credit lines for fuel.

“We can go on until December but the trouble is that this will not stop then,” Rathnayake said.

“If there is a period with no rainfall in Feb March April next year, if we do not use renewables or something and increase generation plants somehow, this situation can continue for the next four to five years.”

Power and Energy Minister Kanchana Wijesekara stated in a press briefing Friday (10) that government offices, schools and other institutions were implementing a request to install solar panels to help with the energy crisis.

Critics say that the request is impractical, as existing buildings do not have the roof space or capital required to install a sufficient number of solar panels per institution.

Wijesekara had also tweeted in May that he hoped “to encourage foreign direct investments as well as opportunities to local developers to participate in the Renewable Energy Plans.”

Sri Lanka’s plans for renewable energy generation have historically been benched due to delays due to bureaucracy and corruption within institutions.

Former State Minister of Energy Duminda Dissanayake told Parliament that: “When you go for tender, they drag it for years and we will be compelled to buy diesel on which some (corrupt) officials want.”

The island’s latest wind power project with the Indian Adani company is also marred by controversy.(Colombo/Jun11/2022)

ECONOMYNEXT – Sri Lanka Railway Department-owned lands will be leased out to farming societies for a very low tax rate for a period of one year, the President’s Media Division (PMD) said as the country is struggling to avoid a food crisis in the near future.

The plan was revealed at meeting with President Gotabaya Rajapaksa and public officials on the progress review of the Ministry of Transport and Highways.

“It was also revealed that a plan to lease the reserved lands owned by the Railway Department for food crops for a period of one year,” the PMD said in a statement.

“(Transport) Minister Bandula Gunawardena said that the Divisional Secretariats are planning to provide the relevant lands to the farmer societies at a very low tax rate.”

Sri Lanka is facing a looming food crisis because farmers could not produce adequate food after President Rajapaksa banned chemical fertilizer overnight in April last year.

A foreign currency shortage along with sharp depreciation of the US dollars have made food imports very expensive and reduced the food imports into the country resulting in a food shortage.

Prime Minister Ranil Wickremesinghe has said the a food shortage is imminent from August. He has already held discussions over obtaining help from the World Food Programme to prevent a food crisis.

The government is in the process of encouraging people to grow crops and home gardening in all the lands available to prevent food shortage, government officials have  told EconomyNext.

The United Nations World Food Programme launched a 47.2 million US dollar Humanitarian Needs and Priorities (HNP) Plan to provide life-saving assistance to 1.7 million people worst-hit by the economic crisis over a four-month period, from June to September in Sri Lanka, the UN said on Thursday. (COLOMBO/June 11/2022)