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ECONOMYNEXT – Sri Lanka is paying the price for carrying out policies based on comprehensive falsehoods spread to win an election and a woeful lack of science or evidence, opposition legislator Eran Wickramaratne said.

The 2019 election was fought on a series of cooked up issues, including targeting minorities and foreigners, external internal enemies and anti-science, in which the country’s professional associations sadly also colluded, he said.

False Foundations

Wickramaratne who was state Minister of Finance the last administration and a banker said it was dangerous to build a policy framework on false foundations because the real issues are neglected.

“Sri Lanka politicians they themselves on politics but are very poor on governance,” he said. ,

“That is very, very obvious. They are building stories, and spreading falsehoods, manipulating the voter and winning elections.

“But governance is completely different. There is a big gap between the two.”

Wickramaratne as Minister for Finance in the last administration had to fix the fiscal damage created from the 100-day program and end the economic imbalances created from fuel subsidies with a price formula.

However its benefits were undermined by the central bank which printed money to create a forex crisis by operating un-anchored monetary policy, critics have said.

A series of non-issues were built-up in the run-up to the last elections including the Sri Lanka – Singapore free trade agreement Wickramaratne said.

Free trade agreements benefit the poor by reducing the monopoly powers of big businesses that exploit the poor and others with higher than world prices.

In addition to making false claims about the potential negative effects of the FTA based on its clauses, entirely cooked-up claims were made about service liberalization which was not a part of the agreement.

Professionals

Professional organizations ganged up to spread the lie.

“It is very shameful that professional organization would propagate such falsehoods,” Wickramaratne said.

“Now three year’s since the signing, nothing anything they said materialized. But there was no basis for what was claimed and everything had claimed had proved to be false.”

Professional associations had repeated a lie that there was service sector liberalization, Singaporeans would ‘flood’ the country and steal the jobs of professionals.

Pointing out that Sri Lanka’s salaries were far lower than Singapore and that services liberalization was not even part of the agreement had no effect. The same lies were repeated in Gobelsian fashion and amplified by the media without a fact check.

In case of the Millennium Challenge Corporation grant unusually false claims were made.

“There was a claim that the country will be divided and there will be a corridor where permission from the US embassy had to be sought,” Wickramaratne said.

Other claims were made on the basis of alleged ambiguity of the wording of the agreement. It was claimed that the agreement was against the constitution.

“The MCC agreement could not have moved ahead without parliamentary approval,” Wickramaratne said. “It is a condition of the MCC. Any clause could have been challenged in the Supreme Court.”

Such strategies are based on a plan to create ‘external enemies’, he said.

Creating a non-issue and bashing them on election platform as if they are true is known as a ‘straw man’ strategy in Western politics and is by students who study logic (https://www.logicallyfallacious.com/logicalfallacies/Strawman-Fallacy). In Sri Lanka the logical fallacy it is known as ‘billek ma-weemer’ (magicking up a bogey man) in local parlance.

Though MCC was not enacted for people to see its actual effects, Singapore FTA was signed. However were no flood for Singaporeans to Sri Lanka.

Making election platforms going against science was also dangerous, Wickramarante said.

“Science was igonored in the case of the fertilizer,” Wicremeratne said. “In the case of the case burial of Covid-patients also science was ignored.”

Sri Lanka banned Muslims from burying dead family members despite the World Health Organization saying it should be allowed and forced them to be cremated.

While foreigners were made into external enemies, minorities were made into domestic enemies.

There was a severe negative hit on the agriculture sector and people’s well-being in the case of anti-science in the case of the fertilizer ban.

Policies and strategies based on a false foundation also leads to an erosion of trust and confidence, Wickremarante said.

“Before an investor gets into a project international investor would look into country risk before project risk or financial risk.

“The country risk is based on political, social and economic stability,” Wickremeratne said. “All three are intertwined.”

Money Printing

One of the new false claims made was regarding money printing.

“There were claims that money printing does not lead to inflation,” Wickremeratne said. “But now Sri Lanka has the highest inflation in Asia.”

Money printing also leads to balance of payments trouble in pegged monetary regimes, making it impossible to have free trade.

However in Sri Lanka both inflation and currency depreciation has been blamed on other factors based on Mercantilist dogma which had been defeated in stable countries with low inflation, strong currencies, free trade and no exchange controls.

Such countries have central banks which base monetary policy on a single anchor (external anchor or domestic anchor) instead of having two or more which are in conflict and will be create monetary crises.

Sri Lanka is now in the middle of a massive economic crisis and monetary meltdown long predicted by analysts.

However analysts have pointed out that in the of the last administration the central bank also printed money including in 2018 to create balance of payments trouble and depreciate the currency and destroy its free trade agenda and strengthen the hands of import substitution oligarchs.

When Wickremeratne as State Minister of Finance and the late Mangala Samaraweera corrected the excesses of the 100-day program and brought the deficit down, the central bank printed money to manipulate the yield curve.

Money was printed and bought bonds from previous deficits to create excess demand and break the exchange rate peg which fell to 182 to the US dollar using ‘monetary policy independence’.

As public pressure mounted against economists who were purchasing bonds at auctions to create money, new tactics were used by the central bank to buy Treasury bond outside auctions such as through term reverse repo auctions and outright auctions.

The central bank also separated its permanent bill stock from the overnight and term bill stocks which had the effect of under-stating the bill purchases (central bank credit) and misleading the public.

With large volumes of Treasury bills being bought, the rupee is now collapsing.

The money printing central bank was set up during a United National Party administration in 1950, and Keynesian economists (primarily Cambridge/Oxford and US ‘saltwater’ universities) have used ‘monetary policy independence’ to manipulate interest rates, create inflation and balance of payments troubles.

Modern Monetary Theory

Sri Lanka’s latest crisis was triggered by tax cut in December 2019 (fiscal stimulus) and money printing from early 2020 (monetary stimulus) to push up growth, which instead blew the balance of payments apart and made it difficult to service foreign debt.

The stimulus measures were apparently based on Modern Monetary Theory, a more radical version of the output gap targeting exercise pursued by the central bank under the previous administration.

Analysts have faulted the IMF for giving tools to calculate an output gap to central bank known for being increasingly activist. From 2014 September to 2019 the central bank created two currency crises involving stop-go policies which led to output falls.

Sri Lanka is expected to seek International Monetary Fund assistance again soon.

A similar strategy of VAT cuts and monetary stimulus was followed by Conservative Finance Minister Anthony Barber in the early 1970s who wanted to create a Barber boom (go policy).

Instead the resulting inflation triggered massive labour unrest in the UK amid oil price rises as the US also printed money for output gap targeting and the Bretton Woods system collapsed.

World oil prices are also rising following US money printing by Fed Chief Jerome Powell.

Sri Lanka now has to impose a ‘stop policy’ to save the currency. However warnings have been raised that a steep fall in the currency would lead to dollarization and renewed calls have been made to set up a currency board.

Both measures will stop economists from trying ‘stimulus’ and delivering economic shocks to the people. (Colombo/Mar28/2022)

Sri Lanka: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka

ECONOMYNEXT – Sri Lanka’s public debt is unsustainable under possible budget improvements and state enterprise contingent liabilities could add to the burden the International Monetary Fund has waned as money printed to keep interest rates down has created foreign exchange shortages.

If money printing is continued Sri Lanka can default in the near term IMF has warned in a report issued after annual Article IV consultations as well as an economic shock. Sri Lanka authorities had pinned their hopes on external inflows.

External Arrears

“Unless the fiscal and balance-of-payments financing needs are met, the country could experience significant contractions in imports and private credit growth, or monetary instability in case of further central bank financing of fiscal deficits (printing money),” the IMF report warned.

“Should the unidentified external financing not be forthcoming, the country could experience a disorderly adjustment through severe import compression and potentially external arrears in the near-term,”

Sri Lanka has a soft-peg or a flexible exchange with conflicting domestic and external anchor which creates periodic balance of payments crises, but this time the problem has been complicated by a steep rise in international sovereign bonds over the past few years.

Both sovereign bonds and dollar debt of state-run Ceylon Petroleum Corporation went up as money was printed in 2015, 2016 and 2018, triggering forex shortages which were bridgeed with borrowings, despite tax hikes and a fuel pricing formula in 2018.

Analysts had warned that the country was following un-anchored monetary policy for several years under discretionary ‘flexible inflation targeting regime’ that gave room for the central bank to print money and create currency crises at will, including during an IMF program in 2018.

In 2019 tax hikes were reversed (state salaries were hiked in 2015).

Failed Treasuries auctions

From 2020, money printing was ratcheted up and redeeming the printed money for reserves to maintain a pegged exchange rate has depleted reserves using price controls in auctions. Unsold bonds were bought by the central bank with printed money.

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“Authorities temporarily imposed strict ceilings on interest rates in treasury security auctions, resulting in substantial auction shortfalls and primary T-bill purchases by the CBSL,” the IMF said.

“To help finance the government, the CBSL provided 3.5 percent of GDP in direct financing in 2020 and around 5 percent of GDP in the first 3 quarters of 2021.”

Sri Lanka’s gross financing needs were high with market access cut off with downgrades and high and not possible with simple reduction of budget deficit, indicating debt restructuring.

“Based on staff analysis, fiscal consolidation necessary to bring debt down to safe levels would require excessive adjustment over the coming years, pointing to a clear solvency problem,” the report said.

The gross financiability index was 23.8, which was high.

“Staff assesses that Sri Lanka’s public debt is unsustainable. Left unaddressed, persistent fiscal and BoP (balance of payments) financing shortfalls will constrain growth and jeopardize macroeconomic stability in both the near and medium term.

The government gross public debt was estimated at 118.9 percent of gross domestic product by end 2021 and gross financing needs were 30.1 percent of GDP. But it could rise to over 50 percent based on risks in the near term.

SOE debt was 15.8 percent of GDP and 6.6 percent of GDP was covered by explicit guarantees.

Sri Lanka halted state enterprise reform and privatization under a policy articulated by Sri Lanka’s Janatha Vimuthi Peramuna (selling national assets) which was embraced by the Rajapaksa administration.

Successive administration then stopped market pricing energy also following a JVP championed policy called ‘removing the plug’.

The central bank also had debt.

The report said Sri Lanka was at risk of exchange rate depreciation. At the time the projections were made the rupee had not started to fall steeply. (Colombo/Mar26/2022)

ECONOMYNEXT – Sri Lanka’s stock index ended steady on Friday (25) while turnover hit five-week high as investors bought risky assets amid steep depreciation in the currency and high inflationary expectations, brokers said.

The main All Share Price Index (ASPI) gained 0.03 percent or 3.61 points to close at 10,455.32.

The day’s turnover was 4.5 billion rupees, the highest since February 18 and slightly lower than this year’s average daily turnover of 5.2 billion rupees.

“Index witnessed a sharp upswing while hitting an intraday high of 10,592 during the first half of the session as buying spree infused on EXPO, LOLC and HAYL,” First Capital said in its market note.

First Capital said a crossing in Agalawatte Plantations accounted for 50 percent of the turnover.

Analysts said many investors are still concerned over how the government is going to face the mounting debt as they are not still confident if it would really go to the IMF or if it also be a dragging tactic.

An All-Party Conference held on Wednesday assessed the ongoing economic crisis with no conclusion after the rupee has fallen around 45 percent since March 8 while the market saw yields in government’s treasury bills rising to around 12 percent.

Analysts said investors are trying to shift their savings to hedge against rupee fall and inflation, which is at record high and over 5 percent higher than one-year Treasury bill yield. Brokers said investors opt for stocks to hedge against inflation.

Sri Lanka’s rupee has fallen nearly 45 percent since it was allowed flexibility on March 08.

All commodity prices in Sri Lanka are on the rise due to the currency fall. Currency dealers expect more depreciation in the coming days as the central bank devalued the rupee.

S&P SL20 of the most liquid stocks edged up 1.06 percent or 38.22 points to 3,649.93 points.

Rising oil prices, policy rate hikes, a slowing economy, and shortage of dollars, fuel, and cooking gas along with extended power cuts continues to dampen the sentiment.

The market has lost 8 percent so far in March after falling 11 percent in the previous month. Overall the market has lost 14.2 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year.

Foreign investors moved back to selling after being on buying side. Foreigners sold a net 32.7 million rupees worth of shares. However, the market has witnessed a total foreign outflow of 2.3 billion rupees so far this year.

Expolanka, LOLC Holdings and Hayleys pushed the index up on Friday.

Shares in Expolanka gained 3.7 percent to close at 272.25 rupees a share, LOLC ended 2.4 percent higher at 822.25 rupees a share while Hayleys gained 3.8 percent to 103.75 rupees a share. (Colombo/March25/2022)

ECONOMYNEXT – Power cuts of 5 hours for some areas in Sri Lanka and 4 hours and 20 minutes for other areas were approved in two blocks for March 26 Saturday, Public Utilities Commission Chairman Janaka Ratnayake said as a forex crisis creates power shortages in the dry season.

Areas PQRSTUVW will have 3 hours of power cuts from 9.00am to 6.00pm and 1 hour and 40 minutes from 6.00pm to 11.00pm

Areas ABCDEFGHIJKL will have 3 hours and 20 minutes of power cuts from 800am to 600pm and 1 hour and 40 minutes from 600pm to 1100pm.

Download the power cut schedule for March 26 from 26-03-2022-power-cut-schedule

Sri Lanka is facing forex shortages due to money printed to keep interest rates low and the country has run out of reserves and the currency has been floated.

However, the float has not yet taken place and the rupee has fallen from 203 to 275 to the dollar and prices are getting validated at that level. (Colombo/March25/2022)

ECONOMYNEXT – Sri Lanka has allowed the International Monetary Fund to release a staff report prepared following annual Article IV consultations after protests in parliament by the opposition and by ex-Prime Minister Ranil Wickremesinghe.

“The 2021 Article IV consultation with Sri Lanka concluded with the Executive Board Meeting on February 25,” Sri Lanka mission chief Masahiro Nozaki said.

“The authorities consented yesterday to the publication of the Article IV staff report. In preparing the staff report, we followed the IMF’s Transparency Policy, which aims at safeguarding the independence of staff’s views in IMF country documents.

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Sri Lanka should table IMF Article IV report in parliament: opposition

Ex-Prime Minister Ranil Wickremesinghe at an All Party Conference, had an exchange with Finance Minister Basil Rajapaksa on blocking the release of the report.

Minister Rajapaksa claimed the final report was not ready and seemed to be unaware that official had blocked the report.

However during Wickremesinghe’s time, IMF staff reports were also blocked when his appointing Arjuna Mahendran was running the central bank.

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Sri Lanka govt blocks publication of IMF program report

Mahendran, like Finance Minister Rajapaksa also claimed that he did not block the report when questioned by reporters.

During Wickremesinghe’s the central bank also created two currency crises. In the first crisis the central bank busted the rupee from 131 to 151 to the US dollar and in the second in 2018 to 182 to the US dollar.

Classical economists have called for reforms to the central bank law to block Keynesians and other interventionists to print money to manipulate interest rates and bust the rupee.
(Colombo/Mar25/2022)

ECONOMYNEXT – Sri Lanka should set up a currency board to stop further currency falls, US economist Steve Hanke has said as the island’s currency collapsed from 203 to 290 to the US dollar in an attempt to float the currency which has not yet succeeded.

“Since January 1st 2022, the Sri Lankan rupee has depreciated ~26% against the USD. #SriLanka’s severe balance of payments crisis and recent fuel price hikes are sinking LKA,” Hanke said in a twitter.com message.

“To ease the crisis, LKA needs to install a currency board, like the one it had from 1884 until 1950.”

Sri Lanka – then Ceylon – set up the currency board after the Ceylon Rupee issued by the Oriental Bank Corporation stopped exchanging silver for rupee notes, technically called a suspension of convertibility.

A modern day central bank attempts a float also in a similar fashion, though the bank is not closed.

Since January 1st 2022, the Sri Lankan rupee has depreciated ~26% against the USD. #SriLanka's severe balance of payments crisis and recent fuel price hikes are sinking LKA. To ease the crisis, LKA needs to install a currency board, like the one it had from 1884 until 1950. pic.twitter.com/rz8fSn0l2J

— Steve Hanke (@steve_hanke) March 24, 2022

At the time the Mercantile Bank which also issued notes provided convertibility at par.

Oriental Bank Corporation ran out of silver reserves following bad loans. A modern day central bank runs out of dollar reserves due to direct government financing of deficits, re-financed credit schemes and sterilized interventions or giving reserves for imports.

The central bank of Sri Lanka today holds over two trillion in Treasury bills a part of which was taken back from banks in the course of private sector finance to maintain a policy rate or price controls of bond auctions.

Sri Lanka’s currency board, which had kept the island safe through two World Wars and a Great Depression was replaced with a Latin America style cenrtral bank under US technical advice in 1950.

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Sri Lanka should prepare to float, and promote parallel dollarization: Bellwether

Almost all such central bank by Fed experts have led to social unrest and some central banks have collapsed and led to spontaneous dollarization.

Analysts have warned it may happen in Sri Lanka as well if the float is not established.

Knowledge of currency boards have been lost to most post World War II ‘economists’ who relentlessly favour depreciating currency central banks, through which they try to boost growth with ‘stimulus’ create balance of payments trouble, starve the poor, create social unrest, boat people, and bring down governments.

The rising world food and commodity prices hurting the poor around the world while strengthening the hands of authoritarian leaders of natural-resource rich countries after the US and ECB printed vast amount of money is the latest example analysts say.

Steve Hanke was one of the few economists in the world who correctly warned that Fed’s Jerome Powell would set off an inflationary spiral.

Hanke has helped set up several currency boards including in Eastern Europe.

Currency boards have neutral policy and are still in use in East Asia. However most East Asian pegs including Vietnam are tighter than currency boards and collect forex reserves exceeding the monetary base. (Colombo/Mar25/2022)

COLOMBO (News 1st); A controversy has arisen over the Opposition’s comments in Parliament on Thursday (24) that Food Security in the country is facing a serious crisis. Ven. Athuraliye Rathana Thero stated that the importation of fertilizer from China and India has resulted in a crisis. Ven. Athuraliye Rathana Thero questioned under whose orders and NO issues on Food Security; Mahindananda