Sri Lanka’s SJB stands for central bank reform, accountability: Sajith | EconomyNext
ECONOMYNEXT – Sri Lanka’s Samagi Jana Balawegaya stands for reform of the central bank to ensure accountability and transparency as well as independence, its leader Sajith Premadasa said as the country is hit by one of the worst currency crises it is history after a bout of money printing.
Since its creation in 1950 in the style of a Latin America central bank by a US money doctor, the agency has pushed up the cost of living, triggered currency depreciation and social unrest, creating severe difficulties for elected administrations and de-stabilizing their economic programs.
Similar situation takes place in other Latin American nations despite severe fiscal corrections. Such central banks which sterilize the balance of payments drive countries into dollar sovereign default even with budget surplus by sterilizing interventions, as in the case of Mexico in 1994.
Sri Lanka however is also hit by an expanding budget deficit. Rising inflation from two year of money printing force the current administration give a ‘relief package’ further pressuring domestic credit and inflation it if is financed by the central bank.
Rules vs Discretion
The SJB stands to “ensure that there is greater transparency, accountability, responsibility as far as the main monetary institution is concerned,” Premadasa told Colombo-based foreign correspondents.
“In our economic team we all agree that we have to put in place legislation to ensure that its independence and autonomy is guaranteed.”
Sri Lanka’s imports are now soaring, inflation is soaring, forex shortages are acute and money is being printed to sterilize interventions and keep rates far below inflation.
When the agency printed money and created forex shortages after 1950, people and businesses have been hit by trade controls, exchange controls and price controls leading to blackmarkets, corruption and loss of respect for rule of law.
Currency depreciation also triggered calls for subsidies. Depreciation and inflation reduces real salaries of public sector officials exposing them for corruption.
Singapore for example saw high levels of malnutrition and public sector corruption as the British returned afer World War II, due to wartime inflation triggered by Japanese ‘Banana money’, which its leaders later said led to a ‘corrosive effect on personal integrity.’
The British Military Administration (BMA) which took over and imposed price controls was dubbed the Black Market Administration. Under Keynesianism the UK also had price controls and rationing.
Singapore however maintained the British style currency board, and now appreciates its currency whenever the US prints money and creates global inflation. (Why Singapore chose a currency board over a central bank)
Razeen Sally, a classical economist, has said while a currency board may not solve all problems (a panacea) rules over discretion was the way to go.
“What was essentially a pretty strict, rule based regime to limit political and bureaucratic discretion – very roughly equivalent to a fixed and non adjustable peg – was transformed in 1950, thanks to the design the tutelage of John Exter, let’s not forget, under a UNP government with J R Jayawardene as Finance Minister, into discretionary, central banking,” he said in September 2019, just as the agency was buying bonds from past deficits, to end monthly BOP surpluses and start the current cycle of reserve depletion.
“And since then, we’ve had at least some periods where monetary policy with discretion over the rules has reinforced the mistakes of fiscal policy rather than leaning against it as it were.”
“I think that move away from the currency board to discretionary central banking was perhaps one of independent Ceylon’s early birth defects in the light of what’s happened subsequently.”
Others have gone further and called for an orthodox currency board or dollarization to strictly tie the hands of activist central bankers and allowing for free trade and non-inflationary growth.
#SriLanka‘s #Rupee faces crisis after crisis because it operates a flexible #ExchangeRate backed by contradictory money & exchange policies. As I advised President Suharto of #Indonesia in ’98, the only options are to #dollarize or est. a currency board.https://t.co/k0tC8RZtEM
— Steve Hanke (@steve_hanke) September 10, 2019
The China Port City special economic zone has been ‘dollarized’ (mutliple currency area) protecting it from the Monetary Board and domestic money printing.
In the last ‘Yahapalana’ administration in which Premadasa was a minister, the central bank printed large volumes of money through multiple means to artificially control short and long-term interest rates and busted the currency from 131 to 182 to through two currency crises.
Inflation spiked and growth collapsed after each money printing bout and the administration became unpopular.
The central bank found new and innovative ways of injecting liquidity to control interest rates and de-stabilize the external sector during the last Yahapalana administration as growing public opposition to the naked purchase of Treasury bills, reduced its ability to cripple Treasuries auctions.
In 2015 large volumes of money was released by terminating term repo deals and then Treasury bills were bought, through term and overnight reverse repo auctions to suppress rates as budget deficits and private credit expanded in an exercise that began around the third quarter of 2014.
The external sector started to stabilize after then Governor Arjuna Mahendra suddenly ordered the head of domestic operations to halt money printing in March 2016 after the rupee fell to 145 from 131.
“On or about 03rd March 2016, Mr. Mahendran had telephoned Mr. Rodrigo (head of domestic operations) and instructed him, that the conduct of Reverse REPO Auctions should be immediately stopped, so as to stop the injection of liquidity into the market through Open Market Operations. “In this connection, Mr. Rodrigo said that the “Governor telephoned me in the morning, and said to immediately stop conducting of reverse REPO Auctions.”, according to report of of Presidential Commission into securities fraud.
The crisis stopped at 151 to the US dollar.
After stabilizing the external sector with non-contradictory policy 2017 and sell-downs of Treasury bills held by the agency (deflationary policy) the central bank again printed money to suppress rates and created another currency crisis in 2018.
In 2015 the fiscal authorities raised state salaries and gave subsidies, contributing to high domestic credit growth and interest rates which were suppressed by the central bank with printed money, blowing the pegged exchange rate and balance of payments apart.
Politically Difficult Fiscal Fixes
However in 2018 after Finance Minister Mangala Samaraweera…