ECONOMYNEXT – Sri Lanka is inching forward from bankruptcy because people backed a program to stabilize the country amid great hardships, President Ranil Wickremesinghe said in his independence day message.
When Sri Lanka marked the 75th day of independence last year the country was labelled bankrupt.
“Undergoing various hardships, becuase the majority of the people supported a long term program to rebuild country we are now inching forward,” President Ranil Wickremesinghe said.
“If we go in this road, the difficulties will fade away. The cost of living will become lighter. Economy will become stronger. Mother Sri Lanka will flower.”
Sri Lanka defaulted in 2022 after the most aggressive growth by printing money (macro-economic policy) ever deployed macro-economists in the country in the history of the central bank which was set up in 1950.
The central bank in the course of mis-targeting rates for various reasons (re-financing rural credit, other private credit, sterilizing interventions) to suppress rates had depreciated the currency from 4.70 to 184 by 2020 by denying monetary stability to the nation.
The 2020 exercise of extreme macro-economic policy to close a ‘persistent output gap’ led to the collapse of the currency to 330 and the exercise to re-estabilish credibility in the rupee led to two years of contraction.
Trade and exchange controls swiftly as the central bank became more activist along with post Keynesianism took off in the West especially in the 1960s, eventually leading to the collapse of the Bretton Woods in 1971 and the ‘closed economy’.
Before the central bank was set up, Sri Lanka (then Ceylon) had a currency board, like Singapore, Hong Kong and somewhat similar to the Dubai, tying the hands of macro-economists and giving stability to the general public, especially less affluent classes.
Under the currency board Sri Lanka was considered only second to Japan in several indictors at the time of independence. The country’s foreign reserves equaled 11 month of imports. In 2022 the central bank’s reserves were negative after it borrowed dollars to print money.
“When Sri Lanka became an independent nation is 1948, the expectation of the international community was that Sri Lanka would become a developed nation in Asia,” Prime Minister Wickremesinghe said.
“We had all the background factors for that. But in the end we became a bankrupt nation.”
“We should not make the mistakes we have done in the past. That the current path is correct is correct has been proved before the entire world. We should be determined to go on this path and on this independent day.
I am asking all Sri Lankans in the country and outside to help the country to help to the extent they can to re-build Sri Lanka.
Sri Lanka’s rupee has been allowed to appreciate from 360 to 325 levels and to around 315 this week, with the help of deflationary monetary policy.
The 76th Independence Day celebrations are celebrated in the presence of Thai Prime Minister Srettha Thavisin.
Thailand had one of the least activist central banks even during the break up the of Bretton Woods and in the steep growth period had negative net assets and strong fiscal metrics as a result of monetary stability.
Thailand’s peg had only broken a few times in the first few years after the the IMF’s second amendment and the East Asian crisis in 1997, while Sri Lanka repeatedly goes to the IMF after mis-targeting rates. (Colombo/Feb04/2024)