Stabilization programs, despite halting greater inflation and more hardships from hyperinflation, provide fertile ground for fringe elements to come to power even as economies start to recover.

No liberal government, with free trading aspirations, can now survive in a country where forex shortages are created by spurious economic doctrines founded on statistics, backed by the International Monetary Fund more often than not.

Sri Lanka’s post-independence currency troubles emerged soon after the central bank was set up in 1950.

At the time Fed was firing a commodity bubble, by purchasing Liberty bonds (in what would now be called yield curve targeting) pushing up Sri Lanka’s export prices until 1951.

At the time the Sri Lanka’s currency board had just been abolished and 3-month T-bills were 0.4 percent according to central bank data.

The Fed tightened in 1951, some export commodity prices fell, but rice prices rose requiring more subsidies from the budget.

Stabilization Programs and Illiberalism

Sri Lanka ran BOP deficits in 1952 and 1953 as the central bank printed money. Reserves fell from 216 million US dollars to 114.3 million by year end 1953.

Then 3-month bills were pushed up to 2.48 percent. Attempts were made to cut food rations. Food rations had started during the Second World War as the Bank of England lifted convertibility (floated in today’s terminology) and ran un-anchored policy printing money.

Sterling monetary instability also worsened after World War II, with Keynes driving British economic policy and Sri Lanka also had some exchange controls dating back from British policy, though a currency board regime does not really need them.

There was a leftist hartal in 1953.

In 1954, Sri Lanka’s politicians acted decisively and pushed the budget into surplus in what would be the country’s first stabilization program without IMF help with fx reserves down to 114.3 million dollars.

Growth fell, inflation also fell, but in the slowdown the nationalists started to peddle their wares.

The Sinhala Only Act was an election issue. The Sinhala only by nationalists upset the Tamil community.

When nationalists come, or leftists come, policies reverse, as liberal economic policies of free trade and private enterprise as well as small government and fiscal prudence are discredited.

German Nazism after Reichsbank/Fed Excesses

Rewind to 1931.

Much the same happened in Germany, during the administration of Chancellor Heinrich Bruning, where a stabilization program helped bring Hitler to power.

The Fed had as the time already triggered the Great Depression by inventing the policy rate (about 1920) and open market operations (in 1923) in the previous decade.

The usual socialist messing up of the economy, expropriation, coupled with the global depression leads to a belief that a ‘strong man’ can also solve the problem, economist Friedrich Hayek later explained.

In Germany the Social democrats (Marxists essentially) were ruling at the time, and with their policies discredited, nationalists under Hitler peddled their ideology easily and came to power, targeting the Jewish minority.

West Germany Stands Out as Central Bankers Win Elsewhere

By the end of World War II, with Germany in shambles, nationalists were defeated by outside forces and liberals came back with a hard money and stability doctrine not policy rate (money printing) driven growth.

They closed the Reichsbank, set up the Deutsche Mark under full control of the politicians, in the Austrian-Ordoliberal tradition, established free trade and full free market competition under a full liberal democracy. There was not an inflationist macro-economist in sight.

The Deutsche Bank as a formal institution was established much later.

West Germany’s Ordoliberals were so successful that the Social Democrats were relegated to the political backwoods until shortly before the break-up of the Bretton woods, unlike in Sri Lanka where Socialists went from strength to strength.

In 1959, The SPD officially abandoned its Marxism of expropriation and anti-capitalism under its Godesberg Program as the economy boomed and support for a strong currency and private sector grew gaining strong public support.

READ MORE: Godesberg Program of the SPD (November 1959)

But the UK, the country that defeated Germany, remained mired in Cambridge economics, Sterling crises and IMF programs till Thatcher came.

The US was only slightly better.

Economics was under siege from the so-called Saltwater universities with a virulent form of Post-Keynesianism, coupled with toxic statistics, displacing classical economic principles.

Paul Samuelson, of MIT was a key driver of mindless econometrics in what could now be called data driven monetary policy.

Monetary policy deteriorated in the Fed with macroeconomics coming to the fore with lean-against-the-wind policy, with the ‘wind’ also being originally fanned by the Fed with rate cuts.

In Sri Lanka in 1961, the Bank of Ceylon was expropriated and the People’s Bank was set up.

In 1961 the Federal Republic of Germany appreciated its currency around the same time as the Fed invented central bank swaps to borrow from other central banks without going to the IMF after printing money and losing gold.

Sri Lanka where Anglophone qualified ‘development’ economists who were by now pushing import substitution after severely depleting reserves, started going to the IMF from 1965.

J R Fails to Defeat Macro-economists

J R Jayawardene, the Finance Minister who originally created a central bank in 1950 and made the country a member of the IMF the day after, brought B R Shenoy – probably the greatest classical economist produced in South Asia – to help in 1966.

Shenoy advises the country not to print money and float the currency, and avoid periodic devaluations, saying the calculations about equilibrium exchange rates which had by then emerged – with the expansion of econometrics – are suspect.

This is advanced thinking as the Fed has not floated yet.

Macro-economists in Ceylon predictably ignore his advice and instead print money for rural credit and start multiple exchange rates, Latin-America-style, amid rising central bank activism.

In 1969, with reserves severely down, an import control law was brought in, discrediting Dudley Senanayake’s free trade plans as central bankers won the day yet again.

In 1969, as the Fed fired global inflation, Germany’s Social Democrats were able to form a coalition government in Germany for the first time since they lost, helping bring Hitler to power so many decades ago.

In 1971, as oil, food commodities and gold prices soared, President Nixon closed the gold window, floated the dollar and imposed import tax surcharges (Nixon shock).

Nixon is impeached later.

As the Bretton Woods and the US dollar collapsed, Sri Lanka closed the economy completely in the 1970s going much further than Nixon.

Econometric Corruption Spreads

The collapse of the US dollar led to the Great Inflation of the 1970s as reserve currency countries struggled to find an anchor for floating exchange rates.

Statistical corruption of economic principles reaches a new high.

Academic inflationists, apparently with no knowledge of central bank operational frameworks, clutch at the latest statistical formula.

Blaming statistical formulae, imports and trade deficits are regurgitated from classical mercantilism as excuses for monetary instability allowing macro-economists to escape accountability for inflationary suppression of rates.

Wage-spiral inflation, oil shock, gives a new life to ‘cost-push’ inflation.

Nominal effective exchange rates are made popular by Fred Hirsch and Use Higgins.

Leftist uprisings proliferate worldwide.

Econometricians then came up with real effective exchange rates as currencies collapsed and inflation diverged widely in the 1970s and worsened in the 1980s.

Germany rejects the ideas and starts to target money supply and shifts to inflation later in the 1970s.

The deep knowledge operational frameworks (OFs) of note issue banks that classical economists from Ricardo to Hume to Torrens had developed in the 19th century seems to have disappeared by then in the unusually effective brainwashing at Anglo-American universities.

In 1978, the IMF effectively ended external anchoring without a credible replacement domestic anchor, plunging many countries like Sri Lanka into a blackhole of monetary instability.

The exchange rate goes haywire, and inflation rockets.

As inflation goes up budgets go haywire as the state is unable to manage rising expenses.

The macro-economists artfully blame budget deficits for monetary instability (which is dumb in the first instance, since credit is credit whether it’s private or state), not inflationary central banking.

Related Sri Lanka’s rupee depreciation and economic crises; the deficit lie

In the 1980s East Asia latches on to the dollar with currency boards (or currency+board+plus regimes where foreign reserves exceed reserve money), and imports the stability the US Fed achieves under Volcker and Greenspan which was called the Great Moderation.

These countries grew with both monetary and political stability and used the renewed free trade agenda of Western nations in the Great Moderation to grow their economies.

J R Jayewardena came to power on the back of trade and economic controls of the 1970s, driven by money printing as well as bad Fed policy involving the so-called ‘Great Inflation’.

In the belief that the ‘strong man’ can take the economy forward, an authoritarian constitution is enacted, in a repeat of what happened in Germany after Weimar socialism.

Open Economic Reforms Discredited by Unanchored Money, REER

But the depreciation of the rupee led to a period of ‘Greater’ Inflation within Sri Lanka until 1995, even as the US, Europe and East Asia grew in the Great Moderation of low inflation, directly as a result of the IMF depriving the country of a credible monetary anchor.

Sri Lanka tries money supply targeting without a floating rate and fails. As the Fed tightened in 1980, Sri Lanka went into the worst BOP deficit up to then of 191 million dollars.

In Latin America, external defaults begin.

J R ends up with severe social unrest and a second leftist uprising on top of the northern rebellion which turned into an intensified civil war after the 1983 nationalist riots. There was high inflation and a stabilization program around the time as well.

JR brings the greatest classical economist East Asia has produced, Singapore’s former finance minister Goh Keng Swee, as Sri Lanka is shunted into an IMF bailout within two years of the most radical economic reforms the country had ever seen.

Goh tells J R not to print money and not to depreciate the currency, as Sri Lanka is similar to Singapore and is a trade dependent country.

Related How Sri Lanka rejected Singapore monetary advice and politicians, people paid the price

Macro-economists ignore the advice. Instead, in 1985, macro-economists set up Regional Rural Development Bank linked to the central bank to give refinance (printed money) credit.

Jayewardene held on to power with electoral gimmicks and authoritarianism as the currency collapsed and inflation soared.

Import substitution again came to the fore, spreading to onions and potatoes.

Stabilization and Jan Bala Meheyuma

Fast forward to 2001.

Ranil Wickremesinghe came to power as Prime Minister on the back of the 1999/2000 currency crisis and IMF stand by arrangement, the ‘pariwasa government’, and the Jana Bala Meheyuma.

He completes the stand-by and starts a new IMF program – not to restore stability, but a pure reform program, labelled ‘Regain Sri Lanka’ with monetary stability already restored. The economy recovers strongly with a ceasefire also in place.

The JVP attacks him on fuel pricing as oil and fertilizer prices soar with Ben Bernanke misleading Greenspan into printing money to target positive inflation in what was later called the ‘mother of all liquidity bubbles’.

The just-ended 2000 currency crisis has also seen Sri Lanka’s CPC borrowing from Iran to import oil amid forex shortages in a precursor to supplier credits in the post-war flexible inflation targeting driven currency crises.

Though inflation is low, and the economy is in full recovery mode, Wickremesinghe is attacked by his political foes on a peace deal with the Tamil Tigers. When then-President Chandrika Kumaratunga takes over ministries while he is in the US, people flock to the road to support him as he lands in Katunayake.

Wickremesinghe sends them home empty handed and later he ends up without a government.

Because the Fed is targeting positive inflation using core inflation, ignoring the commodities, using hedonics and other tools that understates inflation amid a private sector productivity boom, a massive asset price cum commodity bubble is formed by 2008.

Amid a civil war and the Fed’s housing cum commodity bubble, Sri Lanka has another currency crisis with capital flights from rupee bonds, and goes to the IMF in 2008.

In the next election Mahinda Rajapaksa wins, despite the IMF stabilization program, with a war victory, in an unusual first for Sri Lanka on nationalist considerations.

The rupee is allowed to re-appreciate from 120 to 113.

But in 2012. rate cuts with printed money triggered a currency crisis within the IMF program giving rise to another stabilization program. The rupee fell to 130 to the US dollar.

Ranil Defeated by Potential Output Targeting

Fast forward a little to 2015.

Wickremesinghe came back to power in 2015, just as the economy is recovering very strongly from a currency crisis triggered by central bank rate cuts in 2011/2012.

The IMF then teaches Sri Lanka to calculate potential output. The central bank prints money to cut rates in 2015, amid a spending bout for the 100-day program, and triggers another crisis.

In this IMF program, there is no cost cutting. Instead, ‘revenue based fiscal consolidation’, a type of IMF backed state expansion, which rejects cutting government spending, is in operation.

Spending is ok, but deficits are supposed to be cut by tax hikes only, not cutting expenses (spending-based consolidation), putting the entire burden of adjustments on private citizens.

Sri Lanka then starts to print large volumes of money to narrowly target the call money rate in another deterioration of the central bank’s operating framework. The rupee falls from 130 to 152.

There is a stabilization program which discredits Wickremesinghe’s administration and taxes are hiked.

Hot on the heels of the 2016 crisis, another currency crisis is triggered in 2018 despite tax hikes on revenue based fiscal consolidation, due to targeting potential output with printed money, as inflation falls.

Yield curve targeting, Liberty-Bonds-style, also emerged in the period.

Instead of borrowing from Iran, the petroleum utility gets suppliers’ credit after potential output targeting driven fore shortages, and then converts them into state bank loans.

Related Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt

CPC runs losses despite market pricing oil. The borrowings later add to national debt after a default.

The rupee falls to 182 and another stabilization program is put in motion.

Wickremesinghe’s goose is cooked and his economic policies are discredited.

Nationalists Rise on Stabilization Program

Nationalists have a field day on the stabilization program and revenue-based-fiscal-consolidation in 2018. This time Muslims are targeted.

Hitler blamed the jews for a ‘stab in the back’.

Muslims are blamed for sterilization pills. A prominent Buddhist monk calls for a Hitler to come to power.

Gotabaya Rajapaksa comes to power and takes oaths in front of Ruwanwelisaya, a Buddhist dagoba, built by King Dutugemunu.

Macro-economists and think tanks, who are advising, descends on him like vultures and taxes are cut on top of rate cuts saying there was a ‘persistent output gap’ in the most extreme macro-economic policy seen in the island up to then.

Covid comes. As the economy recovers from Covid, the printed money triggers forex shortages despite the worst import controls since the 1970s. All kinds of shortages appear.

People come to the streets, dwarfing the 1953 hartal and the Jana Bala Meheyuma.

Gotabaya Rajapaksa’s goose is cooked.

Poor people starve. Poverty rockets, Latin-America-style, as the rupee collapses. Outmigration picks up, Latin-America-style.

Another Stabilization Program

After the Rajapaksa’s ouster, Wickremesinghe comes to power again and goes about fixing the country, helped by newly appointed central bank Governor Nandalal Weerasinghe who markets prices interest rates. Longer term yields go far above the policy rate.

Unusually, going against the usual IMF advice to destroy the currency, to destroy savings, to destroy salaries and trigger more social unrest, he allows the currency to appreciate amid deflationary policy.

Because many nationalist elements are supporting President Wickremesinghe, nationalism is muted in the current stabilization program.

Instead of Muslims, nationalist elements tried to use archaeology against Wickremesinghe.

However, the strategy is less successful than in the past since it was a nationalist-backed administration that created the crisis in the first place. It seems also that Wickremesinghe knows more history than the nationalists.

Sri Lanka has destroyed the currency as well as domestic capital since 1977, but has not become an export powerhouse like East Asian nations with monetary stability did, or services hubs like the Middle Eastern currency-board-style nations.

The rupee is now probably allowed to appreciate on some econometric formula, not with any belief in sound money.

Wickremesinghe has been duped into legalizing potential output targeting through a deadly monetary law and giving ‘independence’ to macro-economists who believe in 7 percent inflation and central bank swaps.

The Reform Lie

Mercantilists and macro-economists who earlier spread the narrative of imports, trade deficits, current account deficits, lack domestic production and real effective exchange rates to escape accountability for external instability and IMF programs, come up with yet another excuse.

They now blame the lack of reforms for monetary instability and repeated trips to the IMF, conveniently forgetting that the 1980s repeated IMF programs came with the most radical reforms ever.

Each time, rate cuts trigger external instability and downturns, leftists and nationalists are elected by a desperate public who are looking here and there for saviour.

Liberal policies are rolled back and post-independent policies that gripped the nation from 1956 to 1977 are brought back.

Monetary instability involving dual anchor conflicts (a reserve collecting central bank trying floating rate OFs) is unchanging, and continues under different labels.

Corruption is also blamed for the crisis. Dollar earning exporters are themselves blamed for forex shortages and the currency crisis by some in another strange twist, which however is rejected by the central bank.

Who will IMF and the Central Bank Elect in the Upcoming Elections?

In summary, history shows that a stabilization program, which comes after rate cuts for growth, is when fringe elements are mostly likely to be elected.

The JVP, a leftist party which believes in expanding the state (in line IMF’s progressive Saltwaterist revenue based fiscal consolidation) is now doing well on social media.

Some of the younger demographics that supported Gotabaya Rajapaksa after the 2016 and 2018 stabilization programs are active in social media hoping to find salvation within the JVP.

In the confusion, a widespread belief that the currency crises and default was caused by corruption, and not aggressive macro-economic policy, is being strengthened.

The belief also helps the JVP, which has not been in power, and is projecting a clean image, regardless of its economic credentials and violent past.

That the 1970s problems came from Harold Laski’s Marxist ideas on top of monetary instability from the central bank is not known.

In any case it was before the time of the current generation of young voters.

On rare occasions, stabilization programs have helped build liberal democracies in the past, when nationalists and socialists were responsible for the crises.

Germany after WWII when the Social Democrats were confined to the backwoods for three decades and Korea in 1987 are key examples.

Korea’s Great Peoples’ Struggle or June Uprising which made the country a liberal democracy, better than Japan, came on the back of stabilization and the first currency appreciation in the history of its central bank under its previous authoritative administration.

Springtime of the Peoples after Railway Bubble and Puran Appu

The 1847-1848 Commercial Crisis or the Panic of 1847 in Britain also did not lead to nationalism but to the enhancement of liberal ideas sweeping the region, with most countries then under monarchs.

The 1847 banking panic also marked the end of the British Railway bubble

The 1847-1848 crisis saw widespread political crises in the gold area, not just the UK and Ceylon.

It was also called the ‘Revolutions of 1848‘ or the ‘Springtime of the People’.

The ensuing crises was mostly a liberal democratic struggle that led to the end of monarchies, freedom of the press in several dozen European nations.

As commodity prices deflated and coffee prices collapsed, many plantations in Ceylon went bust and Governor Torrington had to put new direct taxes on the people, IMF style.

The 1848 ‘Matale Rebellion’ was seen in Sri Lanka. This involved Gongale Godabanda, Puran Appu and others where it started with a tax protest in front of the Matale kachcheri.

This is why the IMF’s progressive taxation that has caused so many problems for the people and made a reformist government unpopular, should be a warning to the ruling class.

Wealth taxes are also on the horizon, in further depletion of wealth and savings for investment for the future.

Politicians on both sides of the isle, who have socialist tendencies, like direct taxes and only criticize VAT, which is a superior tax.

But people feel income tax, where money is taken in big chunks, before a voluntary transaction is made.

The IMF’s planned wealth tax is a type of expropriation where people who have invested their savings and built houses are punished even when there is no cash flow and are also likely to turn people away from reformist leaders.

The wealth tax, like the progressive taxation and revenue based fiscal consolation, is in line with old communist ideas, which is coming to Sri Lanka as the result of progressive Saltwaterism of the West.

There is no wealth tax in socialist Vietnam. European style wealth taxes have been resisted by Republicans in the US, a country which already has inheritance taxes when people die. Wealth taxes, especially on homes, are slammed as people, including elders on pension, are still alive.

Progressive Saltwaterism and Unsound Money

Under IMF influence Sri Lanka now has US-style inheritance taxes and personal income taxes, European style-VAT and and Argentina-style monetary policy under flexible inflation targeting with up to a 7 percent target.

A country can still survive socialist style big-government taxes with higher levels of unemployment, like in Europe, if monetary stability is provided.

Before the policy rate for economic intervention (macro-policy), was devised in the 1920s by the Fed, monetary crises were relatively rare, that is why the British were able to rule with only a few rebellions in Ceylon and elsewhere.

Sri Lanka’s central bank which has given coercive powers to a few bureaucrats to cut rates with printed money and create forex shortages, is a key reason for this country’s monetary as well as political instability.

Unlike in West Germany or UK under Thatcher (UK was IMF’s top client until Thatcher-Hayek-Walters), the current reforms will not bring any long term benefits.

As a result, all the reforms that are being done now will be so much water under the drain, as they have been for the last 72 years, since monetary stability will be denied to the people by the use of inflationary rate cuts.

Sri Lanka was a fully free trading, stable country in better shape than Singapore, when it gained independence with a currency board. There were hardly any economic controls to reform.

Singapore on the other hand was devastated under Japanese occupation and Banana Money (Military Yen) by the end of World War II, just like the rupee was with potential output targeting now.

In the final analysis, whoever comes to power may be academic, as the IMF has already denied a single anchor monetary regime to the country with the new central bank law and legitimized printing money for growth which devastated the country after the civil war ended.

In Latin America, nations default repeatedly with 23 percent plus revenue to GDP and 5 percent budget deficits, due to rate cuts enforced with printed money under operational frameworks similar to that of Sri Lanka’s central bank.

After the Second Amendment to its Articles Argentina is now IMF’s biggest client, not Keynes’ birthplace.

The undermining of Milei’s monetary plan, which would have stabilized the country, shows macro-economists and the IMF really rules Argentina policy.

Sri Lanka’s current central bank has allowed the rupee to appreciate, giving immediate benefits to the people, in sharp contrast to earlier programs.

History Set to Repeat

It is however not stable or consistent sound money, but only a temporary gain from external anchoring as the domestic anchor (5 to 7 percent inflation target to be achieved with money printing or depreciation or both) is not yet operative.

The operating framework involving flexible inflation targeting, and the flexible exchange rate is fundamentally flawed.

The benefits are coming now because external anchoring has supplanted the domestic 5 to 7 percent anchor. Inflation is now only 0.9 percent with currency appreciation from deflationary policy.

Unlike in East Asia, deflationary policy is not assured.

On the other hand, external instability is almost guaranteed under flexible inflation targeting, with a 5 or 7 percent inflation target, the latest spurious monetary doctrine peddled to hapless countries which then end up in default, where a reserve collecting central bank is urged to cut rates claiming historical inflation is low.

Not just future, but current domestic credit is disregarded in flexible inflation targeting despite a reserve collecting central bank being operated.

With Sri Lanka having market access, a second default is likely as the money exchange conflicts re-emerge as the economy recovers.

Supposedly, since 1978 (after the IMF’s second Amendment when external defaults proliferated) 58 percent of defaulters have defaulted again.

Meanwhile, after a decade of quantitative easing, US government finances are shot, and the chickens are coming home to roost. Economic nationalism is on the rise in the US.

With Trump in the wings, fully fledged nationalism is also on the cards. The same is happening in Europe.

Sri Lanka will also have to cope with that.

Whether it is Governor Torrington in 1848 with the British Commercial Crisis or Ranil Wickemesinghe in 2019 or 2024 after the potential output targeting cum/flexible inflation targeting crises, destroying money and credit has powerful political consequences to those who later try to fix the problem.

Even if 90 percent of the things are done right – as now – even this column will pick holes in some leftist aspects of IMF programs and warn about the inevitable consequence of deeply flawed monetary policy, confusing the public.

It is not about reforms or leaders. Sri Lanka’s politicians have been willing to take very hard decisions always to take the country out of crises.

It is about bad unstable money that prevents the fruits of those decisions from coming to the people in subsequent years.

“Today’s anniversary is a grim reminder of the collective failure of the Sri Lankan authorities and the international community to deliver justice to the many victims of Sri Lanka’s three-decade-long internal armed conflict.

It is sobering to stand in the same place where, 15 years ago, countless civilian lives were lost during the last days of the war.

Ahead of this event, we have witnessed clampdown on the memory initiatives, including arrests, arbitrary detentions and deliberately skewed interpretations of the Tamil community’s attempts to remember their people lost to the war. Authorities must respect the space for victims to grieve, memorialise their loved ones and respect their right to freedom of expression and peaceful assembly.

UN investigations have found credible evidence of crimes under international law and other violations of international human rights and humanitarian law committed by those on both sides of the conflict, yet there has been little in the way of an independent or impartial national inquiry into such serious crimes.

Meanwhile, the families of those who were forcibly disappeared during the conflict have been left to search desperately for their loved ones. It is truly heartbreaking to hear from victims how long they have been demanding justice in vain.

The Sri Lankan government is best placed to provide answers to the victims, however numerous domestic mechanisms to establish accountability in the last 15 years have been mere window dressing.

The report by the UN Office of the High Commissioner for Human Rights released earlier this week too reiterates the gaping deficits in Sri Lanka’s accountability initiatives that has contributed to impunity remaining deeply entrenched.

Tens of thousands of victims and their families continue to suffer in anguish as they await truth, justice, and reparations. We stand in solidarity with them here in Mullivaikkal today.”

Background:

During the internal armed conflict from 1983 to 2009, Sri Lankan government forces and their armed political affiliates committed extrajudicial killings, enforced disappearances and acts of torture against Tamils suspected of links to the Liberation Tigers of Tamil Eelam (LTTE).

The LTTE also launched indiscriminate suicide attacks on civilian targets like buses and railway stations, assassinated politicians and critics, and forcibly recruited children as fighters.

Violations of international human rights and humanitarian law peaked in the final months of the conflict, most notably in May 2009 when some 300,000 displaced civilians were trapped between the warring parties.

It was at Mullivaikkal, a small village in Mullaitivu district in the Northern Province of Sri Lanka, where the final offensive between the Sri Lankan forces and the LTTE took place, killing at least 40,000 civilians according to UN estimates.

Each year, on 18 May, a memorial event at Mullivaikkal brings together thousands of war-affected Tamils to commemorate those lost to the war and demand justice and accountability.

The Office of the High Commissioner for Human Rights (OHCHR) this week released a report on accountability for enforced disappearances in Sri Lanka.
(Colombo/May18/2024)

Both the Gotabaya Rajapaksa government and now the Ranil Wickremesinghe tenure has been shown up poorly in terms of ensuring the masterminds and those who failed to prevent the bombings are bought to book.

As one sifts through various reports and discussions on the Easter Sunday bombings which took the lives of 315 and injured at least 600, one must, as Sunanda Deshapriya, activist and investigative journalist told a webinar recently, ask whether that tragedy was preventable.

If it was, then why was it not?

The webinar was organised by the Solidarity Movement for Justice and Truth (SMJT).

One interesting fact that investigators discovered, Deshapriya said, was that a phone number used by one of the bombers, was amongst a series used by the infamous ‘Tripoli Brigade’ that is alleged to be behind the Lasantha Wickrematunga murder.

This brings up the question whether the Easter bombers were connected to these covert groups within the Armed Forces which some observers have blamed for a number of violent incidents.

There were other questionable events. In an interview with TNL in 2023 former CID Head, Ravi Seneviratne claimed that though the visit to Vanathavilluwa by his officers investigating the destruction of Buddhist statues in Mawanella, was not public knowledge, the military intelligence had turned up there.
Deshapriya says, “We have to ask who ordered the MI to go there.”

In his interview, Seneviratne also said that Zaharan, the leader of the Thowheed Jamat that carried out the Easter bombings, first came to their attention in January 2019. They received tips of Zaharan’s whereabouts from civilians he said, and those were always that he had been sighted in various locations in the East.

However, following the Easter attacks the CID had realised that while they were looking for Zaharan in the East, he had been moving around in Wattala, Negombo, Mount Lavinia and Panadura. He alleged that while Zaharan seemed to have been secure in these areas, the CID had had no inkling of it.

The CID has informants everywhere, so why were they not aware that Zaharan was living in the Western Province, he asks.

SSP Shani Abeysekara is on the record as saying that the Intelligence operatives had “deliberately mislead the CID.”

Evidence indicates that former head of State Intelligence, DIG Nilantha Jayawardena, had wiped out his phone and laptop prior to handing them over the investigators.

“Why did he do that? When did he do that? What did it contain? There are many secrets about the Easter Sunday attacks that are yet to be revealed,” Deshapriya said.

He also states that “there are also many holes in Azad Maulana’s story on Channel 4.”

Despite these discrepancies, Deshapriya says that the volume of information about Zaharan available to the Security Forces, particularly the intelligence arm was quite substantial.

The bombings and the aftermath, the hysteria around the need to save the country and future generations, the demonization of the Muslim community all pointed to one goal; a regime change. Those fighting these past five years to bring the masterminds to book must also now, determine whether that heinous deed was intentional.

The Parliamentary Select Committee (PSC) and the Commission of Inquiry (COI), both appointed to examine the events leading to the Easter attacks, concluded that if the Indian intelligence reports had been acted on, the bombings on April 21, 2019, could have been avoided, the report noted.

On April 19, the Centre for Society and Religion (CSR) released a report titled, ‘5 Years Since Easter Sunday Attacks: Still Awaiting Justice,” where it says that “various committees were appointed to collect evidence and provide a report of the findings.

‘A Presidential commission, a Presidential committee, and a Parliamentary Select Committee were appointed to investigate the Easter Sunday Attacks. The report produced by the Presidential Committee was not published while the Parliamentary Select Committee’s report was fully published, and the Presidential Commission report was partly published.

On 26th January 2023, the Right to Information Commission directed the Presidential Secretariat to make the presidential committee report public before 9th February 2023 after hearing an appeal filed by CSR. However, none of the major recommendations in the published reports have been implemented to deliver justice for the victims.”

“The reports reveal that authorities had sufficient time and enough intelligence to act on the suspicions and prevent the incident. SIS Director received intelligence reports from India on the 4th and 5th of April 2019 and again two reports on the 20th of April describing the possibility of the attack, naming the suspects, and the urgency of the terror attack.

Additionally, there was a dry run conducted five days before the bombings where a motorcycle was blown up using a remote-controlled device in Zaharan’s home base, and although the SIS learnt of the incident the next day, even after intelligence reports stated that Zaharan was planning a terror attack, proper investigations into this matter did not take place.

The amount of information that was received prior to the attack and the lack of action, investigation, and implementation of safety measures inevitably raised questions as to who was actually behind the attacks” CSR said.

“A less dysfunctional government might have still failed to connect incoming intelligence with the information on Zaharan in Sri Lankan police files, but it would have tried much harder,” it added.
The report goes on to note the lapses made by the Sri Lanka government’s leaders.

“Regardless of the number of intelligence reports both by the U.S and India, that had warned about imminent attacks targeting churches and hotels in Sri Lanka, President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe both acted out of gross ignorance. Even, at the time the unfortunate incident has happened, the executive president Mr. Sirisena was out of the country and returned a considerable time after the incident.”

Fr. De Silva also asks as to how the Police would conduct an impartial inquiry into the role of the various personnel who were holding powerful positions at the time and still continue to do so.

Gen Salley remains as head of Intelligence. The DIG in charge of the area where the Katuwapitiya church is situated in that period was Deshabandu Tennekoon, who is now the Inspector General of Police. DIG Nilantha Jayawardene who was the Intelligence chief is now Senior DIG Administration, a post second only to the IGP.

“In seeking justice how can we engage with these leaders in power who are themselves accused of complicity in these incidents,” asks Fr. De Silva. “We are doubtful we can get justice without a change in the people holding office.”

As election fever hots up, the main opposition political parties are jostling with each other promising to bring the masterminds of the Easter attacks to book, under their regimes. Both the SJB and the JVP led NPP have put out official statements on the course of action they would take if elected to power.

Speaking at a zoom discussion organised by the Australia Sri Lanka Forum for Justice for Easter Victims on April 17, SJB’s Eran Wickremaratne said his party would introduce amendments to existing structures, to create an Independent Public Prosecutors Office to handle such cases.

The SJB plans to establish a permanent office with members of Scotland Yard and the FBI to work alongside local investigators to bring closure to the Easter tragedy, he said.

Meanwhile, the JVP led NPP presented a 7 point plan which would address the inaction of the authorities, and take legal action against all those directly and indirectly involved in the Easter Sunday bombings.
Both political parties have presented their proposals to Malcolm Cardinal Ranjith. Let’s hope they are not mere election promises!

The Easter Sunday victims have been political pawns these past five years, just as the many others who lost family members in the various conflicts the country has been through.
They too, are still awaiting justice.

The US was running bad to atrocious monetary policy since 2001, when Ben Bernanke misled Alan Greenspan into printing money to run an 8-year cycle, firing a commodity and housing bubble which collapsed after rates were kept at around 5 percent for about a year.

That was the end of the Great Moderation started by Paul Volcker and continued with some skill under Greenspan, until the Fed was infected by Bernanke, the depression scholar. Keynes was also a ‘depression scholar’, in essence.

Gold prices fell from 800 to 284 dollars an ounce under Volcker-Bernanke, until Bernanke cooked up a false deflation scare with a healthy banking system and started to reverse it, firing the housing bubble and the Great Recession in its wake.

READ MORE: Deflation: Making Sure “It” Doesn’t Happen Here : Remarks before the National Economists Club, Washington, D.C.

Then came quantity easing after the banking collapse and Frank-Dodd to control banks.

From around Covid and until March 2022, quantity easing resumed no holds-barred with fiscal policy also deteriorating as the government used the money.

It is now almost a year since interest rates have been at 5 percent in the US after Powell started to raise rates.

But this is not the US of 1980 or 2000. And it not just some companies but the government that is choked to the gills in debt after the MMT-style stimulus, Covid handouts and perhaps the most aggressive ‘full employment’ policies seen in the history of the Fed.

Warning Signs

F A Hayek said this of Keynesianism and the policy rate to boost growth through full employment policies (now called targeting potential output in Sri Lanka).

“It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized.”

In continuing with quantitative easing with a healthy banking system, the Fed and the ECB is putting Keynes and John Law to shame.

It was perhaps no accident that the IMF taught Sri Lanka to calculate potential output a few years ago, with this ideology running high in Washington, eventually taking both the Yahapalana and Gotabaya Administration down and driving Sri Lanka to default.

There was an unprecedented overall deterioration of policy around the world that spread from the Fed and US universities, just like in did in the 1920s when the policy rate and deliberate open market operations were invented and the 1960s when its own anchor was busted .

From last year the US broad money supply has been shrinking in absolute terms, something that has rarely happened.

The Fed no longer looks at money supply, under their current framework.

Economist Steve Hanke, who was ad advisor to the Reagan Administration when the landmark action was taken to bring monetary stability back in the early 1980s, and kick-start non-inflationary growth, has pointed out that absolute falls in the money supply is very rare in the US.

Hanke also accurately predicted the 2022 inflation spike from Fed’s inflationism.

Bad Money, Bad Budgets

US budgets are shot.

After years of bad Fed monetary policy (which also helped Sri Lanka borrow in dollars from sovereign bond holders and China), US rates are going up and interest costs are rocketing like in Sri Lanka.

Is it possible for a US Treasuries auction to fail?

In theory no, since the Fed can buy it up as Sri Lanka’s central bank does to cut rates and trigger external crises.

But any such event can send bad vibes which can be the proverbial straw that broke the camel’s back.

The US Treasury had almost a perfect system going until around 2000, with the China and East Asia buying up US debt and importing the stability of the Great Moderation to become investment and export powerhouses.

But US Mercantilists who believe that exchange rate pegs made East Asia export powerhouses, at the expense of the US trade deficit, put pressure on China and other countries to break the peg, losing a big buyer of their debt.

IMF backed Self Destruction

The IMF fully supported these efforts.

China then broke the peg from around 2005 and diverted savings to the Belt and Road project.

When the housing bubble broke, China was in pretty good shape with tighter than US policy until then.

After quantity easing started US rates were low in any case. Sri Lanka was one of the countries that the money was diverted to.

Bond holders, also awash in liquidity started to buy crappy bonds from low rated countries which are now defaulting like dominoes.

The Fed, by triggering commodity bubbles and oil prices that tends to incentivize leaders of illiberal mineral rich countries into war, Arab Israeli wars or Russian aggression.

US dealt itself another blow during the Ukraine crisis.

The lack of knowledge in US policy circles was clearly shown by the freezing Bank of Russia reserves invested in the US.

It prevented Russia’s central bank from using reserves to mis-target rates and sterilizing the interventions with printed money, and helped Russia avoid a monetary meltdown.

Instead of printing money to mis-target rates after intervening to trigger a currency crises like repeated IMF backed countries and Latin America does, Bank of Russia hiked rates to 20 percent virtually the day after reserves were frozen and clean floated.

As a result, the US budget has lost another customer for its bonds. More to the point it has discouraged others from buying US bonds as well. If reserves are frozen, then countries which have bad relations with the US will no longer buy US bonds.

Clean floating countries will not collect reserves in any case.

The steeply rising gold prices now, are partly driven by central bank purchases, who would perhaps have bought more US bonds in the past. If more countries are driven to external crises though flexible inflation targeting, they will also sell US bonds.

The IMF has has started peddling flexible inflation targeting to Vietnam.

In the last Article IV consultation, the IMF also promoted expansionary fiscal policy dealing a death blow the central bank efforts to stabilize the external sector by replacing private credit with government credit.

Curiouser and Curiouser

There is another curious phenomenon seen in Fed statistics that should make people sit up and take notice.

The reserve balances component of the US monetary base (there is no longer a required reserve rule in the US amid the latest deterioration of its monetary framework) is climbing even as the Fed is engaged in quantity tightening.

This is clear liquidity preference behaviour, where the smart banks are getting ready for the worst instead of – say – buying government treasuries.

Sri Lanka saw a similar situation among the best managed foreign banks in Sri Lanka during the country’s ‘mother of all currency crises’.

Fed wants to quantity tighten, but banks are building up liquidity. Essentially the effect on the economy is the same – some banks are not lending. The difference is these banks may be smarter.

There seems to be two types of banks, which are acting in completely different ways in the US.

While some banks seem to be loading up on liquidity others are lending – at 5 percent plus.

Commercial bank credit which stopped growing and fell from the time the Fed started to tighten policy in March 2022 has started to edge up over the past few months.

It is not clear who is taking the loans, at 5 percent plus which is a very high rate for a highly leveraged economy like the US. At least some of it must be going for commodity speculation.

Meanwhile gold has hit 2,400 dollars an ounce. Gold was only 284 dollars an ounce when Bernanke induced Greenspan to print money for positive inflation targeting by falsely firing a deflation scare in 2000.

There was some expectations by various technical analysts that gold will hit 2,400 an ounce. So, it can be a self-full filling prophecy.

Whatever it is, a commodity bubble at the tail end of a rate hiking cycle is not a good omen. A similar trend was seen just before the collapse of the housing bubble. It is like the dead cat bounce of the commodity world.

Soft-Landing or Disorderly Unravelling of the Powell Bubble?

In the Greenspan-Bernanke bubble it was HSBC’s housing unit in the US that showed that the system was rotten.

The jitters over the Iranian attacks show that US markets are skating on very thin ice.

It is not clear to what extent US companies are over-leveraged.  It was mostly a housing bubble that broke in 2008. But this time credit has shifted to other sector.

Government debt is one. The recent bank failures related to marked-to-market long-term government bonds confounding those who promote full reserve banking.

But there are signs that some other companies, including those in infrastructure which tended to be pretty safe, have borrowed and engaged in activities like leveraged dividend recapitalizations.

Over recent years there had been a spate of leveraged dividend recaps.

Jerome Powell said last two weeks ago that the Fed will continue to tighten with inflation still high.

“The recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2 percent on a sometimes bumpy path,” he said at forum at Stanford.

“Labor market rebalancing is evident in data on quits, job openings, surveys of employers and workers, and the continued gradual decline in wage growth. On inflation, it is too soon to say whether the recent readings represent more than just a bump.

“We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent. Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.”

Under the Fed’s (historical) data driven monetary policy and its dual mandate (which by the way was generally ignored by both Volcker and Greenspan in favour of stability) there is no chance to cut rates, so he is justified in the stance.

But it does not necessarily mean that the historical data he is looking at will lead to a soft-landing or another deflationary collapse.

This time, the US government will have less room than in the past to engage in various macro-economic policies to manipulate the economy given its debt and the political crisis in Washington.

The banking system may also not respond to Fed actions as it had done in the past.

In earlier collapses, gold, dollar notes and US government debt were investments of choice for economic agents, as shown in Exter’s pyramid.

The US so-called ‘weaponizing’ of the dollar has reduced its attractiveness overseas, but not necessarily at home as shown by the recent liquidity preference behaviour.

Sri Lanka hit by bad US policy in the past

In past US monetary crises, whether the Great Depression, the 1960s inflationism (Sri Lanka first started its journeys to the IMF in the middle of that decade and passed the import control act), the 1971 collapse of the Bretton Woods (Sri Lanka closed the economy), the country has been hit.

In 1980s when US improved policy Sri Lanka failed to capitalize on it unlike dollar pegged East Asia.

From 1978, at the tail end of the Great Inflation period, Sri Lanka lost a credible anchor leading to high inflation and social unrest and missed stability that East Asia got by maintaining external anchors with the Fed improving its policy.

The US and the US dollar survived in 1951 and 1980 as hard money people got back into the driving seat and inflationist macro-economists lost favour.

However it did not happen in 2008. Things essentially got worse as it did in the 1930s with quantity easing infecting even once prudent reserve currency central banks, as Keynesianism and the policy rate did after the Great Depression, leading to mass devaluations in the 1930s.

It may be time to look for countermeasures. Sri Lanka at the moment is fixing its budgets and has reasonable monetary policy though the operational framework is deeply flawed.

Companies and individuals may also need to hedge their bets.

To reach the columnist: BellwetherECN@gmail.com

To read more recent columns

Sri Lanka should not give standing facilities as lender of first resort: Bellwether

Sri Lanka should protest the 7-pct annual inflation target, not a 3-pct VAT hike

Why the IMF is hated now and is backing bad money in Sri Lanka and Latin America

Sri Lanka central bank salary hikes show lack of accountability for its actions

“Inequality results in adverse economic, social and political consequences,” write Lakmini Fernando and Sulochana Silva.

“Addressing gender inequality is crucial to achieve stronger and more sustainable development.”

In 2021, female labour force participation was 22 percent for South Asia and 32 percent Sri Lanka, while all other regions except the Middle East and North Africa (18 percent) recorded more than 50 percent participation.

Also, a gender wage gap of 24 percent indicates that on average, women are paid approximately 20% less than men in Sri Lanka.

The full analysis is reproduced below;

A Lost Development Opportunity: Regional Integration to Empower Sri Lankan Women

Gender equality is a shared vision for social justice. Addressing gender inequality is crucial to achieve stronger and more sustainable development. While regional integration is seen as a potential development strategy to promote inclusive and sustainable growth and efforts toward women’s economic empowerment, gender equality tends to be sidelined in such discussions.

Inequality results in adverse economic, social and political consequences. Unlike the advanced economies, improvements in education, fertility and incomes have not been able to enhance women’s labour force participation in Sri Lanka.

Gender equality is a shared vision for social justice. Addressing gender inequality is crucial to achieve stronger and more sustainable development. While regional integration is seen as a potential development strategy to promote inclusive and sustainable growth and efforts toward women’s economic empowerment, gender equality tends to be sidelined in such discussions.

Thus, identifying and implementing the right policy mix for meaningful regional integration is vital in creating gender inclusive sustainable growth.

The impact of greater economic opportunities for women

Greater economic opportunities for women create a domino effect. In South Asia, equal employment opportunities for men and women are estimated to enhance incomes by 25%, including increased intraregional trade of USD 44 billion.

Yet, despite the improvements in education and health outcomes, low women’s economic participation remains a critical development challenge for developing economies including South Asia.

In 2021, female labour force participation was 22% and 32% for South Asia and Sri Lanka, respectively, while all other regions except the Middle East and North Africa (18%) recorded more than 50% participation.

Also, a gender wage gap of 24% indicates that on average, women are paid approximately 20% less than men in Sri Lanka.

To achieve gender parity, South Asia will take 149 years, while this is 67 and 95 years for Europe and North America, respectively.

Regional integration: Current challenges and opportunities

Unlike South Asia, other regions like East Asia, Europe and North America are harnessing the potential benefits of regional integration by developing strong relationships with their neighbours.

Intraregional trade accounts for 50% of total trade in East Asia and 22% in Sub-Saharan Africa, but only 5% in South Asia.

Intraregional trade as a share of regional gross domestic product (GDP) is only 1% in South Asia while it is 2.6% and 11% in Sub-Saharan Africa and East Asia and the Pacific, respectively.

South Asian regional integration has been restricted mainly by high tariff and non-tariff measures, lack of trust and political will, weak policy implementation and poor infrastructure.

Although the impacts are asymmetric, deeper regional integration benefits any country. Consumers gain access to cheaper goods and services; producers and exporters gain access to inputs, investment and production networks; and firms gain market access for goods and services.

Reforming stagnating dimensions of regional integration toward gender inclusive growth

To promote gender-inclusive growth, a recent IPS study shows that it is essential to improve the stagnating dimensions of regional integration. This process is complex and varies by country due to its multidimensional nature.

There are six key dimensions: trade and investment, movement of capital, regional value chains, infrastructure and connectivity, people’s mobility and legal and institutional basis for international policy cooperation.

Evenly distributed dimensions lead to better regional integration and higher women’s economic participation. With the most evenly distributed dimensions, the EU is recognised as the most advanced and consistent in regional integration (Figure 1) with more than 50% women’s economic participation.

In contrast, South Asia’s significantly uneven dimensional distribution makes it one of the least integrated and lowest women’s economic participating regions in the world.

South Asia focuses more on infrastructure and connectivity and movement of people and less on money and finance.

Similarly, Sri Lanka’s regional integration is impacted heavily by infrastructure and connectivity and this is no surprise as nearly 60% of public investment has been allocated to infrastructure development in the last few decades (Table 1).

Figure 1: Heterogeneity in the contribution of multiple dimensions of regional integration

Notes: Regions with the most evenly distributed dimensions have the highest female labour force participation. eg: European Union.

Source: Adopted from Park, C. Y., & Claveria, R. (2018). Does regional integration matter for inclusive growth? Evidence from the multidimensional regional integration index. Asian Development Bank Economics Working Paper Series (559).

Table 1: Identifying specific dimensions of regional integration toward gender-inclusive growth

Notes: The multidimensional regional integration index (MDRII) provides a cumulative score of six dimensions: trade and investment; money and finance; regional value chain; movement of people; infrastructure and connectivity and institutional and social integration. A higher score indicates better integration. The least contributory dimensions (with scores below 0.4) require significant reforms to ensure that regional integration promotes gender inclusive sustainable growth.

Source: Author’s calculations based on Park, & Claveria (2018)

The IPS study further reveals that improvements to institutional and social integration and money and finance reduce nearly 50% of gender inequality in South Asia.

Furthermore, better institutional and social integration and movement of people positively impact women in industry and services sectors but not agriculture. In developing countries, women often engage in labour-intensive sectors, which are low-skilled and low-paid, referred to as the ‘feminisation of labour’.

Regional integration creates new employment opportunities in the manufacturing and services sectors. This results in technology-led ‘defeminisation of labour’ leading to increased demand for female labour and higher wages.

In contrast, trade and integration negatively impact women in agriculture. The reason is their limited skills and mobility. Regional integration alters the structure of production where sectors with export opportunities may expand, while import substitution sectors may contract.

Women in the contracting sectors may face job losses. Even in expanding sectors, women may not have benefitted due to horizontal and vertical gender segregation. Thus, selective opening of sectors and providing opportunities for upskilling and reskilling of women will help minimise the negative impacts.

Way forward

Sri Lanka is yet to receive the full benefits of regional integration. Inherently, regional integration is multidimensional, and its impacts are country-specific.

In boosting gender inclusive sustainable growth, a balanced contribution of different dimensions of regional integration is required.

Improvements to most stagnating dimensions like institutional and social integration and money and finance would reduce gender inequality by nearly 50%.

Thus, robust domestic policies that support the establishment of quality institutions and governance systems and financial conduct are most effective in making regional integration a strategy that stimulates inclusive growth and women’s economic empowerment in Sri Lanka.

“The World Bank South Asia Gender Innovation Lab’s (SAR GIL) Women’s Economic Empowerment in South Asia Community of Practice provided support for this research.” (Colombo/Apr4/2024)

Original blog

Across the region, more often than not, women are nominated to fill a seat falling vacant by the death of a male family member, as the party leadership made up of men is confident of winning on the ‘sympathy vote,’ or simply to fill a quota, and not for their qualifications and capabilities.

In Sri Lanka, despite a hard-won battle for a 25 per cent quota for women at the Local Government level six years ago, the drive to have more women at decision making levels continues. It is yet to be seen if the new electoral system at the provincial level will yield the results women seek. Representation of women in the Sri Lankan Parliament is a dismal 5.3 per cent (only 12 of the 225 MPs are women), Dr Sudharshani Fernandopulle, MP pointed out.

Dr Fernandopulle, who entered politics in 2010 following the assassination of her husband, explained that while that first foray into politics was easy, as she contested to fill her husband’s seat and had the sympathy of the electorate, since then, it has been an uphill battle to continue to be nominated and to retain her seat.

On the panel, along with Dr Fernandopulle, were Sania Kamran, Member of the Punjab Provincial Assembly, Pakistan and Anusha Nepal, Communications Officer, Office of MP Gagan Kumar Thapa, Nepal. The webinar held on March 15, 2024, was moderated by Divya Jain, Strategic Advisor and Political Consultant, India, and organised by the Friedrich Naumann Foundation for Freedom, South Asia.

Though it’s the family connection that brings many women into politics, Fernandopulle added that under Sri Lanka’s proportional representation system, the battle is not simply between rival political party candidates, but within the party itself. In an environment where the party leadership is almost entirely male, with no women even on the nomination boards, interventions by female politicians to the General Secretaries of political parties to provide for better female representation have fallen on deaf ears, Fernandopulle alleges.

For the few who do get nominated, limited campaign funds, the reluctance to dabble in bribery to entice voters, negative portrayal in the media, and in some instances, being undermined by their own women who favour promoting male counterparts, are constant hurdles. Unlike their male colleagues, women must also balance their family responsibilities, she added.

The Parliamentary Women’s Caucus meanwhile is refusing to take a step back; private members motion pushing for increased female representation at the legislature, and a call for an amendment to the preferential system where a vote for a woman would be mandatory is on the cards.

The Caucus is hopeful the legal reforms will be introduced before the next parliamentary election is called. Interventions made to the Presidential Commission on electoral reforms have been received positively, she stated. As well, some civil society groups are providing training to women politicians and those aspiring to get into decision making positions.

It has not been an uphill battle for Anusha Nepal, who has the support of family and friends, and who has led election campaigns since 2020, ever since she became eligible to vote.

However, the same cannot be said for most other women politicians in her country, especially those living outside Kathmandu. Citing an example of women politicians receiving very little air time, she noted that when questioned, the Station Head of a broadcasting company had stated that accessing the women proved difficult. However, the women had claimed they were never contacted!

Campaign financing is one deterrent she added, pointing out that at the local level, 98 per cent of those holding the post of Chairman are males, while women must be content with a Deputy position. Women are objectified in the media, and though political parties nominate women at all levels, that is done only if it is a requirement.

In a country where only 23.8 per cent of women have access to land and finances, the struggle for equal representation at the hustings is all the more difficult in the male-dominated political structure, Nepal stated.

Pakistan’s Sania Kamran sees a need for more legislation that would pave the way for more women to enter politics and at all other decision-making levels. Women bring the expertise of running their homes and balancing household budgets but are considered unfit to hold decision-making positions in the public sphere, she points out.

As in other South Asian nations, they are used for the sympathy vote. Kamran points out that while women enter politics for a purpose, to bring about change in society, their male colleagues see it as an opportunity to further their business interests; for those hailing from feudal families or business empires, the paltry parliamentary salary is not the enticement, she points out.

Her colleagues marked International Women’s Day two years ago, as Safe Place Day, to sensitise their male counterparts to the issues females face, she said. When a woman politician once brought her sick child to parliament, she was met with derision by the men, but today, the Punjab Assembly runs a daycare, she said.

Kamran also stated, that while women work diligently at the grassroots level, and raise awareness of the needs of the people, when that idea is brought to fruition, the males take the credit; for example, if a school is built the name plaque and recognition will be given to the male colleague.

In her bid to ensure equality, Kamran said she was instrumental in getting two seats for women in the Islamic Ideology Council.

She also believes that taking to the streets in protest is not the answer to resolving issues. Protests disrupt public life, and destabilise the economy, she says, adding that issues must be debated and resolved in parliament.

Addressing the webinar, the Chairwoman of the Committee on Human Rights and Humanitarian Aid, Renata Alt of the German Bundestag, pointed out that women are key players in achieving equality and peace. Yet they are underrepresented and discriminated against. Studies show there is a positive impact on development in countries where there is a higher participation of women in politics, she said.

The CEO of FNF, Annett Witte also addressed the webinar. (Colombo/Mar29/2024)

Standing facilities should be the last among lender of last resort facilities.

The more liberal the LOLR facilities are, the more unchanging the rate, the more external instability there will be in the future, and more bank bad loans will pile up as stabilization policies are applied.

Essentially, standing facilities, term or permanent injections allow banks to lend without deposits, and trigger forex shortages in a soft-peg or flexible exchange rate.

The UK has a standing facility that prints money at 0.25 percent above the policy rate.

“The operational standing lending facility consists of an overnight lending transaction collateralised against high-quality, highly-liquid (Level A) assets. We apply a 25 basis point premium (0.25%) above Bank Rate for this facility.

“The operational standing deposit facility consists of an overnight deposit transaction. This currently returns 25 basis points below Bank Rate.”

Safer, More Prudent Times

In earlier times, before monetary policy deteriorated and when the BoE gave more stability to the country and lower inflation, and less social interest, these premiums including for longer term money, have been higher.

“We moderate upward spikes in overnight rates by being ready to supply overnight funds to our counterparties at 3.30 pm (against collateral) if the shortage of funds has not been fully relieved in our main 9.45 am or 2.30 pm rounds,” according to a paper by William A Allen, one time Bank of England who retired before policy was corrupted by quantity easing and easy money, leading to current troubles.

“At the end-of-day stage, our operations are concerned not so much with implementing the MPC’s repo rate as with the more routine task of squaring off any residual market imbalance in as orderly a manner as possible. The rate charged on 3.30 pm lending is penal – the official repo rate plus 100 basis points (though we can vary this margin) – in order to encourage banks to borrow in the market wherever possible.

“If, after the market has closed, the system is still out of balance, we will lend off-market to the settlement banks to enable them to square off their end-of-day settlement with each other, at an even more penal rate of the official repo rate plus 150 basis points (again, this margin can be varied).

“These facilities are designed to eliminate excessive spikes in overnight interest rates at the end of the day, and have been successful in doing so. They are akin to the ceiling in a corridor system of rates, but not exactly so for two reasons.

“First, they are not standing facilities available at all times to all market participants. Second, funds are normally limited to the amount of the remaining daily shortage (though we reserve the right to supply more).

The rationale for prudence and discouraging moral hazard was explained as follows.

“Both these limitations are motivated by our desire to ensure that banks are subjected to the discipline of having to finance themselves in the market to the maximum extent possible.”

All of these principles have now gone out of the window and the world is a less safe place for all, particularly the poor in unstable countries like Sri Lanka.

How do Liquidity Shortages Emerge?

In reserve collecting central banks with pegged or managed floats, liquidity shortages come from dollar sales.

In a floating exchange rate regime, liquidity shortages do not arise unless many market participants refuse to deal with each other in times of crises and deposit money in the central bank (private sector sterilization).

This also happened in Sri Lanka in the last crisis, with foreign banks depositing money in the central bank instead of buying government securities or lending in the interbank market.

In the absence of a policy rate, such deposits become foreign reserves in a reserve collecting central bank.

If there is ‘quantity tightening’ in progress, liquidity can fall in a floating rate environment.

The Bank of England is giving unlimited facilities in quantity tightening to help ease any liquidity shortages at the moment.

In many countries the quantity tightening is aimed at reducing excess liquidity created from quantity easing.

 Sri Lanka’s central bank is also engaged in ‘quantity tightening’ in effect, by selling down its Treasury bill stock, with no excess liquidity present.

As a result, there is no money in the market to buy large volumes of CB held Treasury bills unless there is liquidity generated from central bank dollar purchases.

Overselling Treasury bills in large volumes and giving liquidity overnight through overnight windows or term, encourages banks and primary dealers to depend on the central bank’s printed money for their operations.

The central bank should internally roll over most of the maturing securities and only offer to the market a volume that will keep the aggregate balance in the market plus or minus 20 to 30 billion rupees.

Now T-bills are sold and money is injected term and overnight to allow market participants to buy them.

Market participants should buy CB held Treasury bill stock from real deposits, not central bank credit. To do so is a type of self-deception.

Liquidity Junkies

More to the point it is a bad practice that will get banks used to borrowing from the window – de-stigmatizing the practice – so to speak.

When banks become liquidity junkies, eventually the country will suffer forex shortages when credit recovers.

In Sri Lanka several well managed foreign banks, (and one or two local ones also before the crisis) always deposit some cash in the central banks window.

These banks are usually net sellers in the interbank forex markets.

In fact, all banks, whether local or foreign should be encouraged to have a little excess liquidity above the reserve ratio.

If the central bank has painted itself into a corner on a belief that it cannot roll-over maturing bills internally under the monetary law, it has only itself to blame for coming up with an illogical law.

If that is a problem, the central bank can submit a non-competitive bid and allocate itself the volume at the weighted average bid for the auction.

The current system of selling bills and giving new money short term, can also lead to sterilization losses in addition to making liquidity junkies out of banks.

In the name of transparency all bills rolled over should be disclosed to the market. The bill holding, inclusive of those taken for term or overnight operations, should also be disclosed daily.

A small liquidity shortage filled at penal rate will encourage better banking.

However if the central bank wants, it can also allow some liquidity to build up from dollar purchases and allow short term rates to fall further in the near term, now that confidence in the currency has been restored fully.

Long-term rates will fall as real savings go up (the exchange rate appreciation helps but care should be taken not to overdo it) and budgets become better, as long as monetary stability is maintained for a few years.

If liqudity is allowed to be plus, from outright dollar purchases and not swaps, a wide policy corridor and a penal standing facility is absolutely required to prevent forex shortages from developing and the whole house of cards collapsing when private credit recovers.

East Asia

Most East Asian nations which collect reserves (with deflationary policy) have tighter liquidity facilities in their operational frameworks, unlike unstable countries like Sri Lanka and those in Africa. Some have penalty rates for intra-day liquidity.

Rates move quickly in case there is a credit spike and exchange rate is defended when there is a wide policy corridor.

A wide corridor or a high ceiling rate helps reduce the negative effects of the obstinate policy rate and allow the market to finance credit instead of central bank facilities.

When standing facilities – including intra-day facilities – are given at penal rates the ceiling rate goes up and widens the corridor, helping protect against currency crises.

In several East Asian central banks domestic assets are negative.

Thailand, which fell victim to hedge funds in the East Asian crises first due to its policy rate and swap operations, was an exceptional central bank even when the Bretton Woods collapsed, but whose policy framework was not up to dealing with a swap attack in 1997 due to ‘monetary policy modernization’.

The Bank of Thailand swiftly descended into inflationary policy under attack, which then shattered confidence.

Running deflationary policy, and building reserves (exports of capital) has not hurt East Asia because the stability the practice provided through a tight monetary standard led to even larger inflows of capital in the form of FDI or other flows than the reserves that were built.

Domestic capital was preserved with no depreciation to inflate away capital.

Countries with completely free capital flows, including Singapore and Hong Kong which have the best monetary frameworks in East Asia, have very low interest rates and do not have policy rates at all.

Sri Lanka also had developed country level inflation and interest rates, before the monetary framework was corrupted progressively under IMF tutelage and also the inflationist beliefs that swept the academic community of the US in particular, from the 1960s.

Monetary instability and currency depreciation that led to high interest rates in Sri Lanka which is unrelated to credit risk.

No Logic

There is no point in imposing statutory reserve ratios if liquidity is provided liberally through standing term and overnight facilities after banks short the SRR.

Given the lack of foreign reserves, and negative net reserves of the central bank, banks should be encouraged to raise deposits, reduce credit and buy central bank held securities from liquidity generated from central bank dollar purchases.

Any cash deposited by banks in the standing facilities over and above the SRR actually results in foreign reserves for the central bank, unless system liquidity is liberally filled with standing facilities.

Dollar net open position units of banks in fact should be tied to the net balance of their standing facilities and other borrowings.

Outright purchases of securities and the engaging central bank or market swaps to borrow dollars should be discontinued.

Central Bank Swaps are also Illogical

A central bank swap with a domestic market participant is the same as the Lebanon Central Bank dollar deposits, which proved its undoing.

In addition to Lebanon Central bank swaps is also the path of Argentina central bank’s dollar Leliqs.

Sri Lanka’s central bank also made large losses on swaps, ACU borrowings and IMF borrowing in this crisis, by using swaps to meet external payments and printing money to maintain an untenable policy rate.

Goh Keng Swee did not allow swaps and Singapore banks gave credit to foreigners to reduce the room for speculative attacks which make rates rise, though other currency board regimes like Hong Kong which have a fixed exchange rate had no such restrictions.

Speculators who tried to hit HKMA with swaps lost out as the interbank rates went up during the East Asian crisis, while they made hundreds of millions in profits from policy-rate central banks.

Soft-pegs which were hit in the East Asian crises including Malaysia and Thailand, also stopped attacks by closing the offshore swap market.

Sri Lanka’s and the problems in other countries with forex shortages and the depreciation and social unrest comes from the deterioration of monetary doctrine in the ‘age of inflation’ started from the Fed’s open market operations in 1920 to trigger the Great Depression.

The deterioration accelerated very sharply in the 1970s with the collapse of the Bretton Woods and IMF’s second amendment to its articles.

That is why budgets became unmanageable in Sri Lanka from the 1980s, despite J R Jayewardene cutting subsidies, ending price controls and administered prices as they were known then.

 John Law and the Policy Rate

There was no bureaucratic policy rate before the Fed was created as such action has been fiercely resisted in Europe and Great Britain which had a longer monetary history.

It was John Law who originally proposed to suppress rates with liquidity injections for ‘macro-economic policy’ rather than imposing price controls. Britain in fact had usury laws, which imposed ceilings on interest rates at the time.

“Some think if Interest were lower’d by Law, Trade would increase, Merchants being able to Employ more Money and Trade Cheaper. Such a Law would have many Inconveniencies, and it is much to be doubted, whether it would have any good Effect,” John Law wrote.

“Indeed, if lowness of Interest were the Consequence of a greater Quantity of Money, the Stock applyed to Trade would be greater, and Merchants would Trade Cheaper, from the easiness of borrowing and the lower Interest of Money, without any Inconveniencies attending it.”

That new money was not to have been backed cross border exchangeable assets like gold or silver, but a non-tradable domestic asset, land.

Though John Law’s ideas were not accepted in Britain, he was able to persuade the French to do so, leading to the Mississippi bubble. The Mississippi bubble proved that Law was wrong.

In this age of inflation, asset price bubbles, external default, rising national debt, exchange and trade controls, the policy rate and liquidity tools are taken for granted amid heavy propaganda by academic inflationists and other Mercantilists.

But before the ‘age of inflation’, and before 1920 it was not so.

It is also not in central banks with wide policy corridors and those that give tiered facilities.

No less than William Patterson, a key promoter of the Bank of England (which did not have a bureaucratic policy rate to manipulate interest rates in the beginning though it also got into trouble by giving excess credit from domestic assets in times of crisis) opposed John Law and the deliberate attempt to suppress rates with printed money.

Reserve Currency Inflationism

When the Bank of England was able to maintain the gold standard and the Sterling was the pre-eminent currency in the world, it had no policy rate.

The peacetime economic crises seen after World War II was a direct result of the bureaucratic policy rate and aggressive liquidity facilities of central banks, as was Sri Lanka’s currency crises and default since the end of the civil war.

Ironically, when the Fed started open market operations in April 1923, (New York Fed Governor Benjamin Strong who later triggered the Great Depression with rate cuts was on leave), it was to mop up liquidity and do ‘quantity tightening’.

John Law was proved wrong by the Mississippi bubble, and people understood the problem.

But the Great Depression did not prove Strong wrong and instead gave rise to Keynesianism and the age of inflation.

The Housing bubble did not prove Ben Bernanke wrong but gave rise to quantitative easing which is much worse than the Keynesianism that brought down the UK after World War II.

After more than a decade of repeated trigger-happy quantitative easing US budgets and US debt have been shot to bits. There are no good budgets with bad money.

The Institute of Policy Studies of Sri Lanka (IPS) recently hosted a hybrid Roundtable Discussion titled ‘Ed-tech Towards Achieving SDGs,’ offering valuable perspectives on the role of Ed-tech in bridging educational gaps and the facilitators and barriers to the expansion of Ed-tech going ahead.

Currently, the primary focus in Ed-tech revolves around adapting to rapidly evolving technologies. There are also concerns that overreliance on technology could widen disparities in accessing quality education. The preceding discussion provides insights into how Ed-tech can be used to address these gaps and overcome barriers, emphasising the importance of regional cooperation and public-private partnerships, and the recent emergence of AI.

Regional Collaboration in Facilitating Ed-tech

A key insight from the discussion was the pivotal role of regional cooperation in accelerating the implementation and adoption of Ed-tech. Ms Cahya Raith from the Southeast Asian Ministers of Education Organization – Regional Open Learning Center (SEAMOLEC) underscored the role of knowledge sharing, joint research and development efforts, and collaborative capacity-building programmes in advancing Ed-tech in the region.

Similarly, the SEAMEO plays a crucial role in the region’s Ed-tech landscape, fostering innovative practices in Open and Distance Learning (ODL) with a keen eye on integrating metaverse and artificial intelligence (AI) technologies. They are also looking at enhancing the capabilities of educators through their regional training programmes which are designed to improve technology integration in the learning process.

The alignment of Southeast Asian countries towards a knowledge-based economy has emerged as a driving force in shaping Ed-tech policies in the region. Ms Ratna Hartine, representing Angel Investment Network Indonesia (ANGIN), noted that Ed-tech policies within the region are more focused on digitising national education data and administration. This includes establishing digital repositories like lectures, ebooks, simulation software and other learning materials, and seeking to expand access to quality education by leveraging mobile learning platforms and by equipping teachers with the required skills through teacher training programmes.

The Role of Public-Private Partnerships

The discussion also shed light on the critical role of public-private partnerships (PPP) in expanding Ed-tech. Mr Asith de Silva, Senior Manager – Social Innovation at Dialog Axiata PLC, discussed how their collaboration with Sri Lanka’s Ministry of Education significantly contributed to the success of ‘the ‘Nenasa’ programme. Nenasa has been delivering educational content for Sri Lankan students since 2009 via a variety of technological means including TV channels and mobile apps, as well as teacher training programmes for teachers in utilising technology in the teaching process.

India’s ‘OLabs’ is another noteworthy PPP in South Asia that makes lab resources readily (anytime) and remotely (anywhere) available to students without access to physical labs or where equipment is not available in their schools due to scarcity or cost. The initiative was pioneered by AmritaCREATE and C-DAC under a research grant from the Ministry of Electronics and Information Technology in India, and collaborating and funding support from the public sector has been instrumental in developing such Ed-tech initiatives that support education in schools. Students can access over 170 interactive simulations online anytime, anywhere with OLabs.

Improving Access for Vulnerable Groups

A significant part of the roundtable focused on using Ed-tech to enhance access to education for vulnerable populations. Several Ed-tech initiatives in South Asia, Southeast Asia, and the Middle East and North Africa (MENA) region that cater to this purpose include Pakistan’s ‘WonderTree’ initiative for children with disabilities, Indonesia’s ‘BEEP’ for out-of-school children, India’s ‘OLabs’ and ‘Class Saathi’ for rural children and children from underprivileged areas. These initiatives can support to fill shortages of special education teachers. For example, at present in Pakistan there is only one special need therapist for every 230,000 children with special needs. WonderTree in Pakistan has filled some of this gap in education, benefitting around 4000 students with special needs. Recognising its potential, the UNICEF is actively supporting its expansion efforts.

‘‘Currently an assessment could be deployed in about 5 minutes, in class, student responses are instantaneous and so are the results (he doesn’t need to grade them separately). Traditional assessment usually takes 3-4 hours each’’ says an assistant teacher at a Composite School in India who has been using Class Saathi, an Ed-tech initiative which is a Bluetooth clicker-based smart classroom solution that makes formative assessment easy and fast.

Importantly, Mr Georges Boarde, Senior Education Programme Specialist from the United Nations Relief and Works Agency for Palestine Refugees (UNRWA) in the Near East, highlighted the role played by the UNRWA e-learning platform in improving access to remote learning material and resources for Palestinian refugee students. He also stated how they prioritise enhancing education resilience by improving the preparedness of students and teachers for remote learning and teaching in times of emergencies, such as the COVID-19 pandemic and the ongoing conflict in the region. While the UNRWA is a humanitarian organization that provides its services free to refugees, Mr Boarde highlighted the lack of internal revenue sources as a main barrier to implementing their plans for integrating technology in education, as well as the important role played by donors in facilitating the development of Ed-tech, including its scope and quality.

AI’s Role in Quality Education

The discussion also focused on how AI could help education. Dr Gharbi, CEO of Uptitude, a digital learning company, in Tunisia offered insights on the MENA region’s adoption of AI in education through platforms such as Zenon Academy and AI Mentor which uses gamification and other methods to enhance the learning experience of students. But she also emphasised the varying levels of AI integration across countries, with advanced implementations in the UAE and Saudi Arabia, and a growing interest in AI post-pandemic in Tunisia, Morocco, and Algeria.

To add to that, Ms Hartine highlighted Sekolah metaverse community, a PPP in Indonesia that uses AI, augmented reality (AR), and virtual reality (VR) to substitute learning environments like laboratories in schools that lack resources and funding by creating a community. She also noted how such visual experiences are useful for students who struggle with reading. Other participants from the roundtable further highlighted the role of AI in reducing resource requirements, including personnel, reducing costs, and guiding teachers, among its other uses.

Experts from the government sector, private sector, and donor agencies contributed valuable insights to the roundtable discussion. The event, based on a recent IPS study financed by the Southern Voice and managed by the Group for the Analysis of Development (GRADE), provided a comprehensive overview of the Ed-tech landscape and its potential in achieving SDGs.

Some legislators are upset that the Parliament’s control of public finances has been usurped by the ‘independent’ central bank.

But Sri Lanka’s central bank has a history of topping up pensions also to cover for inflation  – whether low or high  – while giving low interest loans for staff.

This is questionable because unlike other SOEs, the central bank itself is responsible for cutting rates, blowing a hole in the balance of payments, driving up inflation and later interest rates to stabilize the currency.

The practice of transferring billions to defined-benefit pension staff funds when inflation and interest rates are down, can perhaps be excused as a reward for not triggering monetary instability.

But when steep salary hikes are given when inflation rises, the act insulates the staff of the agency from its own policy errors and makes the very people who de-stabilized the nation, to be rewarded for their actions.

This runs counter to the principle of accountability.

If a ceiling on the annual salary hikes is placed on the central bank along the lines of the inflation target – not its achievement – may be the agency would be incentivized to give low inflation.

That is why in price regulation, other SOEs with monopoly powers are given price increases based on a benchmark.

However, that is a second-class solution and distracts from solving the underlying problem of not having a single anchor monetary regime that can be practically operated and excessive discretion that comes from a high inflation target.

Lawyers and Activists

Sri Lanka’s lawyers and public interest activists took several macro-economists who injected money to cut rates to court as well as their politicians who endorsed the action (or were misled depending on how it is viewed) and got a historic judgement against them.

This should serve as a warning to macroeconomists who cut rates or otherwise inject liquidity and trigger forex shortages and currency crises.

The actions of the lawyers and activists and the historic judgement show that this country is no longer what it was in the 1970s or the 1980s.

Macro-economists cannot get away with the same actions they did in the 1970s, though they have managed to mislead the legislature into passing a new monetary law of the inflationists, for the inflationists and by the inflationists.

Inflationist macro-economists all over the world are adept at blaming all and sundry for the consequence of their obsession with rate cuts and the belief that easy credit forms a path to prosperity instead of providing a stable monetary foundation for people to live.

It is no accident that Lee Kwan Yew was a lawyer and he understood monetary systems as well as classical economists did.

Both lawyers and classical economists use deductive reasoning.

‘Data driven’ macro-economists today depend on mindless statistics and dismiss anything that does not fit their world view as ‘outliers’.

Even data driven macro-economists should reflect on why currency crises were created with a 5 percent inflation target after the end of the war, eventually driving the country into default, and whether they should continue to take cover under such a high target.

Accountability

The so-called ‘accountability’ provisions of Sri Lanka’s new law, can only be described as a joke and goes to show that it was a self-serving piece of legislation that allowed the agency to de-stabilize the nation and get away with it.

If the central bank misses the inflation target the governor or the monetary policy board does not get sacked.

A central bank’s monetary law has to be a constitution that restrains its actions and forces the agency which has been given a monopoly in money not to de-stabilize the nation.

It should not be a tool to give absolute discretion as the current law has done through ‘independence’, and a high inflation target.

Australia’s Central Bank Governor Philip Lowe last year lost his job – his term was not renewed – following high inflation and rate hikes after money was printed for ‘stimulus’.

He was under pressure for giving what was called forward guidance – promising not to raise rates till around 2024 and getting people to borrow – and suddenly doing so when inflation went up.

Ordinary people understand that kind of thing better than the fact that monetary stimulus or potential output targeting or indeed the policy rate itself which is mis-used for goals other than stability, is the fundamental problem.

A low inflation target is essentially a legal restraint on the mis-use of central bank’s liquidity tools.

How does a central bank get money for salaries?

The central bank earns money to pay salaries essentially from seigniorage, that is profits from the note issue.

If there is high inflation, the central bank makes more money from its Treasury bills portfolio, which it usually acquires in the process of cutting rates and de-stabilizing the nation.

This column has advocated a currency board, rather than dollarization, so that profits from the note issue remain in this country.

But the profits from the note issue are small compared to the losses to generations and the social unrest the agency creates in the process of issuing rupees.

By engaging in third world central banking and borrowing through swaps and the Asian Clearing Union to intervene in forex markets and print money to maintain its policy rate, the central bank made large losses on its forex operations in the current rate crises.

Dollarization is just as good a fix as a currency board, that will bring stability and block the ability of inflationists and the IMF to engage in macro-economic policy.

The benefits from dollarization, which will put a permanent brake on macro-economist’s powers to de-stabilize the nation and drive away part of the population, will be far greater than the lost profits from the note issue.

The macro-economists’ claim that a currency board cannot be set up without full reserve backing is false as a currency board is simply a means of eliminating the bureaucratically decided policy rate.

As in a floating exchange rate, currency boards do not actually use reserves (because money printing is outlawed) for imports or any other purpose. That is why reserves do not fall steeply in currency board regimes and the exchange rate remains fixed.

However, it is less easy to convince the public that a country cannot be dollarized or currency competition cannot be introduced.

In Argentina macro-economists and other inflationists successfully scared off that unfortunate man Javier Milei from dollarizing the country though several other countries in the region itself from Panama to Ecuador to El Salvador have done it.

He is now trying to relax economic controls without restraining the central bank first and the fate of JR Jayewardene or worse, awaits him.

The problems in Argentina show how difficult it is to defeat the inflationist macro-economists and the current ideology of interventionism that dogs a discipline that continues to be called ‘economics’.

Economic Freedom

Instead of just arguing about salaries of central bankers – even though it may well be a valid point from the view of parliamentary control of public finances – a better strategy will be to end the money monopoly of the agency and reduce its ability to destabilize the country in the future.

The current money monopoly was created by the British in 1884 when the Ceylon Currency Board was set up.

Before the currency board two Chartered Banks issued money.

The Madras Bank’s rupees did not depreciate, unlike that of the Oriental Bank Corporation (corrected), which depreciated steeply when it closed its doors in is now called ‘floating’.

Before the Bank Charter Act Sri Lanka had free banking as well as currency competition.

The false claims made by central bankers and other macro-economists today that the exchange rate has something to do with the real economy could not be made so easily in the earlier ages in countries without a money monopoly.

When one currency is stable and another currency depreciates in within the same country, one cannot get away with blaming budget deficits or current account deficits. The problem with excess credit in the note-issuing bank is clearly spotted.

Exchange controls can be eliminated after the powers to create monetary instability are taken away, and economic freedoms restored.

That is why countries like Estonia, Lithuania, Latvia, UAE, Singapore and Hong Kong where macro-economists were defeated in a crisis, figure on the top of the list of countries with economic freedom rankings.

By calling monetary instability ‘macro-economic instability’ Western post-1920s inflationists have managed to deflect the blame away from themselves, and prevented the problem from being ever solved.

If the legal tender monopoly is taken away from macro-economists, the people will have freedom to use other types of currencies.  

The central bank’s ability to depreciate the currency and blame its victims will diminish as foreign currencies progressively push out rupees as the circulating medium.

Salaries are low in Sri Lanka and people leave for jobs in currency-board-style regimes in the Middle East in Saudi Arabia, UAE or Qatar, due to the central bank destroying the rupee and denying monetary stability for this country to grow and create jobs, with unworkable operating frameworks and high inflation targets.

It must be noted that under current central bank Governor Nandalal Weerasinghe, the rupee has appreciated and not depreciated.

It is not an accident but purely due to the monetary policy followed by the agency under him.

The currency appreciation has prevented further burdens falling on the people, including through energy prices, but that is not widely understood.

Upending Economics

Ironically, it was the British Currency School in the classical tradition, that created the money monopoly of the Bank of England, though with very good intentions.

The Bank Charter Act was an attempt to impose restraint on note-issue banking from outside.

However, with the fixed policy rate, the opposite happened after the First World War and the US Fed invented open market operations.

Sri Lanka’s monetary law in particular and the operational frameworks of IMF-dependent reserve-collecting central banks with outright purchases of domestic assets in general, have been developed as if Ricardo, Hume, Cantillon and Adam Smith never existed.

It is a testament to the success of the ideology of Anglophone universities and perhaps the IMF, that such note-issuing banks continue to exist and spurious claims like exchange rates are ‘market determined’ are widely believed.

That the exchange rate is the outcome of the success or otherwise of the monetary anchor pursued by the central bank through its operational framework is no longer widely known.

If Robert Torrens, or Ricardo or Hume were alive today and heard what was being peddled as ‘economics’ in their name, or through Sri Lanka’s IMF backed monetary law, they would be shocked to the core.

They would be surprised to know that people who claim to be ‘economists’ are in fact following the doctrine of John Law, who was among the most well-known persons who proposed the bureaucratic interest rates enforced by printed money or what is now called the policy rate.

Sri Lanka’s macro-economists had inveigled President Ranil Wickremesinghe to handed them the power to conduct monetary policy (read print money) and generate inflation of 5 percent a year with room to push up price rises to 7 percent.

Related Sri Lanka central bank gets political nod to create up to 7-pct inflation

Legislators had already been misled by inflationists into passing the new IMF backed monetary law to target potential output (print money for growth) in the style of John Law, so positive inflation targeting was a piece of cake.

If the IMF knew how to actually draw up a monetary law to provide stability, with a proper operational framework, it would go out of business in two Fed cycles with no customers to bailout.

The Macro-inflationists

Positive inflation targeting denies private sector (capitalist) productivity growth to the people, making them mis-trust private sector led activity, liberal democracy and bring nationalists and other fringe elements to power in the high inflation period or the stabilization that follows.

And whenever there is high productivity growth after a period of stability, central banks fire an asset asset price bubble in trying to reverse it, as happened in the 2008 financial crisis/housing bubble.

If the power of ‘monetary policy’ (injecting liquidity to inflate bank reserves) was taken away from macro-economists this country will have a stable currency and inflation between 1 and 3 percent.

If Sri Lankans have been misled by macro-economist into an inferiority complex and;

a) cannot imagine that they deserve an inflation rate better than Americans, the Swiss or the British,

b) or they do not know that before 1977 Sri Lanka also had the same inflation as Western nations,

c) or cannot relate to Dubai or Saudi Arabia (an even better fully orthodox fixed exchange rate regime existed during British rule),

d) at least they would be able to relate to the Maldives or Cambodia.

The monarchies in GCC countries have remained due to the stability coming from the fairly hardened peg, unlike Iran’s Shah (and indeed Prince Norodom Sihanouk) who was driven out with the help of inflation around the same time.

In the late 1960s when Sri Lanka first started to go to the IMF was when the likes of Paul Samuelson started to corrupt US policy in the heyday of the Phillips Curve, even Malaysia which had a good monetary authority which worked almost like a currency board, saw a second communist uprising.

To give stability to the poor and prevent their flight to countries with monetary stability to seek jobs, the inflationist and interventionist ideology spread by macro-economists and the International Monetary Fund since 1978 in particular has to be defeated.

Sri Lanka’s new monetary law the agreement with Ranil Wickremesinghe shows that the Phillip’s Curve is alive and well, albeit under another label.

Third Rate Discriminatory Monetary Anchors

Before 1978, the IMF did not discriminate between rich countries and less rich countries allowing nations like Sri Lanka to have worse monetary anchors than Western nations.

The big challenge is to defeat the ideology of Progressive Saltwaterism and the relentless drive by the IMF to give central bank powers more and more powers to conduct ‘monetary policy’, essentially tools to print money to mis-target rates for interventionist purposes.

There are several ways to absolutely block the macro-economists from triggering external instability. The easiest is currency competition or dollarization, the other is a currency board.

Friedrich Hayek called currency competition the denationalization of money, but it is actually the emasculation of the Harvard – Cambridge macro-economics and to take away their powers to push up inflation, depreciate the currency and otherwise create monetary instability.

The advantage of monetary stability to politicians would be that they can remain in power for multiple terms and do reforms to boost growth, continuously.

The advantage to the people would be that interest rates would fall to around 5 percent and they can also be free of exchange controls.

The stability will also bring in foreign investors and real incomes would rise over time.

No good budgets with bad money

Bad money, in addition to destroying the finances of individuals, also destroys governments budgets. There can be no good budgets with bad money.

Under dollarization or a currency board, budget deficits would fall and the debt to GDP ratio would be low, at 50 percent or below as is seen elswhere, from GCC countries to Bulgaria to Cambodia to Hong Kong to Pananam.

Without central banks, it is difficult to borrow heavily and the need to give subsidies also goes away. Without a depreciating currency, domestic savings are good enough for investment and the need to borrow abroad is less.

Cambodia had very high debt as the currency collapsed in 1989 amid a coup and the country market-dollarized without any outside help.

The coup leader Hun Sen, was a former associate of Polpot (who abolished money after high inflation).

The country is now growing at 5 to 6 percent a year (Cambodia grew faster in the initial years after dollarization) getting several billion dollars of FDI and is moving from apparel into electronic items including solar panels, riding the renewable energy wave amid the stability brought by dollarization and currency competition.

As a result of dollarization (or currency competition) the central bank cannot conduct monetary policy like in Sri Lanka to (print money to cut rates and generate high inflation and depreciation) effectively.

The IMF remains relentlessly opposed to the status quo and stability and is trying to de-dollarize and give a few unelected economic bureaucrats the power to destabilize the nation again.

“Cambodia has experienced rapid growth over the past decade, outpacing many regional peers. Growth was driven by industrialization, increased foreign direct investment, and a surge in exports, particularly in labor-intensive manufacturing,:” the IMF said in its latest staff report on the country issued in January 2024.

“The Cambodian economy is continuing its recovery from the pandemic, with a GDP growth of 5.2 percent in 2022, driven primarily by manufacturing exports, especially in garments and electronics. Tourism saw a continued rebound in 2023, reaching close to 80 percent of pre-pandemic tourist arrival levels by September 2023.”

“Inflation, after dropping significantly in H1 2023, has since rebounded,” the IMF claims.

The IMF’s ‘rebounded’ inflation is a little over 3.0 percent.
.
“The fiscal deficit is projected to widen in 2023 due to temporary increases in spending and is expected to decrease in 2024,” the agency also claimed.

However, budget deficits are also around 3 to 4 percent. The debt to GDP ratio is 34 percent, a trend that is common in countries with currency boards or are dollarized where monetary policy is constrained. Currency unions with liquidity tools do not have the same benefit.

The IMF however wants to give more power for ‘monetary policy and enhance “monetary
transmission and support de-dollarization” by “modernizing” monetary and FX policy operations.

“Establish an effective interest rate corridor and develop an accurate liquidity forecasting framework. Strengthen the market determination of exchange rates and improve operation of FX intervention procedures.”

The entire benefit and stability Cambodia got from the denial of monetary and fx policy discretion to economic bureaucrats from 1990 will be lost if Cambodia become increasingly de-dollarized and its monetary policy is ‘modernized’ based on various inflationist fads developed in the US and elsewhere and transplanted by the IMF as potential output targeting was planted in Sri Lanka eventually taking a country without a war to default.

Eventually Cambodia may return to its 1970s and 1980s fate or to the fate its unfortunate neighbor Laos, where domestic and IMF bureaucrats have full ‘monetary and fx policy’ discretion and is a basket case.

Then China, a top lender to Cambodia, will be blamed for default.

Unlike an Inflation Index, a Nominal Exchange Rate Target Cannot be Fudged

By constraining monetary policy discretion of bureaucrats and forcing them to maintain the exchange rate – which is a transparent price unlike inflation indices or the REER and cannot be fudged by changing the base – stability can be given for growth and prosperity.

Maldives also has low inflation around 1 to 3 percent without macro-economists to do complicated ‘monetary policy’.

The Maldives Monetary Authority however does print money from time to time and get into trouble. When the peg breaks, inflation soars.

Any technical assistance from the IMF to engage in more aggressive monetary policy would land the country in default.

Maldives actually has borrowed too much, from China and also some of its Middle Eastern friends during about two decades of loose money starting from the Greenspan – Bernanke bubble when easy dollar borrowings were possible.

What policy-makers and politicians have to understand is that denying monetary stability by various in-vogue third rate monetary regimes is not a foundation to base a policy framework.

But from 1950 onwards that is what happened to this country.

To be fair, current Central Bank Governor Nandalal Weerasinghe is doing a good job.

But the relaxation of standing facilities, which do not have a penal rate in Sri Lanka unlike in stable countries, is a key tool for banks to overtrade and goes against prudent policy. It could be the first step in the next default, as targeting call money rates in the middle of the corridor and narrowing the policy corridor was in the current default.

However, the way to achieve stability is not to depend on personalities but to constrain discretionary policy by law.

That is to either have a very low inflation target like 2 percent which has been mostly successful elsewhere, or a hard peg or currency competition through dollarization.

All of these have worked. Where had a 7 percent inflation target worked? This country ran into a default without a war with the room given for open market operations and outright purchases with a 5 percent inflation target.

A 2-pct Target is Better, But Also Has Problems

This columnist is fully supportive of a 2 percent inflation target, but it is not as good as earlier anchors of the classical period or what is advocated by Austrian economists, which drove the policies of Germany after World War II, and made it a stable export powerhouse.

Now Germany is also in trouble with the ECB.

It must be noted that the constant price level, which also denied private sector productivity growth to the poor, was advocated by the Chicago school, at a time when post-Keynesian policy was in full swing in the 1960s, with completely un-anchored policy, leading to the eventual collapse of the gold standard.

Austrian economists warned that even a constant price level would also lead to a boom and bust scenario if there was a capitalist productivity boom, coming after a period of stability, which allows research and development.

“The long-run tendency of the free market economy, unhampered by monetary expansion, is a gently falling price level, falling as the productivity and output of goods and services continually increase,” explained US economist Murray Rothbard in 1971 in the dying days of the Bretton Woods.

“The Austrian policy of refraining at all times from monetary inflation would allow this tendency of the free market its head and thereby remove the disruptions of the business cycle.

“The Chicago goal of a constant price level, which can be achieved only by a continual expansion of money and credit, would, as in the 1920s, unwittingly generate the cycle of boom and bust that has proved so destructive for the past two centuries.

This was graphically demonstrated after Ben Bernanke misled Alan Greenspan to try and reverse private sector productivity growth from 2000, and kept rates near zero, firing an 8-year Fed cycle (also enabled by core-inflation which discounted commodity prices), leading to the housing bubble.

In the Great Moderation (Volcker/Greenspan) period, gold prices fell to 800 to 484 dollars, free trade was accepted, East Asian poverty fell under fixed exchange rates and largely deflationary policy (reserve collections).

In a reserve collecting peg forex troubles emerge before the asset bubble.

The low US interest rates in the run up to 2008 bust as well as quantity easing that followed is one reason for bondholders and China to finance unstable countries with dollar credits. (Sri Lanka’s collapse in new sovereign default wave is not really China’s fault: Bellwether)

In the wake of these monetary blunders not only is Sri Lanka in trouble, but also the US, showing how bad money leads to bad budgets once again.

At the moment the central bank is providing monetary stability seen in the exchange rate and inflation, allowing a battered, long suffering people to raise their heads.

It is not clear when inflationary rate cuts will start. Already 2026 bonds are being bought outright.

Sri Lanka has gone through easy money booms, involving private credit surges financed by central bank credit to boost growth, and the resultant forex shortages, tightening of exchange and import controls, all too often since the agency was set up in 1950.

That Sri Lanka cannot get away from the cycle of inflationary rate cuts, and cannot end exchange or trade controls, is a mute testimony to the false monetary doctrine that is dogging this country and rest of the ‘third world’ that is economically backward.

The IMF is good at imposing stabilization programs, by rate spikes, but is unable to stop the next crisis, or the generation of poverty from currency collapses or drip-drip-drip depreciation, due to flawed regimes it peddles, that encourage money printing for growth, now called potential output targeting.

Monetary Instability

Stabilization programs do not really ‘stabilize the economy’, but involves slowing economic activities steeply to restore the lost confidence of a currency monopoly.

It impossible for a country to grow steadily without monetary stability.

Extensive dollarization and currency competition which reduces the ability of a central bank to conduct monetary policy (print money), can reduce the chances of a next currency or economic crisis, better than any IMF program can.

Meaningful monetary reform, which eliminates potential output targeting (printing money for growth) and money and exchange conflicts inherent in a non-floating ‘flexible exchange rate’ which has been unfortunately legalized in the new monetary law, can eliminate future crises and the need for stabilization programs.

Whether it is drip-drip-depreciation or steep currency collapses, conditions are created in the country of their birth by the bad-money-central-bank to make it impossible for millions to make ends meet and drive them into currency-board-like regimes in the Middle East or East Asia, to the Maldives, or to other low inflation single-anchor, clean-floating countries, with higher real wages.

In the countries to which Sri Lankans leave their homes for, central banking is restrained by tighter laws and depreciation is legally difficult or impossible for potentially inflationist economic bureaucrats or the IMF to engineer.

IMF rhetoric peddled to countries without a doctrine of sound money, that currencies depreciate due to ‘economic fundamentals’ which must be matched by a flexible exchange rate, have no effect on countries where there are legal restraints against money printing.

“Selling FX should be limited to disorderly market conditions and not prevent the exchange
rate from moving in line with economic fundamentals,” the IMF told Sri Lanka in the December 2023, staff report.

All such Anglo-American inflationist talk disappears without trace, when faced with tight laws restraining bureaucratic rate cuts found in Dubai, Saudi Arabia, Qatar, Oman or indeed Hong Kong, who send money to the victim nation.

The sad truth is that, it is not ‘economic fundamentals’ that drive the value of a currency produced by a state-run central bank.

It works in the opposite direction, with the overproduced bad money of the SOE, which has been given a legal monopoly by misled politicians, driving countries into crisis and blasting economic fundamentals in to smithereens.

Who recovers first?

The consumers whose purchasing power recovers first, are the families of the people who have fled the country with the 5-percent-or-higher inflation targeting, ‘flexible exchange rate’, central bank, without a clean float.

In remittance receiving countries which cannot create jobs – or the real wages of whatever jobs are generated are destroyed with a 5 percent inflation target and a depreciating flexible exchange rate – a significant part of the labour force has been driven out by previous monetary instability based on similar ‘impossible trinity’ IMF-backed monetary regimes.

Currency crises – especially in peacetime – do not appear out of the blue, but are necessary outcomes of persistent beliefs in spurious monetary doctrines.

Therefore, there is an existent community outside the country, whenever rate cuts trigger the latest crisis. There is an ecosystem of job agencies, a network of friends and family who will help get into these countries through legal and informal means.

Most clean floating countries usually have tight work permits and visas, making illegal entry more likely.

In periods of extreme instability and deployment of macro-economic policy, there will also be boat people and people smuggling activities as well.

It is a shame upon all Saltwater-Cambridge economists to see this happen in a country at peace, as their stimulus mania (specifically printing money to target potential output under a flexible inflation targeting now), to see boat people.

Unlike wage earners in other sectors, remittance families get dollarized earnings from their family members outside, and their real incomes adjust automatically.

Sri Lanka’s Monetary Board or Monetary Policy Board cannot cut their wages impoverish them since their wages are denominated in a currency issued by a better central bank or currency board like regime, and not Sri Lanka rupees.

Farmers Also Recover

As long as there are no price controls – like those imposed on eggs leading to the closure of layer chicken farms – vegetable and grain prices go up with depreciation or inflationary policy.

Small holder tea farmers, whose green leaf prices are linked to export prices will also see incomes go up to pre-crisis levels.

Food is generally an item that people will consume even when incomes fall, so farmers will tend to get pre-crisis incomes quicker.

Farmers are also getting a boost from El Nino rains, this year, which is a silver lining.

However, next year conditions are less certain for farmers. If there is a bust in the US, commodity prices may also fall further.

Tourist Sector

If there are no price floors – minimum room rates – to drive out tourists to other countries in East Asia, tourism is also a sector that recovers with dollar incomes.

There is usually money to be paid as service charges or wages. Wages take time to adjust, but may be faster than other sectors.

Those engaged in transport and operation of small hotels and are business owners, will be able to fill their hotels and taxis – unless there are minimum room rates to worsen the off season.

The exodus of workers from the sector, where progressive taxes have also taken a hit on real wages, show that the recovery in wages is below pre-crisis levels. But a good season will help.

However small hotel and restaurant owners will get pre-crisis incomes as long as occupancy is maintained. A part of their incomes, especially in larger hotels with debts, will go to settle bank loans.

Wage Earners

The hardest hit are wage earners in other sectors, which are usually the last to recover. They are fully in the grip of a bad-money central bank.

Many small businesses, especially highly leveraged ones, will go down in the stabilization period when real incomes of people fall and their sales also drop in proportion.

Among the wage earners, the higher income categories are the first to get used to the high prices after depreciation and begin to spend.

This time, progressive taxation had also taken a toll on the recovery through that path.

However, in some of the larger companies, salaries have been raised to adjust for the higher income tax.

When income tax rates are raised – as opposed to giving an inflation adjustment to account to bracket creep – recovery to pre-crisis levels takes time.

It may take up to two years or more for prices and wages to adjust to a currency fall.

Typically, in bad-money-central-bank countries, by the time their wages recover, the agency would again be engaging in currency depreciation, would have depreciated some more, making workers either engage in strikes, bloating the ranks of unions or leave the country to other regions with greater monetary stability.

Even in the year that their salaries make a full real recovery, they are vulnerable to the seductive voices of economic charlatans of the right (nationalist) or the left, which will hurt the government in power. It may be moderated by who was responsible and who is carrying out the stabilization program.

Construction

The construction sector will be one of the last to recover. Construction and capital goods sectors are the ones that gain most from easy money (rate cuts from inflationary open market operations).

With outright purchases of bonds from the banking sector or term money injections, a flexible inflation and output targeting central bank or even a clean floating one will make it possible to finance projects that would never have been able to, if only real deposits were available for credit.

Since money created to cut rates and target potential output will end up as mal-investments, capital goods industries will take a hit when the bottom falls out of the market.

The current troubles in China, and the US housing bubble, that led to quantitative easing are also reflections of the same phenomenon.

The phenomenon was very well explained by Austrian economists.

“The Austrian theory further shows that inflation is not the only unfortunate consequence of governmental expansion of the supply of money and credit,” explains US economist Murray Rothbard, a strong critic of the Federal Reserve’s policy errors.

“For this expansion distorts the structure of investment and production, causing excessive investment in unsound projects in the capital goods industries.

“This distortion is reflected in the well-known fact that, in every boom period, capital goods prices rise further than the prices of consumer goods.”

So, there are also bad loans amid the downturn.

“The recession periods of the business cycle then become inevitable, for the recession is the necessary corrective process by which the market liquidates the unsound investments of the boom and redirects resources from the capital goods to the consumer goods industries,” notes Rothbard.

In 1980, when the unfortunate J R Jayewardene was opening the economy from the 1970s closure, and the central bank was triggering a crisis in 1980, Singapore’s economic architect Goh Keng Swee said, building materials was the fifth item to watch.

The first being the Treasury bill stock of the central bank where all troubles start, followed by foreign reserves (which will fall in proportion to the money printed very quickly), the exchange rate (which will also respond fast) and the inflation index. By that time the index responds, it may be too late.

READ How Sri Lanka rejected Singapore monetary advice and politicians, people paid the price

Default and Caution

The resilience of a long-suffering people will always lead to a recovery from an inflationary rate cutting crisis.

But there are several threats to the cyclical recovery.

Sri Lanka’s debt is being restructured and market access is expected to be restored after an ISB restructure, if all goes well.

Sri Lanka’s sovereign default has dealt a blow to confidence. Before the 2022 default, Sri Lanka’s flawless debt repayment record did inspire some confidence.

Having said that, there is usually no shortage of bond buyers for defaulting countries like Argentina, especially when US rates are low.

Repeated defaults do not seem to deter lenders, since default has become fairly commonplace in the wake of post-1980s intensive currency crises.

It may well be the case in Sri Lanka. However, it is also likely that ISB holders and other lenders who give credit lines to banks will be faster off the mark in the next cycle of flexible inflation targeting driven instability.

Sri Lanka will be more vulnerable to external default in the future as some of the lenders will remember what happened in 2022.

Stock market investors will also remember how they were locked in and were unable to remit money out.

Rupee bond holders also seem to be much more cautious now.

Sri Lanka’s recovery can also be slowed by reserve collections where part of the inflows are directed to the US or other reserve currency countries.

In East Asia deflationary policy has led to large reserve collections (below the line capital outflows) and even current account surpluses (total outflows), but the confidence from currency stability tends to bring in more capital and FDI.

As long as there is monetary stability and liquidity is not injected to suppress rates and bust the currency, consumer spending will recover and people’s lives will improve and the economy will grow as a result.

Eventually there will be a need to expand capacity. It is not just easy-money credit that drives growth.

External Threat

A big threat may come from a US and Western economic disruption.

Economist Steve Hanke, who accurately predicted Fed’s inflation based on money supply movements, among other indicators, has said a steep recession is ‘baked in the cake’ based on current broad money movements in the US.

In the last few years, a big volume of money printed by the Fed went into government debt, not housing mortgages like in the 2008 crisis.

People largely spent pandemic cheques, where the government was the borrower and not just private investors like in the Great Depression, when the fixed policy rate busted a country with a fairly benign situation after World War I ended.

A default of US debt seems unthinkable, but the country’s credit is weaker than ever before with downgrades. Confidence is fickle and can be lost in a hurry. The US political system is in disarray.

The effects of US and general Western disruption are already being seen in Sri Lanka’s export numbers, even though a recession is not official in those countries based on econometrics and definitions as yet.

An unusually bad disruption of the US and Western economies are possible whenever monetary ideologies deteriorate as was seen in the 1970s, in 2008/9 and the 1920 Great Depression.

Multiple Mandate Threat

The biggest threat in Sri Lanka, as always, is internal. The ‘flexible exchange rate’ or depreciating soft-peg and potential output targeting can destroy money here and de-stabilize the country within and on top of US problems.

The inflationist monetary regime, currently peddled by the IMF to unfortunate countries without a doctrinal foundation in sound money, can trigger an external crisis as soon as the economy recovers, as it had done before.

The 5 plus 2 percent inflation target is a big threat. It gives the leeway to the central bank to trigger crises easily with room to spare. After the war crises were created with a 5 percent target.

If the central bank can maintain monetary stability without printing money, a chance will be available for battered people to raise their heads.

However, the prospects are dim. In monetary policy statements, mentions of potential output figures larger than life.

“The Board arrived at this decision following a careful analysis of the current and expected developments in the domestic and global economy, with the aim of achieving and maintaining inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach and stabilise at the potential level,” the last monetary policy statement said in the second sentence, rivalling Powells reference to employment, indicating that there is a very strong belief in a dual mandate and the supposed effectiveness of money printing (macro-economic policy) for growth, despite the carnage wrought in the past few years.

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The central bank also paused rate cuts. This is good. The rate cuts were not inflationary, and general interest rates have fallen due to low private credit, improvements in government deficit and state enterprise profits.

The exchange rate is also volatile but not depreciating so far. Exchange rate stability is an overt reflection of monetary policy.

If the central bank does not try to sell large volumes of Treasury bills above the dollar purchases and re-finance them overnight, rates will fall faster. Allowing some excess liquidity from dollar purchases to remain – while private credit is weak, will bring down rates faster.

There is no need to buy 2026 bonds and inject long term money.

But to keep the market marginally short is a good idea, especially as credit recovers.

If stability is provided for a few years, rates will fall as real wages and savings recover as seen in countries like China and hard pegged countries, Sri Lanka will never see a default again.

Because this country like most Asian nations has a high private savings rate it is easy to collect reserves or repay debt.

As mentioned before stabilization periods are also fertile grounds for nationalism to rear its head, despite economic conditions being not that bad as earlier.

It has happened in many countries from Nazi Germany to Sri Lanka.

When nationalists or authoritarians trigger a crisis, and more liberal reformists come to power, countries can progress.

The current President did not create this crisis, so like the Ordoliberals of post-World War II who inherited a messed up economy from the nationalists, there is a chance, provided stability is provided by the central bank.

As the Germans said, stability may not be everything but without stability everything is nothing.

The new President of the College of Physicians Upul Dissanayake told fellow doctors at his induction in Colombo on Friday that the health sector had failed to recognise diversity and there was widespread discrimination.

The majority of healthcare personnel discriminates against 12 percent of Sri Lanka’s population estimated to be from the LGBTIQ (people who have identified themselves as lesbian, gay, bisexual, transgender, intersex, or questioning), Dissanayake said.

He quoted a 2013 study showing that sexual minorities feared seeking help from psychiatrists or psychologists to discuss the violence they may have faced. And of those who sought assistance, 12 percent had a negative reaction from a doctor.

He also recalled how a motivational speaker hired by the police department as recently as 2021 had told officers that homosexuality was “unnatural” and was a psychiatric issue to be treated and cured.

“The situation has changed during the last few years under the leadership of the Sri Lanka College of Psychiatrists and now a person can expect to see a psychiatrist, with no prejudice against non-heteronormative orientations and genders,” Dissanayake said.

Start with doctors

However, Dissanayake urged fellow doctors to ensure a change of attitude to end discrimination by also educating other health care staff in state and private hospitals.

“As a professional medical organization, we will start among our members, then medical officers, and medical students. We will further go into our co-workers, nursing professionals and other categories of health staff.”

Dissanayake said he was hopeful that proposed legislation to decriminalise homosexuality would be passed by parliament see an end to the colonial-era penal code that had outlawed gay and lesbian behaviour.

Dissanayake was also critical of the treatment of women at hospitals where patients were often examined or subjected to tests such as ECGs without consideration for their privacy.

Language-based discrimination was also rampant, Dissanayake said noting that all doctors wrote diagnosis cards in English which a majority of the patients did not understand.

He said while medical education should be in English doctors must also be sensitive to the patients’ need to know in a language they understood.

Doctors considered their patients “not even as subjects but mere objects.”

“Imagine yourself in the patients’ position. You are there sick, not knowing what ails you, when you would go home, whether you are going to go home at all; the big boss (doctor) does the (ward) round in a strange language (English) which only 23.8% of the population understands.”

“How do we include them in the equation and make our health service inclusive,” he asked.

No solace in hospitals

He said not being a follower of a religion that was the majority religion in the area was a disadvantage for a patient in Sri Lanka.

“In the time of adversity, the patient and the family try to obtain some relief psychologically and spiritually by turning to religion. We have temples, Buddha statues and Bo trees in almost all the hospitals.

“In Hindu majority areas, there are Kovils. In some hospitals there are Christian churches. In a few of them there are some prayer rooms.

“However, the unfortunate patient who is in the minority in such a locality is not thought of. We are not sensitive to the diversity of religion in the populace.”

Patients with HIV or hepatitis B had difficulty in obtaining medical care, mainly from private institutions, he added.

“Who is responsible for this social injustice,” Dissanayake asked. “It is you ladies and gentlemen and I, who are going along with the flow not having the will or the strength to swim against the tide.”

During his tenure, Dissanayake said the College of Physicians will recognise diversity of the population “fight” for inclusivity and equity in the healthcare sector of the country. (Colombo/Jan20/2024)

Creative industries create employment, income, increase export earnings, promote innovation and contribute to societal wellbeing (United Nations Publications, 2002).

The creative industry sector generated USD 2,250 billion in revenues and amounted to 3% of the global GDP in 2015, a study conducted by Ernst & Young and presented jointly by UNESCO and CISAC (the International Confederation of Authors and Composers Society) showed.

The “creative economy” encompasses all industries relying on creative activities and akin to the “knowledge economy” is a key driver of endogenous growth through investment in human capital.

The United Nations Conference on Trade and Development (UNCTAD) defines creative industries as cycles of creating, producing and distributing goods and services that use creativity and intellectual capital as primary inputs.

They compromise a set of knowledge-based activities that produce tangible goods and intangible or artistic services with creative content, economic value and market objectives.

Globally, creative economies are a feasible development option in developing economies (United Nations Publications, 2002).

UNCTAD estimates that in 2020, creative goods and services represented 3% to 21% of total merchandise and services exports and it employed more young people than any other industries and accounted for more than 50 million jobs worldwide.

In 2020 main export products in creative goods were design products, new media products, art crafts, visual arts, publishing and performing arts.

In South Asia, India leads in creative goods exports.

Creative Services vastly exceed exports in creative goods but are more difficult to measure.

A White Paper published by the World Economic Forum identified the following factors in enabling a creative economy:
a) Enhancing the local strengths through academic, research and cultural centres to allow ideas and people to mingle.
b) Enabling technological platforms to enable creative ventures to be launched from any location to scale.
c) Inspiring entrepreneurs – highlighting successful individuals to inspire and train other creative entrepreneurs.
d) Governmental regulation and incentives to create the right conditions for creativity to flourish
e) The power of place – making the locality a place people want to live due to location and amenities.

The paper highlights how Chinese governments focus on developing creative clusters including an art zone and creative village with more than 1,000 artists from around the world has led to Beijing becoming a leading creative economy hub in Asia (The World Economic Forum, 2016).

Creative economies recognise and value to interplay between human creativity, ideas, intellectual property, knowledge and technology (United Nations Publications, 2002).

The United National Generation Assembly Resolution 74/198 highlighted that the creative economy is contributing to the Sustainable Development Goals (SDGs) in multiple ways, especially in Goal 1(no poverty), 5(gender equality), 8(decent work and economic growth), 9 (industry, innovation and infrastructure), 10 (reduced inequalities), 11 (sustainable cities), 12 (sustainable consumption and production pattern), 15 (peaceful and inclusive societies) and 17 (means of implementation and global partnerships).

As we navigate the narrow and perilous path of economic revival in Sri Lanka in an unstable and uncertain world, thought should be given to whether enough is being done by both the policy makers and private enterprise to foster the creative economy in Sri Lanka.

In this context the work being done by local arts organisations bear special examination.

The author is a patron of the arts. (Colombo/Jan18/2024)

But the wedding would have been special to me even without that connection because of where it was held: a place of unparalleled natural beauty.

‘The Villa,’ in Bentota (town on the southwestern coast of the island about an hour’s drive from capital, Colombo) was originally a grand colonial house. Known as the Mohotti Walauwwa, it was remodelled by renowned Sri Lankan architect Geoffrey Bawa in the 1970s.

The Villa is a place of wide vistas, extensive gardens and beachfront dining facilities. The sea is a short walk away down a sandy, palm-fringed path. Inside, the pastel hued walls are adorned with paintings by local artists.

There were over 120 colleagues and friends who had come from overseas. For most of them, this was the first visit to Sri Lanka. They had come all the way from Australia , UK, US, France, Sweden, Spain, Germany, Bulgaria, the Netherlands, Hungary and Brazil.

They had come because they wanted to share the special moment of someone they loved, but all of them, without exception, were overawed by the location. Not only did they feel it was a perfect place for a wedding, they were appreciative of the Sri Lankans they met.

Despite a war for 30 long years, a devastating tsunami, two insurrections and an unprecedented financial crisis, the beauty of Sri Lanka still remains intact.

Sri Lanka is the oldest democracy in Asia and is the only country in the world where people physically fight each other to pay bills when they go out with friends.

Despite the financial crisis this custom still continues. This kind of generosity is extremely rare in the world today. The guests got to see a slice of it during their brief stay and that’s what I felt when talking to Jacob’s father Brad and his uncle, Greg.

Nothing could dampen their spirits, not even the rain which inauspiciously came down just when the bride’s father, Priyantha was delivering his speech out in the garden where the ceremony was being held.

He was able to continue, emotions notwithstanding, because a friend rushed in with an umbrella and held it for him until he was done. One could put it all down to the temper of the moment, the festivities of a wedding and so on, but I like to think that location had something to do with it. It was all about friendship, love, happiness, loyalty and the extraordinary and unique beauty of Sri Lanka.

I returned to Kuala Lumpur the following day. Reflecting on the wedding, the beautiful architecture and the exquisite landscaping, not to mention the innumerable bits and pieces of magic afforded by the lovely beach in Bentota, it occurred to me that what Sri Lanka needs is to develop basic infrastructure to turn all its many scenic locations into iconic stay-in destinations for tourists of all kinds.

Sri Lanka, in short, is a place you would visit to attend a wedding, for example, but will compel you to consider a repeat visit of a longer duration. It is a land that will absorb all sorrows because it is made of smiles that are inevitably infectious. Even in the worst weather conditions.

Indeed, Sri Lanka is an ideal wedding-location. Just imagine a wedding by the sea, a river, a lagoon or a splendid reservoir built hundreds and even thousands of years ago. You could have it up in the mountains overlooking rolling acres of tea, in the middle of a jungle, somewhere steeped in history evidenced by rich archaeological treasures or even in the middle of a cluster of humble villages peopled by those whose dignity derives from a long association with life lessons embedded in Buddhist philosophy. You could time it to coincide with the spectacle of a cultural pageant. Many options. All open-ended. I know that the happy couple would take away memories they would cherish all their lives.

Critics of the IMF slam the agency calling it neo-liberal (whatever that is) but it is definitely not liberal as was understood by classical liberals. There can be no freedom for the people with unsound money.

The IMF was never really liberal as it was a product of Harvard-Cambridge interventionists, but before the collapse of the Bretton Woods in 1971 and widespread depreciation promoted from the late 1970s and 80s, the agency supported a sounder form of money based on its founding principles.

With inflationists’ hands partly tied by a commitment to specie-linked tighter currency pegs (maximum of 10 percent devaluation after mis-firing macro-policy) the poor and marginal income brackets were not harmed as much by collapsing un-anchored ‘flexible’ exchange rates as they are now.

Central banks before the collapse of the Bretton Woods and the IMF’s Second Amendment to its articles had limited legal room to steeply depreciate currencies and tip large sections of the people into poverty and countries into default.

As a result, monetary and exchange rate policies through which economic bureaucrats bust currencies now, were constrained to some degree. The main purpose of the Bretton Woods and IMF when it was set up was exchange rate stability and free trade, not depreciation as now.

According to the Article I of the IMF, the purposes were

(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

And

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

The original Article IV did not permit depreciation of currencies more than 10 percent, helping maintain some semblance of good money, as well as social cohesion.

According to the original Article IV:

Section 5 (b) – A change in the par value of a member’s currency may be made only on the proposal of the member and only after consultation with the Fund.

Section 5 ( c ) (i) … does not exceed ten percent of the initial par value, the Fund shall raise no objection.

And under Section 06,

If a member changes the par value of its currency despite the objection of the Fund, in cases where the Fund is entitled to object, the member shall be ineligible to use the resources of the Fund unless the Fund otherwise determines.

Then how did this agency, which withheld support if a currency was depreciated more than 10 percent, end up presiding over programs with the central bank monetary laws that permitted and encouraged horrific currency collapses, triggering social unrest, civil wars, mass poverty and mass migration after 1978 in particular?

It happened in the absolute confusion that gripped the policy makers in countries that drove the Fund following the break-up of the Bretton Woods system, when they were clueless without a credible anchor for money.

But the collapse of the Bretton Woods system and the Great Inflation of un-anchored money goes back the origins of the Fund itself, which was based on Harvard-Cambridge flawed doctrine, that was in fundamental conflict with monetary stability, as well as being prey to shifting fads of the day.

Roots of Illiberalism

The roots of illiberalism go back to the foundations of the Bretton Woods system and the IMF.

As the IMF was set up by the US Treasury’s Harry Dexter White and John Maynard Keynes of HM Treasury (the Bretton Woods was mostly the White Plan not the Keynes one), the agency is necessarily driven by Saltwater-Cambridge monetary confusion that led to collapse of the Bretton Woods and Great Inflation.

The joint statement issued after talks between Keynes and White (and 30 experts) can be accessed at this link.  (https://www.elibrary.imf.org/downloadpdf/book/9781451972511/ch006.pdf)

After the bureaucratically fixed policy rate was devised by the Fed, which led to the Great Depression and later infected the Bank of England, many countries went off the gold standard as their economies went through a cyclical recovery in the 1930s.

Unlike the US, which had its banking system shattered, and Roosevelt’s New Dealers engaged in vicious interventionism scaring the living daylights out of investors with ad hoc policy changes like in Sri Lanka, other countries were not in the same position and recovered fast. (See: Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War – Robert Higgs)

The UK went off the gold standard in 1931 amid problems in Germany which led to capital flight. Keynes cheered the inflationism and discretion trumping rules as the pound fell and then stabilized.

White was himself a Harvard educated New Dealer therefore by definition an illiberal, who was further suspected to have links with the Soviet Union. USSR eventually did not join the IMF though White was willing to make concessions, over its gold contribution and voting rights.

Keynes also wanted to keep exchange controls longer than the original 3 years proposed as the UK was expected to mis-target policy rates.

But Bretton Woods and IMF was based on a liberal idea

Despite having its roots in illiberalism, monetary confusion, the Bretton Woods itself was based on a fully liberal idea of having free trade and some semblance of monetary stability which had been shattered by the fixed policy rate in the 1920s.

The architects of the post-World War II monetary order wanted to stop the devaluations that took place in the 1930s as the fixed policy rate infected countries while some like the US did it deliberately.

A key US politician with liberal ideas was Secretary of State Cordell Hull, a Southerner who opposed protectionism.

Hull’s ideas not only led to the United Nations but also to the WTO.

Classical liberals had always maintained that free trade was a key tool to avoid war, based on irrefutable logic that is too involved to go into now.

Hull in fact led the US delegation to the 1933 London Economic Conference which sought to stabilize exchange rates. Roosevelt opposed the plan eventually.

The illiberal inflationist Keynes who had cheered the float of the pound, said Roosevelt was ‘magnificently right’.

The US dollar which was not under pressure due to the depression was deliberately devalued by Roosevelt. The Supreme Court upheld the decisions, despite a constitutional requirement to coin money. Recall Sri Lanka’s Supreme Court which nixed a plan to ban provisional advances.

The Cost of the Inflationist Bureaucratically Fixed Policy Rate

As a result of bad monetary policy, the UK was weakened after World War II and had no reserves and little gold left.

It was just deserts for Keynes as he had to pay dearly for his policies implemented in the UK including after the War ended.

The US was still on the gold standard in the 1940s and he had to knuckle down before Dexter White and have his idea for a ‘Bancor’ and international clearing union rejected.

The UK owed money to the Ceylon Currency Board and the Reserve Bank of India. India, which was one of the countries in the original 44 in the Bretton Woods conference, wanted the issue of ‘blocked reserves’ taken up.

There were very few people in 1944 who knew how to run a self-correcting central bank. The French knew and submitted a plan. It was rejected.

J Walter Kemmerer, a Princeton economist who had set up a number of self-correcting central banks including in Latin America and helped set up the Fed originally, without a fixed policy rate and based on the gold standard, also proposed a plan.

Kemmerer’s Latin American banks were later modified and smashed by arch-Keynesian Robert Triffin into Argentina-Sri Lanka style interventionist sterilizing central banks, leading to severe currency trouble and hyperinflation and those agencies becoming top customers of the IMF.

If they had accepted Kemmerer’s ideas, or even later the proven stability of German liberals who came to power after the nationalists were defeated by the Allies in World War II, the later monetary debasement which drove social unrest, civil wars, military coups and communism which spread like wildfire from the 1960s would not have taken place.

Millions would have been saved from death, rape and mass migration.

The Khmer Rouge would not have emerged and Cambodia would have been a stable country like it is under dollarization now.

The IMF itself would not have been needed.

After the collapse of the Soviet Union, countries with monetary instability are now largely ending up in military coups, not communism.

The Second Amendment

An obligation to maintain an exchange rate is the best check on the ability to conduct macro-economic policy, generally known as the lack of monetary independence.

After the US ended gold convertibility in 1971 and countries went to floating rates, the IMF changed the specie fixed exchange rate undertakings contained in its Article IV.

Countries could now depreciate more than 10 percent. Countries also no longer could use gold as an anchor.

The exchange rate is an anchor or a very transparent restraint on macro-economists’ ability to print money.

With its removal unfettered money printing and devaluations could be done by rate cuts and other means.

By sterilizing interventions or engaging in open market operations by repurchasing government debt to inject money, budget deficits could be blamed. As the currency depreciated, budgets and state energy enterprises went haywire, just like the financials of individuals deteriorated.

Sri Lanka devalued steeply after JR came and the country continued to destroy the rupee, until A S Jayewardene came and policy changed, albeit slowly and industrial strikes reduced.

The currency started to fall again rapidly after W A Wijewardene retired in 2011 and overt potential output targeting began.

Steep depreciations hit Latin America after 1980 which had similar central banks and market access, defaults began.

Newly re-opened Eastern European countries suffered the same fate.

These countries did not have clean floats unlike the US, Japan, Germany, Switzerland and Canada to name a few.

They were reserve collecting central banks with un-anchored policy. As they ran from crisis to crisis, repeated stabilization programs were put in place.

Pakistan’s rupee slid alarmingly within the IMF program and is still wobbling. Argentina is still sliding.

Stabilization Programs on Liberal Lines

Unlike IMF programs, stabilization programs implemented on liberal lines with strong controls on the central bank are once-in-a-lifetime affairs.

Unfortunately, there are very few Americans who know how to do this, due to the lack of a history of central banking or deep monetary debate and the proliferation of so-called Saltwater University money printing and interventionist ideologies.

A key post-Keynesian was Alvin Hansen of Harvard. Others include Paul Samuelson from MIT.

A small group of universities led by Chicago where Hayek and later Friedman taught, know how to control central banks.

Other than Kemmerer, who died in 1945, only a few Americans have stabilized countries for a long period.

Joseph Dodge, a banker who worked with the Austrian economists and Ordoliberals (Ludwig Erhard) in the stabilization of West Germany also stabilized Japan at an exchange rate of 360 to the US dollar in 1948.

This was after Harvard types nearly destroyed the country with a central bank financed Reconstruction Development Bank which sent inflation soaring to triple digits in peacetime.

Korea was similarly de-stabilized by US economists with the Hwan currency and people starved until a halfway decent won was re-built in 1960.

Both Japan and Germany became export powerhouses and remained stable in the Bretton Woods period and their currencies appreciated against the US currency after the dollar collapsed and floated in 1971.

Another country that a US official helped decisively was Saudi Arabia. The Saudi Arabian Monetary Agency was set up on currency board lines by Anthony Young, who learned a lesson in the mis-use of a full central bank in China which led to communism. But that is another story.

Once in a Lifetime

Japan also underwent a stabilization program soon after the Meiji restoration in the late 1880s when the Bank of Japan was set up and other money printing central agencies were abolished and the world’s first mass privatization was done by then Finance Minister Matsukata Masayoshi.

The French Franc collapsed in the 1950s and by the end of the decade the country was mired in exchange and trade controls and the Algerian crisis was in full swing.

Finance Minister Antoine Pinay and Jacques Rueff, an ‘anti-Keynes’ economist, presented a stabilization plan, re-worked the new Franc after a devaluation and removed all trade controls, allowing France to meet free trade commitments under the European Economic Community.

The Pinay-Rueff stabilization plan made France a strong country again with a strong currency and allowed President de Gaulle to tread an independent path from the US when he wished. Stability held until shortly before the turmoil around the Bretton Woods collapse.

If a country does not want to go back to the IMF, it cannot follow Fund advice on central banking, which involves depreciation and more depreciation and instability and a new stabilization program.

The UK had exchange controls and instability until Thatcher with the intellectual backing of Friedrich Hayek himself, as well as Milton Friedman, stabilized the Sterling after high inflation and two back-to-back IMF programs.

When Steve Hanke fixed Bulgaria or Estonia, they stayed fixed. Once the monetary authority’s activism is constrained, other reforms can be done at leisure. Successful reformers will come back to power.

Japan’s Finance Minister Hayato Ikeda, a liberal who firmly believed in fighting inflation was once forced to resign after saying that even if five or ten small businessmen commit suicide it cannot be helped. He later became Prime Minister.

Stabilization programs are painful and should be once in a lifetime affairs. To stop them, the root cause, which is flexible central banking, should be blocked with strong rules which stop discretion or flexibility.

No Awards for Illiberal Recidivism

But that does not happen with the monetary reforms as advocated by the IMF. The flawed regimes trigger a crisis in a few years, a phenomenon that some economists call recidivism.

Sri Lanka’s new monetary law is a deeply regressive one which incorporates all the policy errors made after the civil war ended.

If the central bank is operated, as intended, to target potential output with printed money on top of monetary and exchange rate policy conflicts, a second default is inevitable.

The post-war near hyperinflation in countries under US influence like Japan (before Dodge line stabilization) came from the advice of experts from the Economic Co-operation Administration, the agency that administered the Marshall Plan.

There is also another difference. Whatever their faults, White, Keynes and company did not prescribe a third rate monetary regime to some countries and single anchor regimes to themselves.

Joseph Dodge prescribed to Japan, a fiscal and monetary regime that was superior to the US and was based on the German model.

IMF on the other hand is prescribing third rate monetary regimes to countries like Sri Lanka, with 5 percent inflation, which have a proven track record of failure in Sri Lanka and Africa, while clean floats with 2 percent inflation (whatever flaws that has) are operated in the home countries of its architects.

Joseph Dodge was decorated with the Grand Cordon Order of the Rising Sun by Emperor Hirohito on the tenth anniversary of Japan’s postwar independence, on April 28, 1962.

If the IMF was liberal and it prescribed a sound monetary doctrine, whatever the critics say in the first two years, the country will stay stable and grow and the people will be grateful.

But due to the illiberal third-rate monetary regimes prescribed through its programs to countries in Africa, Latin America and Asia, and ad hoc taxation, which cannot make up for denied monetary stability, no one will give awards to the IMF or the politicians who follow difficult fiscal policies to stop crises coming from bad money.

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Notes:

IMF Article I Purposes

• (i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
• (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
• (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
• (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
• (v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
• (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

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A typical blue feeding dive is an athletic and physiological marvel. Strokes from huge tail flukes power her downward against her own buoyancy through the first 25 meters. As she descends, pressure from the water above forces her flexible rib cage inward, decreasing her volume and increasing her density so that her buoyancy dissipates and she begins to fall rapidly with gravity toward the sea bed. She turns and heaves herself upward in a strenuous lunge through krill balls, fighting not only gravity but also the hydrodynamic drag created by her own gaping jaws. She shudders to a halt, having gulped maybe 60 tons of seawater. With a gelatinous tongue the weight of an elephant, she spews the water out through her baleen—cartilaginous sieves that line her mouth—retaining countless krill then to swallow. She does this all again and again, upward toward the surface, holding her breath all the while of course. After gasping in the waves for several minutes, her tail goes up again in her next dive.

Lankan waters teem with organic nutrients washed from the rain-drenched land. They sink by the ton into cold deep waters just beyond the shelf. Winds sweep surface water away in mighty currents and this pulls oxygen-rich, nutrient-laden cold water up from the deep in a process called ‘upwelling.’ When sunlight hits this fertile slurry, photosynthesis goes crazy. Tiny plants called ‘phytoplankton’ grow and multiply by the billion. Micro-animals (‘zooplankton’) dine on this sumptuous buffet and likewise proliferate. Feeding on both, krill blooms turn the sea to orange.

That, in a nutshell, is why blues visit Lankan waters. Science is learning more and more about how these astonishing animals came to exist in the first place. Shall we take it from the top? In this essay’s Part I here, I recount the first five of eight key evolutionary stages. In a later Part II, I shall recount the remaining three.

One: Origins

It all began in Lanka’s general neighborhood. It has long been known that cetaceans (whales and dolphins) are mammals and therefore evolved from exclusively land-going animals. Amazingly enough, recent science assures us that they sprang from the order of artiodactyls!!! Artiodactyls? Oh, of course, you know them by their street name: even-toed ungulates!!! OK, OK, so even-toed ungulates are mammals with hooves formed from two (or sometimes four) of their five toes. Present-day representatives include deer, pigs, sheep, camels, cattle, giraffes and hippos (the closest living cousins of cetaceans).

Herbivorous artiodactyls found themselves roaming Asian savanna as the Indian subcontinent broke away from Africa and raced across the ancient Tethys Sea until it collided 50 million years ago (mya) with Eurasia’s southern flank and began pushing the Himalayas up toward the sky. Coincidentally, or probably not, cetacean evolution dates from that same time. A deer-size creature called ‘Pakicetus’ began taking dips in shallow water, perhaps when streams flooded seasonally or perhaps to dodge predators. Its fossils now lie high in the mountains of India and Pakistan.

By and by, it learned to fish, launching the speedy 10-million year cetacean journey from land-going herbivores to sea-bound carnivores. There must have a day early on when a frustrated mommy growled the Pakicetus equivalent of ‘Yes, you ARE going to eat this and you’re going to eat it right NOW!’ as she spat some regurgitated fish down her pup’s throat, and then a moment later the pup chirped back the equivalent of ‘MommyMommy, I actually like it!’

Two: Fresh Water to Salt

Rains, possibly early monsoons, poured themselves on the rising Himalayas, creating streams flowing down toward the Tethys, itself shrinking down as its floor got squeezed up into hills. This would have created varying riverine habitats that perhaps fueled rapid emergence of new cetacean species. Some developed hippo-like heavy bones, providing ballast against buoyancy, allowing them to wade and bottom-walk while submerged. Some supplemented their diet with underwater grasses. For a while they hunted in water but returned to land for sleep, mating, calving and nursing, like present-day seals and walrus.

Some learned to swim of course. First came an awkward dog-paddle with limbs moving in a gait easily adaptable from trotting on dry land. Later, front paws thrust out motionlessly forward and webbing emerged on back-pushing hind feet, alternating left and right. Then hind legs came into simultaneous strokes, which continued down through a stiffening tail undulating downward and upward, providing propulsion both ways. Cetaceans migrated quickly into deeper and broader freshwater streams, then into brackish swamps and marshlands where they had to tolerate salty water, drastically altering their metabolisms in so doing. In an incredibly brief time of perhaps only one million years from their first emergence, cetaceans reached the sea. It had never been that far away but getting there required arduous metamorphosis.

Like a furry 400-pound crocodile, ‘Ambulocetus’ skulked in shallow bays, marsh and estuaries. Comfortable in both fresh and salt water, it could also shamble awkwardly on land if need be. With eyes high on its head, it could stay concealed while swimming. Squat, powerful web-footed hind legs launched its massive head and jaws in ambush takedowns. Its time was brief, however. New cetaceans departed the land entirely to spend their whole lives at sea, including sleeping, mating, calving, nursing and rearing young. Land-linked cousins they left behind fell extinct, out-competed by other carnivores. (Today’s freshwater dolphins and porpoises later migrated back from the sea.)

Three: Ocean Radiation

Physiology again transformed quickly as cetaceans made oceans their home. Genes for producing hind legs sputtered into quietude. Eyesight, useless in deep darkness, lost primacy, yielding to accelerated hearing acuity, exploiting sound’s superior transmissibility in water. Sound could help detect both predators and prey as their changes of speed and direction generated noise. Nostrils migrated to head-top blowholes, facilitating breathing at the surface. Body shapes moved toward hydrodynamic tubularity. With enlarging bodies, surface to volume ratios shrank, fostering heat conservation. Forelegs became flippers, enhancing maneuverability, and keel-like fins grew, providing stability. Backs acquired flexibility and tails sprouted flat broad flukes providing powerful up-and-down propulsion from the rear.

Kidneys got better dealing with salty seawater. Buoyant and drag-inducing fur disappeared in favor of buoyancy-neutral blubber, making dives easier and proving useful for reserve energy and heat maintenance needed for energy-expensive warm blood. With oxygen stored in blood rather than lungs, long dives on a single breath became feasible. Learning to sleep with half their brains at a time, they could maintain conscious control of their breath with the other half.

Drawing on mammalian smarts and social bonding, cetaceans became top predators, rivaling sharks who had ruled since the dinosaur extinction event (65 mya) that ushered sea-going reptiles to their doom. By 40 mya, cetaceans broke out of the shrinking Tethys and colonized all the seas, proliferating westward across the widening Atlantic, then through a gap between North and South America into the vast Pacific.

New species took up positions in the variegated niches they explored. By 35 mya, cetaceans poised for their next great transformation. ‘Modern’ cetaceans peeked between the curtains, then confidently took center stage.

Four: Echolocators and Filter-Feeders

Antarctica split from South America, isolating itself at the South Pole. A cold water current now circled it through southerly reaches of the Pacific, Atlantic and Indian Oceans. It obstructed flows of warm air and water to Antarctica, turning a previously subtropical climate to an icy one. In this so-called ‘Southern Ocean,’ cold water upwelling proliferated, fueling massive blooms of phytoplankton, zooplankton, krill and other organisms. Ocean productivity rose exponentially and cetaceans moved in to take advantage.

Deep-diving hunters with teeth (‘odontocetes’: the name referring to, well, teeth) emerged by steering their excellent hearing in a new direction. High-frequency clicks echoing back to them off increasingly abundant prey allowed them to ‘see’ with sound. This new sonogram sense colonized and re-wired their visual cortex, providing precision ‘sight,’ comparable in acuity with human vision, far outstripping the best human-made sonar. It all stemmed from a genetic shift identical to what propelled echolocation in bats, a stunning example of ‘convergent evolution’ if ever there was one. Echolocation feeds the charismatic bottlenose and spinner dolphins, orca and sperm whale found around Sri Lanka today.

Other cetaceans, however, found a different way to exploit oceanic abundance. They swam through balls of small animals, gulped them with seawater, then forcefully expelled the water from their mouths, leaving teeming prey stuck to the insides of their teeth, thereafter to be swallowed. This ‘filter-feeding’ also proved an excellent way to make a living.

They soon kicked it up a notch, sprouting cartilaginous bristles between their teeth, allowing them to filter more efficiently. These strips, known as ‘baleen,’ grew longer and more numerous through time and the teeth vanished, being necessary no longer. The great cetacean sub-order of ‘mysticetes’ (referring to mustache-like rows of filtering baleen hanging from upper jaws in their mouths) came fully into its own, right around the same time as echolocation perfected itself among their odontocete cousins.

That is the usual story at least. A minority view, however, holds that mysticetes emerged much later than the odontocete radiation 35-30 mya. This view contends that mysticetes sprang from odontocetes themselves, maybe around 25 mya, tracking another uptick in ocean productivity. A line of odontocetes found that they could abandon the expensive machinery of echolocation and learn to live by filter-feeding alone, as sketched above. Echolocation confers no great advantage in finding large balls of fish or krill. Normally acute cetacean hearing can fill the bill. To make room for more and more baleen, their skulls needed to change shape and this disallowed effective echolocation. The theory goes that baleen whales radiated quickly as they exploited a previously-underutilized feeding technique.

It seems counter-intuitive that a cetacean cluster would give up a tool as useful as  echolocation, but evolution brims with strange pathways and reversals. Lanka’s huge ‘fruit bats,’ for example, forsake echolocation because their stationary food source doesn’t require or reward it. They use eyes and nose to find their fruit. And cetaceans, after all, returned to the sea millions of centuries after their ancestors wiggled out of it onto dry land.

Five: Pouch and Lunge

In any case, mysticetes weren’t done yet. Around 15 mya, cooling seas boosted prey abundance yet again. To take advantage, some mysticetes developed large pouches extending from their mouths back toward their navels. Longitudinal folds in these pouches and changes in head morphology helped these so-called ‘rorquals’ open their jaws in a widening gape so as to hoover up heavier mouthfuls of prey.

Rorquals combined this new physiology with a novel style of feeding: ‘lunging’ at high speed through balls of prey, jaws magnificently wide, drawing massive gulps of food and seawater into their mouths. They developed soft fleshy tongues capable of licking their lunches efficiently off their baleen plates after spitting the water back into the sea. Swallow and repeat.

Close ancestors of today’s blue whale, early rorquals conspicuously lacked its size. They were in fact outsized by a contemporary odontocete, ‘Livyatan,’ extinct forebear of today’s sperm whale. A massive mammal hunter with bigger teeth than any other animal ever, it undoubtedly relished rorqual for breakfast.

As indicated above, Part II of this essay will address three more blue whale evolutionary stages.

(Writer, lawyer and former law professor, Mark Hager lives with his family in Pelawatte. mark.hager@gmail.com; https://www.linkedin.com/in/mahager/)

Further Reading:

Small, The Blue Whale

Zimmer, Fish With Fingers, Whales With Legs

Rice, Marine Mammals of the World

Berta, Return to the Sea

Whitehead & Rendell, The Cultural Lives of Whales and Dolphins

Mann, Deep Thinkers

Pyenson, Spying on Whales

Martenstyn, Out of the Blue

Organizations and Resources:

Centre for Research on Indian Ocean Marine Mammals (CRIOMM) (Sri Lanka)

Sri Lanka’s Amazing Maritime (SLAM) (Sri Lanka)

NOAA Fisheries, National Oceanic and Atmosphere Administration (USA)

Whale and Dolphin Conservation (WDC) (UK)

Marine Mammal Institute, Oregon State University (USA)

Wildlife and Nature Protection Society (Sri Lanka)

Sri Lanka Wildlife Conservation Society (Sri Lanka)

Department of Wildlife Conservation (Sri Lanka)

Whale Watching:

Borderlands, Weligama

Mirissa Water Sports, Mirissa

Raja and the Whales, Mirissa

Royal Tours, Mirissa

A hike in value added tax still leaves money in the hands of wage earners and others giving them the freedom to make economic decisions and spend.

A 3 percent hike in VAT to 18 percent is less damaging on the people than a 5 percent inflation tax, which the country’s inflationist central bank imposes on the people at a minimum.

It must be remembered that the central bank’s 5 percent inflation tax or currency depreciation through flexible exchange rate is imposed to on the very poor through higher food prices while foods are exempted from VAT.

Indirect value added taxes are collected after an economic transaction is made. Income and wealth taxes prevent a gainful economic decision from being made.

Value added tax however is somewhat complex for businesses to operate.

Thought retail businesses operate on cash, businesses that operate on credit will have to borrow 18 percent of revenue to pay the tax on the 20th of the next month.

Businesses operating on credit therefore will have to borrow to pay VAT encouraging false accounting or raising costs.

This may not be a problem in countries with legally controlled central banks with tight inflation targets, sound money and low interest rates, but it is problem in flexible inflation targeting countries where inflation and interest rates are high.

Giving Power to Rulers to Decide Through Income Tax

Capital consumption taxes like income taxes and wealth taxes transfers economic decisions to bureaucrats and the political class, and tends to mis-direct the economy.

The US, which is heavily focused on income tax has no VAT and small state level final sales taxes are found.

The IMF, perhaps due it US progressive (read socialist) or New Dealer origins may favour income tax like most socialists.

However, in Sri Lanka people are whacked with both income and value added tax.

All capital consumption taxes destroy investible resources which are then frittered away in bureaucratic current spending.

The very sudden tax hike, involving a low threshold, and no deductions, is also contributing to brain drain.

However, the heavily socialist thinking behind income tax – tax the rich – does not help anyone.

High progressive taxes were a feature of Roosevelts New Deal interventions – which delayed a recovery from the depression, as well as Hitlers program. The Social Market economy architects cut the marginal tax rate.

Post 1980 IMF programs which do not stabilize the currency unlike before the Second Amendment when the agency was less vilified but attempts other reforms, are supposedly based on Thatcher era reforms.

But Thatcher not only stabilized the currency (in parallel US also raised rates strengthening the dollar), reducing fuel and energy prices, helping public acceptance of the power sector privatization (but hurting coal miners).

Giving Freedom for People to Choose through VAT

A key reform was raising VAT while cutting income tax.

Unlike in Sri Lanka, Thatcher campaigned on cutting high progressive taxes and giving freedom for people to choose after they came to power.

This is how Thatcher’s finance minister, Geoffrey Howe boldly gave choice to the people on the street and a boost to economic decisions of the community vs the bureaucrats, hiking VAT and cutting income tax.

“We made it clear in our manifesto that we intended to switch some of the tax burden from taxes on earnings to taxes on spending,” Howe said in his budget speech in 1979, where the clarity of thought, reason and interconnected logic was worthy of any 19th century classical liberal.

“This is the only way that we can restore incentives and make it more worthwhile to work and, at the same time, increase the freedom of choice of the individual. We must make a start now.”

In the late 1970s the UK was also in the same position as Sri Lanka. High income taxes were hitting skilled workers.

In fact the ‘brain drain’ originally started in the UK during its period of monetary instability.
“The upper rates no longer affect only those on very high incomes,” Howe said.

“They apply – and Labour Members may find this surprising – not only to senior executives and middle managers in industry but increasingly to skilled workers, as well as to professional people and the proprietors of small businesses.

“These are the people upon whom so many of our hopes for initiative, greater enterprise and national prosperity must depend.

“Our long-term aim should surely be to reduce the basic rate of income tax to no more than 25 per cent.”
The basic rate is now 20 percent.

This column said before the IMF program started that Sri Lanka should go for 20 percent VAT and eventually 15 percent corporate income tax eventually (The Yellen Tax). If 15 percent tax is given for new companies the IMF cannot object since that is official US policy.

However spending must be brought down.

READ MOREWhat Sri Lanka’s IMF program should look like

Thatcher also raised the slabs to account for inflation. A five percent inflation target should lead broadening tax slabs.

Eliminate the Social Security Contribution Levy

In the next tax reform, the cascading social security levy should be eliminated and the VAT raised to 20 percent.

The SSCL should be eliminated simultaneously with the raising of VAT so that market prices will remain the same and the government will recoup some of the money lost from the cascading tax.

Charge VAT on Fuel and Electricity

Value added tax should also be charged on electricity and the turnover taxes the excise taxes on diesel and coal should be removed or reduced.

Fuel taxes are in the nature of road taxes and should not be charged from electricity. Import duties on fuel should not be passed on to exporters. Zero rating and charging VAT will eliminate the problem.

This will allow exporters to reclaim VAT on energy, making the country competitive.

As a result, industries will not have to be given a different electricity tariff.

Vat should not be charged on electricity while excise taxes on diesel remains. Import duties on coal should be converted to VAT.

Brain Drain and Dependents

Sri Lankan politicians and politicians look at East Asia with envy, but does not follow their policies either on central bank control, or taxes.

Countries in East Asia that have good monetary regimes and do not go to the IMF regularly tend to have low value added taxes (about 10 percent) and corporate tax rates (about 20 percent).

Anecdotal evidence show that professionals are migrating because they are unable to pay school fees and medical expenses in addition to being unable to make mortgage and lease payments.

In social media there are posts of migrating families seeking good homes for pets.

Though politician claim that people are taxed for education and health, income tax payers end up sending their children to private schools and they go to private hospital.

One way out is to give tax credits for dependents and housing mortages like in East Asian countries, whose policies IMF countries do not follow.

The state should be limited to 20-pct VAT

World Bank and IMF claims that 20 percent spending to GDP is not a problem should be rejected.

Sri Lankans know how the state was bloated due to giving jobs to unemployed graduates by both the JVP ideology and the Rajapaksa regimes which put them to practice.

After raising VAT to 20 percent and with income tax at 20 percent, the rulers will take about 40 percent of a persons’ income.

That should be enough for the rulers and state workers to survive.

The state should be limited to the taxes than people can pay.

The government should also impose a 2 percent inflation target on the central bank. Putting on inflation tax on top of VAT increases is an invitation to disaster.

The 5 percent inflation tax is to be imposed on the people every year. An annual 5 percent inflation tax is worse than a one time VAT hike.

However unless the central bank is restrained printing money for growth, preferably with an exchange rate target as it is simple and transparent, no other reform in taxes will either stop the out-migration nor investment driven growth. (Colombo/Nov08/2023 – Update IV)

By these actions, inflationists escape accountability for money printing or the deployment of inflationary policy to trigger monetary instability by cleverly transferring the blame to the victims, which include not only the general public but also politicians who lose office.

In order to escape Sri Lanka’s 73 years of monetary instability which started with the setting up of the central bank and frequent trips to the IMF, it is important to examine the truth or otherwise of these claims.

This is the first of a series that will attempt to show how countries suddenly started to experience balance of payment deficits in the last century in peacetime and various narratives stopped any correction.

These red herrings were not developed in Sri Lanka, but by Western inflationists as ‘macro-economic policy’ advocated by US post-Keynesians in particular, undermined the Bretton Woods soft-peg system and the last vestiges of the gold standard were shattered.

The mis-labelling of monetary instability as macro-economic instability was also one of the ways the victims of central banks were misled.

But the most enduring and oft-repeated false excuse given by these inflationalist working within and without what were effectively ‘independent’ central banks of the West was that the budget deficit was the cause of forex shortages and inflation.

In Sri lanka in the year the central bank triggers the currency crisis, deficits have been stable or barely grown nominally, indicating that very small rises in rates early under a wide policy corridor would have prevented a currency crisis.

On the other hand, deficits tend to grow steeply in the year the balance of payments was brought back into surplus through a stabilization program, which tends to slow growth, push up rates, and the debt to GDP ratio.

In the next currency crisis, especially if there is commercial debt, the country tends to default.

The Deficit Lie/Fiscal Dominance

The false narrative around deficits goes like this: politicians expand the budget deficit and the central bank is subject to de facto (by the large deficit by itself) and de jure fiscal dominance through operational dominance by politicians or Treasury officials blocking rate hikes.

There are two problems with this claim. One is that there is no data to support this claim, especially in Sri Lanka, especially after the end of the civil war.

The other is that Treasury Secretaries in Sri Lanka have almost always been ex-central bankers, therefore, it is a problem of economists and not politicians or the general public anyway. Politicians are clueless in third world countries and when they had a clue, they did not interfere.

A close examination of recent currency crises shows these trends. Some of these trends are also present in older crises before the civil war started as well as in many countries including Latin America that experience peacetime currency collapses and default.

Trend One: the deficit expands in the stabilization year when currency crises are eliminated and the BOP returns to surplus. This deficit apparently is not subject to ‘fiscal dominance’ either de facto or de jure.

Trend Two: In the year the currency crisis is triggered and money printing suddenly expands, the deficit to GDP sometimes falls and nominally the increase is small.

Trend Three: The money printed in the year that the central bank triggers crises is disproportionately higher than any nominal increase in the deficit, compared to the previous year when there was monetary instability. This is because central banks trigger BOP deficits not by printing money for the current year deficit, but by printing money to buy back government debt held by banks from deficits decades ago to target the call money rate initially and then sterilize outflows as panic sets in.

The Recent Crises

In the 2008 crisis, which happened in the middle of an intensified war and the Great Financial Crisis, some of these factors were present, but it was also driven by capital flight within a stable exchange rate, but monetary policy was tight.

In the 2001 crises, which also took place in the middle of a war also some of the characteristics can be seen, though the currency collapse was steeper.

This column is prepared to make some allowances for war, since, even in classical liberal days, private central banks like the Bank of England got into trouble in wartime. It also must be kept in mind that the country that did not print money or printed the least was usually the victor. But there can be no excuse for peacetime monetary instability.

The trend of expanding deficits in stabilization years holds true even in war years. In 2001 for example, when monetary stability was restored and reserves were re-built with a BOP surplus of 219.8 million US dollars, the deficit went up steeply from 9.5 to 10.4 percent of GDP.

The nominal deficit went up from 119.4 billion rupees to 146.7 billion rupees, yet money printing was reversed by 5.7 billion US dollars.

In 2009, a stabilization year, the budget deficit went up from 309.6 billion rupees to 476.4 billion rupees, yet the BOP was in surplus with higher interest rates.

In peacetime currency crises came in rapid succession as money was printed to keep rates down as the economy recovered.

The Crisis year

In the 2011/12 currency crises the central bank triggered a BOP deficit of 1,059.4 billion rupees without a war as the economy strongly recovered and private credit recovered. The deficit in the crisis year of 2011 went up only by 5.2 billion rupees from 445 billion rupees to 450 billion rupees.

This deficit could have been easily managed if interest rates were allowed to move up a little. But the central bank printed 184.6 billion rupees that year to keep rates down and effectively finance the private sector.

In 2015, however there was a substantial increase in the deficit due to Yahapalana salary and subsidy hikes, where an excuse can be made that there was de facto or otherwise fiscal dominance.

However, the central bank started injecting money from the third quarter of 2014 before that government even came to office to suppress rates. As the deficit went up by 238.3 billion rupees the central bank printed 80.4 billion rupees, according to the rise in credit to the government, which however did not tell the whole story.

In 2016, when the deficit was reduced by 189.2 billion rupees to 640.3 billion rupees, the central bank printed 183.0 billion rupees.

Then, in 2017, the stabilization year, the deficit went back up to 733 billion rupees or 93.2 billion rupees and the central bank reduced its credit to the government by 188 billion rupees. In terms of GDP also the deficit fell marginally.

In 2018, in another currency crisis year, the budget deficit went up by only 27.3 billion rupees but the central bank printed 247.7 billion rupees as massive amounts of money was injected to target the call money rate and then sterilize interventions when foreigners fled re-financing the private banks to buy the debt.

In 2018 as well as in other crisis years, the budget deficit could have been easily bridged by a 100 or 200 basis point rate hike and reducing private credit or boosting savings, as the difference in deficits of the two years show.

Instead of which rates were cut in that year, just like in earlier crisis years. As a share of GDP, the deficit fell from 5.5 to 5.3 percent of GDP in 2018.

In 2019, the stabilization year, the budget deficit went up to 6.8 percent of GDP but the BOP came back into surplus. In rupee terms the deficit went up to 1,016 billion rupees from 760 billion rupees, but 109.6 billion rupees in central bank credit was reduced.

It can be very clearly seen that the budget deficit was not the problem, for the external deficit in the previous year as it was lower.

No Escape under Data Driven Monetary Policy

Then what is the problem?

The problem is data driven monetary policy, or the belief that rates can be cut with printed money to get easy growth, when inflation falls.

In 2015 when the deficit went up, the central bank had no business cutting rates. The central bank was already printing money from the third quarter of 2014 and running forex shortages.

Yet the agency cut rates in April 2015 suicidally and injected money to target the call money rate claiming inflation was low.

Based on this argument it was justified in doing so under data driven monetary policy, where econometrics triumphed over laws of nature.

In 2018 it cut rates while the deficit was down. The excuse at the time was that fiscal policy was tight, therefore monetary policy must be loose to boost growth.

That is the time it was quite evident that Sri Lanka had no future. The central bank would print money whether the deficit expanded or narrowed. The people and the economy had no escape from monetary instability.

To suggest that Mangala Samaraweera or Eran Wickremeratne was putting pressure on the central bank to print money does not hold water. Harsha de Silva publicly asked rates to be raised.

Whatever the fiscal authorities did was not relevant, the central bank would cut rates and trigger currency crises as soon as private credit recovered.

And post the currency crises, 12-month inflation tends to fall around the same time as private credit recovers, giving excuses for a fresh round of money printing.

Why does all this matter?

There is a further complication for a reserve collecting central bank. To collect reserves, a country must finance the deficit of a third party reserve currency country.

If Sri Lanka buys US securities, then the American deficit is financed. Raising taxes and reducing the deficit domestically is not enough, domestic investment must be curtailed sufficiently to build reserves (finance a reserve currency country deficit).

So why does all this matter?

This matters because it shows why deficits and debt go sharply up in countries with bad central banks. The deficit and debt (including the rupee value foreign debt) go up for reasons that have nothing to do with fiscal policy.

While good fiscal policy is important, no amount of fiscal fixing will help if the central bank is triggering monetary instability and depreciating the currency, because repeated stabilization cycles will destroy growth and fiscal metrics.

The reason for spikes in bad loans in the private sector and bad fiscal metrics is virtually the same – it is bad money.

This is also important for another reason, which these columns have explained before.

Mistargeting of rates is the reason IMF programs fail in the second year. It is important because Sri Lanka is now about to make the same mistake again under data driven monetary policy.

This is what happens in peaceful Latin American countries and it is what happens in Sri Lanka and in all IMF countries.

Politicians in particular must take note.  Ranil Wickremesinghe and his ministers must not put pressure on the central bank to cut rates.

Already the writing is on the wall. Noises are coming about ‘high real interest rates’.

It is when private credit gains momentum that the real problems will begin. Under a flexible exchange rate, even a small pick up like in 2018 can create havoc.

The IMF itself has warned that the pace of reserve collection has slowed. And no wonder. The central bank started injecting money on a gross basis in May. From June the external sector started showing signs of instability.

But the IMF warning about reserve collections is disingenuous.

The IMF itself is at Fault

It is the IMF that promotes econometrics (data driven monetary policy and the monetary consultation clause that promotes money printing as soon as inflation falls) that go against laws of nature well described by classical economists to avoid balance of payments troubles.

The IMF suggests there is monetary financing. There was minimal monetary financing of the deficit, except after 2020. There is however ‘monetary financing’ of banks consistently (by repurchasing old bonds from prior year deficits), which is way higher than the deficit.

This mistake did not happen in classical days. Financing of banks (or discount houses initially) was through bills of exchange and it was clearly visible.

Hence classical economists, some of whom got themselves elected to parliament to bring laws against central banks, easily made the distinction between financing of ‘merchants’ and the ‘government or the King.’

Unlike the IMF or present-day economists of third world central banks that go for bailouts frequently, classicals had a deep knowledge of note issue banking operations.

As the data shows above, in the crisis year, the reason large volumes of money – much higher than the increase in the deficit is printed – is because the central bank is actually financing the private sector.

In Argentina for example crises are driven by the failure to roll-over BCRA’s own sterilization securities like (Leliqs).

In Sri Lanka it is the re-financing of banks by either outright, term or overnight purchase of securities from banks, through inflationary open market operations claiming inflation is low.

That is why IMF programs are destined to fail and second or third defaults happen in many cases.

4-6 pct inflation targeting is an invitation to disaster

All this matters because of a third reason.

An examination of the data table in Sri Lanka shows that all post war currency crises had taken place by targeting a 4-6 percent inflation range.

What the numbers show is that targeting 4-6 percent failed to stop currency crises, which eventually led to growth shocks and spikes in debts as the monetary brakes were hit.

The post-2020 “macro-economic policy” deployed had tax cuts on top of money printing. During that crisis also inflation was relatively low initially despite large volumes of money being printed.

Sri Lanka’s problem and that of other African and Latin American countries is that monetary regimes are fundamentally flawed.

There is a propensity to deploy macro-economic policy despite the existence of a reserve collecting central bank in the legal and operational frameworks themselves, despite such actions defying laws of nature.

Sri Lanka, Africa and Latin America and unstable countries in East Asia like Laos are in the same universe as stable countries with 2 percent targets and subject to the same laws of nature described by classical economists when BOP deficits and monetary instability were absent.

No amount of reforms in other sectors, including in budgets which are undoubtedly required, can help a country, if monetary stability is denied by targeting 5 percent inflation and failing to defy laws of nature, repeatedly. (Colombo/Oct23/2023)

The idea of output gap targeting with easy money dates back to Scottish Mercantilist John Law and fully discretionary flexible policy to James Steuart.

The ideas have been revived down the ages through different labels driving countries into instability and people to misery.

Sri Lanka’s central bank was originally set up in 1950 in a fit of Mercantilism ideology that took hold of the US economists who created the post-Worl War II monetary order. However the basic ideology has been festering from the 1920s.

Sri Lanka started its descent towards Mercantilism, started less than 10 years after the central bank was set up, with exchange and trade following in its wake giving rise to Nazi-autarkist self-sufficiency with protectionist (domestic production) rent seeking.

The country descended into IMF programs from the mid-1960s, as US inflationism worsened under econometrics, triggering big shocks in unwary Bretton Woods members.

The recent revival of targeting potential output by rate cuts that eventually drove Sri Lanka to default, seems to be knee-jerk reaction following the interventionism that became ‘normalised’, just as Keynesianism was a reaction to the Great Depression.

The new law did not outlaw provisional advances as promised, but amusingly the can be printed for interest. But in any case the central bank will transfer profits as domestic currency and there is full discretion for open market operations to print any amount of money, so provisional advances may be irrelevant.

More dangerous is the underlying interventionist ideology behind the law, which tends to persist in countries without a foundation in sound money.

A central bank law is expected to be a ‘constitution’ which restraints the agency, not a tool for discretion or flexibility.

Dowload Sri-Lanka-monetary-law-Act-2023

The John Law Clause

The Central Bank of Sri Lanka Act 2023 legalizes both exchange rate policy (intervening in forex markets) and monetary policy (printing money to mis-target rates), which was the fundamental flaw that failed the Bretton Woods system and is found in all unstable countries in Latin America, Africa and South Asia.

But the monetary law goes beyond the Bretton Woods by taking away the last vestiges of legal restraint on the central bank by allowing flexible exchange rates instead of restraint by an external anchor.

That a central bank by inflating money (cutting rates and inflating money supply through open market operations to maintain excess liquidity in the interbank bank market), can grow an economy is a classical Mercantilist belief articulated several centuries earlier.

In 1705 Scottish Mercantilist John Law wrote as follows in Money and Trade Considered With a Proposal for Supplying the Nation with Money.

“Domestick Trade [meaning economic activity] depends on the Money. A greater Quantity employes more People than a lesser Quantity. A limited Sum can only set a number of People to Work proportion’d to it.”

The 2023 Sri Lanka Monetary Law enshrines John Law’s concept by writing it into the law with fancy econometric terms with the idea of a ‘potential output’ replacing the John Law’s ‘Domestick Trade’ in Section 6 (4).

“In pursuing the primary object referred to in subsection (1), the Central Bank shall take into account, inter alia, the stabilization of output towards its potential level,” the law says.

In the US, this idea is expressed as the Fed having some ability to create full employment by a peripheral legislation, though high inflation, commodity bubbles and banking crises are often the result.

BOP troubles (gold losses of the Fed) and the collapse of the Bretton Woods and the US dollar was the result before 1971.

The Fed’s interventionims worsens because the effects of commodity bubbles are not initially captured due to the use of a ‘core inflation’.

The Battle Between Classical Economists and Mercantilists

Mercantilism has a frightening ability to resurface in cycles, with slightly different terminology, though the basic ideas have been the same across centuries.

John Law’s ideas were defeated in the UK and Scotland and he went to France to peddle his ideas and drove that country into a crisis with the use of Banque Royale, in the lines of the one Sri Lanka is undergoing now and Latin American countries do repeatedly.

However, the ideas re-appeared in the bullionist and anti-bullionists debates in the early 1800s (after Bank of England suspended gold convertibility or floated) with David Ricardo among those opposing the Mercantilists.

Ricardo and his followers were able to defeat the Mercantilists. However, the ideas keep re-appearing like a bad penny.

Mercantilism re-appeared in the UK in the 1840s with the debates of Currency School vs Banking School. Again, the Mercantilist Banking School was defeated resulting in long term free trade and monetary stability at least up to World War I.

The Fed was set up as a state bank in 1916. The US did not have a long history in central banking (The Second Bank of United States was closed in 1836 after only 20 years of operations) and the Fed accidentally invented the fixed policy rate, triggering the Great Depression in its wake.

The Bank of England which resumed gold convertibility in 1925 with the Sterling under upward pressure, and was able to sterilize gold (like the central bank builds reserves) but fell victim to the fixed policy rate, with which it was also infected soon.

Mercantilism Revived by Keynes

In the 1930s Mercantilism came roaring back with Keynes writing his Treatise on Money (1930) and General Theory (1936), regurgitating the ideas of John Law and others leading to inflationist macro-economics.

The Fed’s Latin America unit – driven by arch Keynesian Robert Triffin – was also instrumental in setting up a series of interventionist central banks in the region, which later became top customers of the IMF and serial defaulters that ended up in hyperinflation. Only dollarization stopped the monetary massacre of several of these countries but they remain steeped in socialist ideology to this day.

With universities teaching Keynesianism and interventionism, later backed up econometrics which gave these once discredited ideas a ‘scientific’ aura, the problem never went away unlike in the 19 century.

The Great Moderation ended in 2001 with Ben Bernanke persuading Alan Greenspan to cut rates and run an 8-year cycle triggering the Great Recession, leading to another revival of inflationism, which was festering in any case except for few German speaking countries in Europe and some East Asian countries.

In addition to the problem of universities teaching inflationism, Mercantilism from the World War II onwards was also perpetuated due to nationalized central banks, like Bank Royale.

As state agencies, they were not accountable and subject to the same criticism as private central banks were before World War II and managed to dupe the people and legislators with false doctrine more effectively than private banks ever did.

After World War II the Bretton Woods was set up along with the IMF backed by the mistaken idea that money can be printed with a fixed policy rate to engage in discretionary macro-economic policy while also maintaining a stable exchange rate, defying laws of nature.

In the last century universities led by Cambridge and Harvard had fully jumped into the fray except for a minority like LSE and University of Chicago where Friedrich Hayek had taught.

“..[E]ven some of the colleagues I most respected supported the wholly Keynesian Bretton Woods agreement, I largely withdrew from the debate, since to proclaim my dissent from the near-unanimous views of the orthodox phalanx would merely have deprived me of a hearing on other matters about which I was more concerned at the time,” Hayek wrote later.

“I believe, however, that, so far as some of the best British economists were concerned, their support of Bretton Woods was determined more by a misguided patriotism – the hope that it would benefit Britain in her post-war difficulties – than by a belief that it would provide a satisfactory international monetary order.”

A large number of central banks were set up in newly independent countries, based on Bretton Woods/IMF lines, bringing misery to millions, as forex shortages came with development economics and re-financing credit programs by central banks.

Targeting potential output is however much more indiscriminate.

Singapore, Dubai, Oman got independence about a decade later and escaped the carnage of development banking and open market operations kept stable exchange rates.

Stable exchange rates necessarily require prudent monetary policy with little room for flexibility.

Exports and Keynesianism

Sri Lanka’s central bank was set up by John Exter, who was increasingly skeptical of Keynesianism even then, and who put a number of caveats into the law even in 1949.

Though the central bank he set up had dual anchor conflicts (both monetary and exchange rate policy) like in the 2023 law, he insisted that exchange rate policy must be the final restraint on monetary policy as Ceylon was as a free trading nation which wanted to export.

Keynesianism worked in self-sufficient economies, not in external trade oriented open economies like Ceylon where half the productive resources (at the time Ceylon had an East Asia style currency board) were geared to exports, he said.

“…[H]igher domestic incomes would stimulate the consumption of imported goods and precipitate serious balance of payments difficulties,” he wrote in background notes on the draft monetary law in 1949.

“This should serve as a warning to those who might hope that some of the policies growing out of Keynesian economics can be uncritically adapted to Ceylon,” he added.

In targeting potential output Sri Lanka is now “uncritically” adopting the policy of Keynesian inflationism along with a high inflation target to make it possible.

The IMF is at fault for teaching the central bank how to calculate this so-called potential output, leading to repeated currency crises and default under a 5 percent inflation target in recent years.

Potential output is also a milder version of Modern Monetary Theory which was peddled in the wake of the Great Recession and quantitative easing, along Mercantilist lines.

Despite giving the ability to the central bank to engage in monetary policy by abolishing the non-discretionary rule based currency board, Exter warned that if there are monetary policy errors, the exchange rate should be the final brake (Section 64) if the country wanted to be an exporter.

“This clause recognizes the importance to Ceylon of a stable currency and of making the Ceylon rupee feely convertible for current and international transactions,” Exter wrote.

“In a country where almost half the national income is produced for export the significance of these objectives is self-evident”

Exter had said this long before East Asian nations became export powerhouses riding on the discipline imposed by fixed exchange rates.

Singapore’s Goh Keng Swee famously rejected central bank GDP targeting with this phrase speaking in favour of floating interest rates: The way to a better life was through hard work, first in schools, then in universities or polytechnics and then on the job in the work place. Diligence, education and skills will create wealth, not Central Bank credit.

This is in sharp contrast to the idea of permanently depreciating currencies in IMF countries in Latin America, Africa and South Asia.

How, a despite being a Harvard economist, Exter ended up doubting Keynesian or bureaucratic targeting of GDP was explained later in a 1991 interview.

Keynes published his famous book, The General Theory of Employment, Interest, and Money, in 1936. I went to Harvard graduate school in the fall of 1939, 3 years later, Exter explained.

By that time the principal professors of economics at Harvard had just grabbed Keynesianism and run away with it. It was like a new religion.

The leading Keynesian at Harvard was Alvin Hansen. His sidekick was John Williams. Williams was much more circumspect, much more doubtful about Keynesianism.

I should not say that I rejected Keynesianism right away. I had it pumped into me in those early years and actually taught it in the entry level economics course at Harvard. As the years wore on I became more and more sceptical.”

Flexibility and Discretion

Sri Lanka’s 2023 monetary law touts the idea of a “flexible” exchange rate as well as “flexible” inflation targeting.

In practice this flexibility allows unchecked money printing and for monetary policy to triumph over exchange rate policy.

Under the IMF’s flexible exchange rate, instead of ending easy money to stabilize the external sector, the currency is busted, usually repeatedly, driving social unrest and poverty,

The overwhelming desire to maintain easy money over temporary tightening of credit is explained by the exchange rate as the first line of defence ideology despite having a reserve collecting central bank.

This is a policy that seemed to have emerged from the 1980s, as the original idea of the IMF and Bretton Woods of stable exchange rates were hurriedly jettisoned in the chaos of the Bretton Woods collapse, US tightening in 1980.

It seems to have been subsequently backed up by mistaken ideas about the East Asian crisis where currencies other than Hong Kong, which did not have a fixed policy rate, collapsed.

Depreciation is encouraged due to another econometric idea that currencies are either “overvalued” or “undervalued” through a real effective exchange rate index.

But Sri Lanka’s currency collapsed repeatedly in recent crises, with the REER below 100, due to inflationary open market operations.

The overall idea of a flexible inflation targeting regime with a high inflation of 5 percent or more is also to give discretion: discretion for bureaucrats to print money and cut rates, discretion to depreciate the currency, and discretion to target output.

There is a wide time gap between price inflation showing up in indices and the start of inflationary policy.

A 5 percent inflation target is not a rule. It is to give oneself enough room to print money (inflate reserve money) until the currency collapses. Reserve losses or depreciation tends to take place long before price inflation shows up in indices.

The Benevolent Discretionary Bureaucrat

The entire idea of giving discretionary independence to the central bank bureaucrats through a high inflation target to engage in both money and exchange policies and target potential GDP with printed money also, dates back to another fundamental classical Mercantilist idea.

It hangs on the idea of discretionary and benevolent and all-knowing bureaucrats who have perfect knowledge to intervene for the good of one’s own country unchecked by rules.

James Stueart, a leading classical Mercantilist explained the ideology as follows.

“The more perfect and the more extended stateman’s knowledge is of the circumstances and situation of every individual in the state which he governs, the more he has it in his power to do them good or harm,” Steuart wrote in an inquiry into the principles of political economy.

“I always suppose his inclinations to be virtuous and benevolent.”

Steuart is also a pioneer proponent of the idea that inflation is not monetary but cost-push. False doctrines like wage spiral inflation, and speculation (hoarding), that re-emerged in the 1960 and 1979s were articulated more than 200 years ago by Steuart.

Money and inflation works in opposite directions where the money supply adjusts to higher prices, including through velocity (a reverse causality), he also argued.

Central banks that trigger high inflation and depreciation like in Sri Lanka and Fed, in the run up to and after the Bretton Woods collapse, also believed that inflation is at least partly, cost-push.

However not even classical Mercantilists had put forward such a mixed-up theory.

The recent inflation and commodity bubble were fired by the Fed and ECB who claimed that ‘supply chain bottlenecks’ and not monetary policy was the cause. These ideas have an amazing knack of persisting.

It is an idea that emerged in the run up and during the Great Inflation period put forward by dysfunctional central banks and their allies in academia.

When central banks believe that inflation is not monetary, either fully or partially, the country ends up like Sri Lanka or the US and UK in the 1960s and 1970s.

In the ashes of the new monetary law, there lies a way out. That is to target the exchange rate, which is permitted, so that mistakes in targeting interest rates in an open economy are checked automatically.

Targeting the exchange rate at 323.50 rupees or any other rate is no big deal as long money is not printed to mis-target rates down.

It is one of the simplest monetary regimes to implement and was used by East Asia to provide stability, promote domestic capital formation, encourage foreign investment with long term stability, grow fast and avoid a second default.

But to do that, open market operations have to be deflationary and short-term interest rates have to move within a wide policy corridor. (Colombo/Oct16/2023)

Granting another extension to Inspector-General Wickramaratne appears to be an affront to those appalled by the crime wave gripping the country, but not many know that the police chief has absolutely no disciplinary control over his officers because of the recent bureaucratic layer that has wrested the police chief’s powers.

While it is natural to hold the head of the police responsible for the prevailing pathetic state of law and order, the deepening crisis is a direct result of institutionally subverting the command-and-control structure, the Police Commission.

No Action Against Officers Coming Under Police Commission

“The Police Commission, which was intended to protect officers from politically motivated actions and transfers, may have ended up insulating them from any disciplinary action.”

The setting up of a Police Commission to handle all disciplinary matters and transfers of policemen and women has taken away the authority of the police chief to put such issues into effect himself. In fact, the IGP can only address the Police Commission through the secretary to the ministry of Public Security, a political appointee.

For example, the Presidential Commission of Inquiry into the Easter Sunday attacks recommended disciplinary action against several top officers, including the then intelligence chief Nilantha Jayawardena and Senior Deputy Inspector General (SDIG) Deshabandu Tennakoon, but nothing has been done to-date thanks to the ineffectual Police Commission.

The police chief’s authority extends only to men below the rank of sergeant and two lower-level constables have already been dismissed from the service for failing to prevent the Easter Sunday attacks. But, not a single senior officer has been disciplined to date because of procrastination by the Police Commission.

The same applies to police transfers. While the primary courts, the Attorney General and the police chief himself have called for the arrest/removal of officers such as Deshabandu Tennakoon from the Western province, the Secretary to the ministry of Public Security has blocked action.

Immediate and Comprehensive Reforms

It is clear that the current state of the Sri Lankan Police Department calls for immediate and comprehensive reforms. For a start, empowering the police chief, whether Wickramaratne is retained or not, is a crucial step towards addressing the issues plaguing the department.

In the current hierarchy, the officers directly in line to replace Wickramaratne have serious blemishes that preclude them. The first is current SDIG Nilantha Jayawardena who has been fined by the Supreme Court over his role in the Easter Sunday attacks. Next in line, SDIG Lalith Pathinayake and number three, SDIG Deshabandu Tennakoon have adverse findings against them and the Presidential Commission of Inquiry wanted them disciplined as well as criminally prosecuted.

Sources close to President Wickremesinghe said neither of the three contenders for the top job were considered and hence the extension to low-profile Wickramaratne.

Any change of guard in the leadership, however, may not change the law and order situation in the country given the disciplinary structure following the establishment of the Police Commission. The commission was intended to eliminate political interference and make the department more efficient, but successive commissions have repeatedly revealed their partisanship, which has effectively blocked any decisive action.

Politically Motivated Appointments Continue

The direct interference by the Ministry of Public Security has further compounded the issue. This interference has led to the appointment of politically motivated individuals in charge of police stations, many of whom have proven to be ineffective and ineffectual.

The consequences of this practice were evident after the violence that occurred on June 9, 2022, exposing the inefficiency of officers in charge of maintaining law and order and security.

Yet, there has been no significant shake-up in police leadership within high-crime areas. This lack of accountability not only perpetuates the problem but also raises serious questions about the integrity and effectiveness of law enforcement.

The IGP should be given the authority to lead the 80,000-plus men and women in the force and restore discipline and order. However, this reform must be part of a broader restructuring effort to make the entire police system more transparent, accountable, and responsive to the needs of the public.

The path to reform will be challenging, but it is necessary to restore public confidence and ensure the safety and security of the nation, especially in high-crime areas where drive-by shootings have become a grave concern.

The recent International Monetary Fund governnance diagnostic report went into a number of revenue agencies and suggested an internal affairs unit to probe misconduct of officials. Ironically police support was recommended for key agencies, including the anti-bribery commission.

However no mention was made of problems within the police, or the lack of an effective disciplinary mechanism or internal affairs unit within the police department itself. (COLOMBO/Oct 15/2023)