ECONOMYNEXT – Sri Lanka’s Finance Minister Basil Rajapaksa said vehicles will not be imported in 2022 as money printing continued to be printed to keep policy rate at 6.0 percent creating forex shortages, despite import controls.
Sri Lanka is prioritizing foreign exchange for food, medicine and fuel, Minister Rajapaksa was quoted as saying by Sri Lanka’s state-run Dinamina newspaper, at a forum on the dairy sector, aimed making the country ‘self-sufficient’ in milk.
Sri Lanka printed large volumes of money for ‘stimulus’ and crippled bond auctions in 2020 and 2021, using Keynesian and Modern Monetary Theory belief systems.
Bureaucrats running Sri Lanka’s central bank and Treasury have been printing money, creating foreign exchange crises from within two years of its creation, based on similar beliefs, putting the public and incumbent government in difficulties.
Sri Lanka has halted car imports for two years but forex troubles have got worse not better as bank credit flowed into other areas favoured by interventionists Mercantilists which brought lower levels of taxes.
Such controls are part of cascading policy errors made due to lack of classical economic knowledge, stemming from teachings of key Anglo-American universities.
Money is fungible and moves as long as excess money is printed creating excess imports immediately and inflation with a lag, classical economists say.
Finance Minister Rajapaksa had said Sri Lanka should become ‘self-sufficient’ in milk by next year to save foreign exchange. His comments came as milk importers warned there may be more shortages due to lack of foreign exchange.
BR Shenoy, a classical economist warned Sri Lanka in 1966 not to engage in import controls but to stop inflationary financing (central bank re-financing or monetization) to stop balance of payments problems and the futility of import controls.
“..Balance of Payments difficulties cannot be solved by intensifying the rigorous of exchange control and import restrictions; nor by extending the schemes for expanding domestic production to substitute import goods — the so called measures for “economising” on foreign exchange,” Shenoy wrote in a policy document for the then government in 1966.
“Intensification of the rigorous of exchange control and import restrictions may reduce the quantum of import goods flowing into the market. It cannot reduce the flow of moneys seeking to purchase goods, either for consumption or for investment.
“The remedy to this problem lies in putting a stop to inflationary financing, not in tampering with the normal course of international trade.”
In 1966, the administration brought the Import Control Act and was defeated in the electorate.
In 2018 the central bank printed money despite budget deficits being brought down to target a call money rate, which is has brought intensified monetary instability to the country over the last six years, regardless of the fiscal situation.
The administration was roundly defeated in the electorate.
Shenoy was the only economist to oppose the five year plans of Prime Minister Nehru styled on Soviet Gosplans, drawn up by among others Prasanta Chandra Mahalanobis, a statistician who had studied at Cambridge University.
Read full text of Shenoy’s A NOTE OF DISSENT ON THE MEMORANDUM OF THE PANEL OF ECONOMISTS.
upon the rigour with which we may resist temptations for inflationary
finance, and the pressure to encroach upon the liberty of the individual
Before the Reserve Bank of India was nationalized and money was printed, the Indian rupee was the ‘dollar’ of South Asia and most of the Middle East and some part of Africa.
Almost all South Asian countries including Sri Lanka had currency boards or highly credible peg based on the Indian rupee. Nepal and Bhutan still has similar arrangements.
As Sri Lanka style foreign exchange troubles emerged in India, initially a Gulf Rupee was printed, import controls and import substitution intensified and countries in the Gulf set up monetary authorities styled on currency board principles.
The UAE Dirham, Kuwaiti Dinar, Qatar Riyal and Saudi Riyal are produced by monetary authorities that do not print money and does not print money to target a short term rate but raises rates along with the Fed and allow market rates to move.
Many Sri Lankans and Indians go to work in these countries with monetary stability which have high growth, low taxes, free trade, and no ‘stimulus’ to earn what money printing countries call ‘valuable foreign exchange.
Finance Minister Basil Rajapaksa had said in 2020 only 53,000 persons had gone to work in foreign countries, compared to 230,000 in pre-pandemic years.
Authorities are targeting 300,000 expatriate workers in 2022, he had said.
Meanwhile due to import and exchange controls imposed by the central bank, the printed money that is trying to rush out of the country had created a parallel exchange rate of around 240 to the US dollar, above the non-credible peg of 200 to the US dollar.
This had diverted large volumes of remittances to the Hawala market.
In the 1960s money was diverted to the ‘Tandu’ market, Shenoy said in 1966, when he advised the government not to print money.
At moment money is mostly being printed to sterilize interventions in the forex markets. In the month to December 09, overnight injections grew from 310 billion rupees to 367 billion rupees.
The central bank has also started repo auctions to suck up some of the injected liquidity by itself in a Zimbabwe style move.
Meanwhile exchange controls have been tightened with exporters and dollar earning residents forced to covert their money against their will, on top of import controls.
Shenoy warned at the time not to print money and spend only “democratically generated savings, rather than risk undue infringements of the liberty of the individual”. (Colombo/Dec09/2021)