Sri Lanka in worst crisis in modern times, differing views on rupee: Prime Minister | Sinhala News

Sri lanka News – Sri Lanka will have to stand on its own feet Prime Minister Ranil Wickremesinghe as the country ran out of fuel due to forex shortages coming from a soft-peg destabilized by money printed mis-target interest rates.

“We have to come out of this situation,” Prime Minister Wickremesinghe said in a video statement. “But we have to come out by our own efforts.

“Others have no obligation to rescue us. If get up on our own efforts we can go further. But we cannot go on the current system.”

Sri Lanka now has a large public sector and a soft-pegged central bank which prints money to mis-target interest rates, triggering monetary instability and currency depreciation.

“There is a view among some that that they not getting the value for their dollars,” Wickrmesinghe said.

“That is why some remmittances are coming through Undiyal system. Some others are keeping their money abroad without sending.

Such phenomena is known as a loss of credibility of a pegged exchange rate.

Why the Sri Lanka rupee is depreciating creating currency crises: Bellwether

When the credibility of the peg is lost, the currency has to be floated and interventions to maintain a a peg abandoned (a suspension of convertibility) and money printing halted.

To stabilize the exchange rate the domestic economy has to be smashed by killing private credit through high rates and monetary financing of the budget has to be halted through tax hikes and sales of Treasury bills to real buyers and not the central bank.

An International Monetary Fund program usually does that. Sri Lanka has gone to the IMF 16 times since a non-credible peg was set up in 1950.

Sri Lanka set up a non-credible with money printing powers in the style of Argentina’s central bank in 1950 (a monopoly note-issue bank), abolishing a currency board or credible peg which had kept the economy stable through a Great Depression and two world wars.

The Great Depression was a crisis in the Gold Standard ares triggered mostly by the US Fed.

Wickremesinghe said Sri Lanka is facing the worst crisis in modern times.

Sri Lanka has faced big crisis around 1869 over the collapse of the coffee industry, he said.

“At the time the crisis was limited to Colombo, Kandy and Galle and most people were in rural areas,” Wickremesinghe said.

Though coffee rust was first discovered in Sri Lanka the the big monetary crisis happened 15 years later as commodity prices collapsed in generally called the panic of 1884.

There was a banking crisis in the gold and silver area (mostly Asia) at the time and a Eastern and Oriental Bank, which was among several banks that were issuing money in then Ceylon closed its doors.

The banks had loans in silver (rupees) and borrowings in sterling (gold) amid bad loans in troubled coffee plantations.

Sri Lanka’s central bank today has dollar loans in swaps, central bank swaps, an IMF loan and deferred ACU payment to India and a lot of government rupee debt on the other side of the balance sheet.

Colonial authorities set up the currency board at the time as a separate agency with the Ceylon Rupee issued by the Eastern and Oriental Bank having fallen to as much as 50 percent after the the ‘float’ or suspension of convertibility.

“What has happened with this bank and may, may, and probably will, happen again in the case of any bank that may take its place with the priviledge of note issue,” the Governor Arthur Gorden said prophetically over a century and a half ago.

“We shall again see the paper currency of the country depreciate in a day 50 percent, within a stone’s throw of the bank itself, and rendered wholly valueless in more distant places; we shall again see universal dislocation of of all business and a total collapse of credit, including that of the Government itself threatened.

“We shall again be brought face to face with the fact, on the one had of the people being unable to buy food, and on the other, with chetties who are the principal rice dealers in the country trooping to the Solicitor-General for leave to use fire arms in the defence of their stores; and again will Government inevitably be compelled to intervene with a guarantee – fortunate if by such interventions, it may avert at the risk of heavy pecuniary loss still graver disaster and calamity.”

Sri Lanka’s government’s credit how is now at selective default, having defaulted on its debt in April 2022, after two years of money printing and tax cuts for ‘stimulus’, a fringe theory that became mainstream in Mercantilist universities. (Colombo/June30/2022)

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