ECONOMYNEXT – Sri Lanka plans to strengthen public finances and reduce money printing to stabilize the economy, Treasury Secretary Mahinda Siriwardene said ahead of talks with the International Monetary Fund.

Secretary Siriwardene said a circular to cut current spending would be issued immediately.

Money printing

In April, 125 billion rupees were printed, bringing the stock of central bank treasury bills to 1,853 billion rupees, from 1,727 billion rupees at the end of March.

Finance Minister Ali Sabry told Parliament on April 7 that 123 billion rupees in salaries and festival advances had been paid by April 6.

When the state workers spend the money and appropriate the goods on the shelves or the fuel at the pumps, there is no foreign currency to import goods and replenish the shelves because the money has been created with credit from the central bank.

Meanwhile, Siriwardene told reporters that state finances will need to be strengthened to reduce money printing.

It will issue a circular to all spending agencies to reduce spending (consolidation based on spending).

“Public finance problems are the cause of many problems in the country,” Siriwardene said. “We need to manage resources carefully and reduce the budget deficit.

“There had been a lot of discussion about money issued by the central bank. This happens because of public finance problems.

“There is not enough income. We cannot get foreign loans. The entire amount is therefore financed on the domestic market. National resources are limited. So the next step is to go to the central bank and get it.

“What we need to do is reduce the demands made on the central bank to buy treasury bills. It is difficult to do that in the current circumstances. So we need to strengthen the state finances. That is what we want to do in the future.”

Flexible instability

However, analysts pointed out that the central bank created a currency crisis in 2018, when then finance minister Managala Samaraweera raised taxes because money was printed under flexible targeting. inflation and the output gap.

Unless laws are passed to force the central bank to operate a consistent single-peg monetary framework (a hard peg with reserves or a clean floating rate without reserves), analysts say the country would continue to experience instability. external crisis, inflation and social unrest as it has done for 72 years. .

Analysts have blamed flexible inflation targeting, peddled by Washington-based mercantilists, coupled with output gap (stimulus) targeting for aggravating the peg conflicts of a reserve collecting a soft peg and driving the country to default and monetary collapse, which was not seen even during a 30-year war.

Under flexible policy and two currency crises, the government’s holdings of sovereign bonds rose from US$5 billion to US$14 billion as currency shortages were created, and the Ceylon Petroleum Corporation also accumulated dollar loans for the exact same reason.

In 2018, CPC borrowed dollars despite formula pricing due to currency shortages, flexible inflation targeting / gap targeting. When the rupee crashed, it made an exchange loss of 80 billion.

This year, CPC’s foreign exchange losses are estimated at more than 250 billion rupees and growing.

After printing money and creating a shortage of foreign exchange, Sri Lanka is now borrowing from India for oil, much like the CPC borrowed dollars from state banks in the past. However, the state banks can no longer provide dollar loans to the CPC and are themselves in trouble.

Repeated crises

The central bank was created in 1950, abolishing a currency board (fixed exchange rate) which could not print money to create high levels of inflation or trigger balance of payments deficits.

In 1950, when the central bank was established, it had $190.4 million in reserves (11.5 months) inherited from the currency board. Money printing began the following year when the Federal Reserve tightened its key rates following a battle with the US Treasury.

In 1952, the Exchange Control Act was introduced as reserves fell to $163 million. In 1953, after more money printing, the reserves fell to $114.3 million and there was a hartal. After two years of money printing, loss of reserves and inflation, people are on the streets today.

Siriwardene said fiscal consolidation would be part of discussions with the International Monetary Fund.

Asked whether the value added tax would be increased to 15%, he said, the details of the tax reforms would be known later.

No decision has been made to stop domestically funded investment projects last week, Siriwardene said in response to reporters.

Domestically financed investment projects account for a large share of imports, which takes foreign currency away from energy and medicine when money is printed, usually to pay state salaries.

Central Bank Governor Nandalal Weerasinghe had raised the policy rate to 14.5% and allowed Treasury bond rates to rise.

Last week, the yield on Treasuries rose to 23%, which Weerasinghe said was an “overshoot”.

High yields bring more money to debt markets, help finance the deficit and government salaries, reduce private credit, and can help stabilize the external sector and possibly interest rates.

Sri Lanka’s Finance Minister Ali Sabray and Treasury and Central Bank Secretary left for Washington on Saturday evening. Discussions should begin this week with the IMF and the World Bank.

Unless laws are put in place to control stimulus and economists who want to maintain unstable intermediate regimes, Sri Lanka will remain one of the IMF’s main clients and doomed to monetary instability, critics say. (Colombo/Apr18/2022)