Sri Lankan monetary policy – Inflation buster or money printing bureaucracy?
- Policy rates corridor as the target for overnight inter-bank interest rates
- Statutory reserve ratio (SRR)
- Some political leaders and economists think that policy interest rates-based monetary policy is a God-given formula to control inflation at levels they wish. Central banks think that changes in policy rates work like a rocket science to affect prices as they wish to keep inflation at targets. However, above points shows that all these are tribal misconceptions.
- If those beliefs are correct, the world from the beginning of 2022 would not have confronted the present four-decades-high inflationary pressures in front of inflation controlling central banks. Further, they have been trying to control inflationary pressures by raising policy interest rates in a range of 10 to 20 times, but even annual statistical inflation does not seem to be turning back towards the targets in a sustainable manner.
- Raising policy rates in countries like Sri Lanka caught by a foreign currency and debt crisis consequent to flawed monetary policies pursued in the past two decades in old fashion demand management concept is unjustifiable. It will push these countries to decades of economic crises and a new round of poverty and social unrest.
- In fact, what the CB has been engaged in is the implementation of the same modern monetary theory although the CB Governor blames the past regime. This is revealed from the excessive money printing for monetary financing through the direct purchase of Treasury bills by the CB. At present, CB’s Treasury bill holding is Rs. 2,539 bn at face value which is an increase of Rs. 689 bn or 37.2% since his appointment on 7 April 2022. Accordingly, nearly 70.4% of the CB’s assets now are lending to the government. Therefore, CB’s new monetary operations are nothing but modern monetary theory. If so, the present monetary policy also will not be able to resolve inflationary pressures underlying the economy although the CB celebrates the unexpected fall of annual or year-on-year inflation towards the mid-single digit.
- As such what the CB is actually and actively engaged in by talking of inflation control and stabilization of the economy is a day-to-day printing of money to fund the government and dealers to help their liquidity management which is good during normal times but not in crisis times.
- Therefore, I feel sorry for the general public whose tax money was spent for providing education to those monetary and fiscal policy bureaucrats who have no new ideas except going after the tribal concepts and IMF model like parrots to rescue the country from the present crisis created by themselves. That is because they have secured academic qualifications by memorizing theories and have got no common sense in business activities.
- At least, political leaders must force the CB to bring the price stability back to the pre-crisis level in terms of the CPI so that the general public regains the living standards and real incomes. Talking about economic numbers, models and concepts is useless without it.
- Otherwise, political leaders will cause another economic catastrophe if they wait till the CB like the God stabilizes the economy by moving its flawed policy interest rates here and there arbitrarily as highlighted above.
- Therefore, it is the public duty of political leaders representative of the public to distant them from tribal economic concepts such as monetary theory and demand management and to implement a fiscal and monetary package capable of driving the supply and demand sides of the economy on sectoral basis towards higher livings standards of the general public if they are interested in the economic welfare of the general public.
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