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Message: <blockquote data-quote="imhotep" data-source="post: 27470635" data-attributes="member: 562115">Illogical following of MMTThen, there was a second error made by his policy advisors. The Central Bank Governor whom he appointed was an academic who had believed throughout his academic career that undertaking expenditure programs through money printing by the Government could deliver miracles to an economy. This was supported by a breakaway group of monetary theorists who proclaimed that they were following an ideology called the Modern Monetary Theory or MMT. Accordingly, money supply was allowed to increase without a break mainly by accommodating the voracious demand for money by the Government.During the 25-month period beginning from January 2020, the country’s money supply, designated by the Central Bank as M2b, has increased by Rs. 3 trillion or 40%. The main contributor to this phenomenal growth in the money stock was the Government’s borrowings from the Central Bank and commercial banks. The net credit which the Government enjoyed from these two sources, that is, after deducting the deposits it was holding with them, amounted to Rs. 4.2 trillion marking an increase of 173%.Any macroeconomics student would know that this is fertile ground for domestic inflation on one side and depreciation of the exchange rate on the other. Inflation began to pick up and is now rising at 17% according to the latest data released by the Census and Statistics Department. Rupee was falling in the forex markets, but the Central Bank had been keeping it artificially at 230 per dollar giving rise to a lucrative black market at which it is traded with a sizable premium over this rate. Anybody who wants dollars today must patronise this market rather than using the formal channels.Releasing the rupee from the tight gripIt is now reported that the Central Bank has now stopped holding onto the artificial cap on the dollar at 230 per dollar. As a result, the market quotes have risen above the cap rate to a level of Rs. 240-55 per dollar. This move by the Bank is a good sign but the market clearing rate for the rupee is somewhat higher than this. Once the country reaches that level, the Council should know that the black market in foreign exchange with high premia will automatically disappear. When the black market is subdued, the Council as well as the Central Bank will regain their power to direct the economy. This is because the existence of black or parallel markets reduces the powers of regulators when they seek to direct the economy.Avoid firefighting at any costOne of the pitfalls to which the Council might fall is the possibility of spending its time for fire fighting in the economy rather than coming up with a plan to direct the economy toward the goal of prosperity and splendour. This weakness was evident in the case of the National Economic Council set up under the leadership of the former President Maithripala Sirisena. That council was expected to present a medium to long-term economic strategy-plan. Instead, it was continuously handling such micro issues like whether the fertiliser subsidy should be delivered to farmers in the form of a cash grant, or in quantity form.These are surely not issues to be tackled by an economic council but by the responsible line ministries. In the present case, given the background and the specialty of the ministers serving on the Council, it is very likely that they would spend time resolving these mundane issues rather than presenting a medium to long-term economic strategic plan. This can be avoided if and only if it engages a professional think-tank like IPS as its advisors.Go to IMFThe top priority of the Council should be to make the choice – and it should be done fast – as to whether Sri Lanka should seek assistance from the IMF to get over its present chronic and acute foreign exchange problem. Though the previous Governor and the present Governor have been talking about an alternative economic plan or a home-grown economic plan, there are no details of what those plans should contain. Even the Six-Month Road Map presented by the present Governor in October last year does not provide any clue about this home-grown plan.Since the Council is to listen to these officials again and again, it is advisable that the Council get outside experts to examine and review the goals of the Road Map to ascertain its workability and efficacy to resolve the country’s forex issue. The former President J.R. Jayewardene did a similar thing when he was advised that the country should seek assistance from the IMF and the World Bank. To convince himself of this strategy, in 1980, JR engaged the reputed Singaporean economist and Deputy Prime Minister Dr. Goh Keng Swee to examine the proposal and report back to him. In a 27-page report, Dr. Goh had recommended to JR that Sri Lanka should seek IMF and the World Bank support to resolve acute problems faced by the country.There is nothing wrong in getting an outside party to review the Road Map prepared by the Central Bank officials because the Council members deserve to know how far its goals have been achieved. If the goals have been stalling, it could come up with a new road map.SL hit by double whammy due to Russia-Ukraine warSri Lanka has just begun to recover from one of the devastating external shocks that was delivered to it in the form of COVID-19 pandemic. Now, another devastating shock has been delivered by the economic sanctions imposed by the Western world on Russia consequent on its invasion of Ukraine. As a result, energy, gas, and wheat prices have begun to rise in the world markets. Sri Lanka is 100% dependent on imports for these three essential items. In this respect, Sri Lanka is hit by two whammies. One is the non-availability of foreign exchange to import them. The other is the escalation of their costs in the international markets exacerbated by the fall in the value of the rupee.What this means is that Sri Lanka cannot think of neither prosperity nor splendour in the future. Immediate action should be taken by the Council to prioritise the use of these items by industry so that there will not be a drop in production or foreign exchange earnings. In this respect, the Council should look at the future rather than savouring in the past. As Nishan de Mel of Verité Research has said, Sri Lanka should look through the front windscreen rather than looking at the rear-view mirror. This is the biggest challenge faced by the Economic Council.The appointment of an Economic Council by President Gotabaya Rajapaksa is a salutary development though it has been done at this late stage. However, since this Council is not made up of professional economists, it is advisable that it engages an economic think tank like IPS to guide it.*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at <a href="mailto:waw1949@gmail.com">waw1949@gmail.com</a></blockquote>

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