The picture below is the CB Communications press release. I was confused to understand what CB Communication Director intended to tell the public whether;

• His Governor made a presentation on Sri Lanka’s inflation success story to a Forum in Germany or on Sri Lanka’s inflation control success story,

• European Central Bank (ECB) President Christine Lagarde spoke at the event of SL Governor’s presentation or at some other event of the Forum, and

• the intended message of this communication and its purpose are in the observance of public trust attached to officials of the CB.

Anyway, I am not surprised of the pictures as top level public officials these days has a fondly habit of communicating of their pictures with the international icons to the public, possibly to impress the public of their ability to resolve the present bankruptcy of the country.

However, I felt whether the CB Governor and Communications Director have attempted to show leaves to those who are unaware of the tree or other way around.

Therefore, the purpose of this article is to provide a few comments in that regard in the public interest.

Berlin Economic Dialogue

The Forum has been organized by the French Federal Ministry of Finance on the subject of “Inflation Kills Democracy: Fiscal Rationality as the basis of Functioning Communities”. Therefore, a few concerns over the CB press release are raised as below.

• This Dialogue has no relevance to inflation success or inflation control success stories of central banks in general. 

• Both French Finance Ministry and French Central Bank have no statutory duties in inflation in France as it is the responsibility of the ECB for the Euro Zone and, not specific to any ECB member countries. The French Central Bank has no money printing or monetary policy arm. That is why the Dialogue has been meaningfully titled on democracy of inflation where the democracy is the sole responsibility of the governments.

• ECB President Christine Lagarde is a former French Finance Minister who was then promoted to the Managing Director of IMF and thereafter to the ECB President. Therefore, her participation in the Dialogue is not a bizarre event.

• The CB press release does not state whether ECP President specifically participated as a discussant at the event of the CB Governor’s presentation. Therefore, the ECB President’s event picture is an unauthorized electronic bud to attach an undue prominence to the CB Governor as his picture is not seen anywhere at the ECB President’s event.

CB press release not telling Sri Lankan inflation success story presented at the Dialogue

The article does not reveal the contents of the CB Governor’s presentation. Therefore, what he told Forum about causes behind high inflationary pressures during 2022/2023 and policies that brought inflationary pressure magically down close to zero by October 2023 are not known. What ever he said, they most would have been new to the participants at the forum as the inflation story in France and Euro Zone is quite deferent from Sri Lanka.

However, the press release states that the CB Governor discussed the measures taken by the Central Bank and the Government in curtailing inflation. This shows that, without the government’s support, the CB would have failed in controlling inflation although it is the statutory responsibility of the independent CB. 

It also raises concerns over the public accountability and trust encrypted in the CB as it has lost the price stability duty in the wake of high inflationary pressure. Inflation control does not mean curtailing inflation when it has risen. It means keeping price stability at all times.

In that context, the conduct of monetary policy for inflation target of 5% (inflation targeting monetary policy) in the medium term is a gross violation because prices will double in 14 years if prices rise by 5% annually as the CB permits in the monetary policy. That means that the value of currency issued by the CB will be worth nothing after 14 years. This is not the price stability mandate of the CB.

According to the press release the CB Governor may have shown the policy measures adopted from April 2022 and how inflation number fallen unexpectedly from the peak in September 2022.

Inflation control measures

The CB Governor would have highlighted fiscal and monetary policies in this regard.

Modern tribal monetarists believe inflation as always every where a monetary phenomenon caused by protracted budget deficits. They fail to understand simple market mechanism behind price changes. Therefore, their eye-closed policy package of robotic accounting mode is the fiscal and monetary tightening. Therefore, the CB Governor may have elegantly listed such fiscal and monetary policy measures by memory. 

• Among fiscal measures, tax increases, control of spending, social security spending policy to protect poor and vulnerable persons and IMF programme would have listed because they all are considered as promising control of money creation from fiscal front.

• Among monetary tightening measures, a sharp increase in policy interest rates by 10% from April 2022 to March 2023, bank order to raise interest rates, a guidance exchange rate in May 2022 to curtail the currency volatility, restriction on standing facilities to banks in January 2023 to activate the inter-bank market, curtail of monetary financing of the budget and new legislation to independent monetary policy by the CB would have been blindly listed.

• The Chart of inflation and policy rates would have been shown to convince the one-to-one success story of monetary tightening on inflation control as follows.

False Story: high interest rates busted inflation.

Rate cuts started with significant disinflation path. 

• Above chart does not know any natural relationship of policy interest rates with inflation. It is just a chart of two types of statistics over time. The relationship has to be established by the underlying economic story. However, there is no any fabulous theory that establishes the impact of policy rates changes on the behaviour of inflation other than monetary faith.

• According to the faith of tribal monetarists, the price stability/inflation control is the pre-condition for everything under the sun for the well-being of the human being and the central bank interest rate is the divine stick to run human prosperity through the maintenance of price stability/low inflation. However, they do not tell the public that it is only their faith not proved by any real world economic research.

Untold truth behind high inflationary pressures in Sri Lanka

In the recent past, Sri Lanka is one among few countries which confronted galping inflationary pressures due to country governance problems where inflation monetary theory does not apply. If the central bank is the divine in price stability in public legislation, the central bank also should be a part of the failure of the country governance in times of high inflation.

Therefore, reasons behind overshooting inflationary pressures in Sri Lanka seen from the beginning of 2020 is the layman knowledge.

• Disruption in supply chains across the globe due to global corona pandemic and anti-pandemic state policies such as social distancing and lockdowns and protracted delays in recovery of supply chains. This is the core factor for global inflationary pressures. We do not need monetary theories to understand it. This is a fact even if the present CB Governor would have been the country’s President. 

• Historic civil uprise on living difficulties consequent to economic disruption by the pandemic. Everybody knows natural marker price pressures from such mass social uncertainties with or without government. In fact, the CB Governor also no sooner assumed the duties to save the nation offered to resign in the middle of the civil cum political crisis while the former Governor also stepped down in 8 months. That shows the degree of macroeconomic instability shock undergoing the economy and general public at that time that has no relevance to the monetary theory of inflation.

• Collapse of the CB foreign reserve as the CB could not find top-up-funding. As a result, imports were suspended and exchange rate control was given up. As Sri Lanka has been an import-dependent country for decades funded by the CB foreign reserve, the suspension of imports and controlled exchange rate caused severe shortages of imports and skyrocketed import prices and all local prices. The removal of administered prices on import dependent products also pushed up prices overnight. It is not a secret that the growth, prices and inflation in the economy for decades were desirably controlled by imports, fixed exchange rate and administered prices financed by the CB’s foreign reserve that was built on government foreign borrowing. 

• Public declaration of default of government foreign debt by the CB on 12 April 2022 due to the CB’s default on the foreign reserve caused a sudden bankruptcy of the country. This was not a default of the sovereign currency issuer (government), but a default of the CB on its foreign reserve to repay foreign debt. However, the default was accounted in government as such foreign debt was accounted in government books although foreign currency proceeds were used by the CB. As a result of this unethical default, all international trade and finance transactions of the country were disrupted and the government could not import petroleum products and energy. This broke the power backbone of the economy and living conditions as seen from long ques. This led to the second round of supply shortages and price increases across the economy.

• The erosion of earing from tourism and remittances that were used to finance the foreign trade deficit also affected the supply side and foreign reserve. Tourism was a direct pandemic effect. The significant drop in remittances through banking/official channels was a result of anti-government political campaign and black market developments connected with foreign exchange market uncertainties. However, black market did not confront shortages in foreign currency.

• The cost-side impact of significant monetary tightening is a normal phenomenon in modern monetary economies. The CB’s forceful intervention in accelerating of Treasury bill yield rates and bank deposit and lending rates to 25%-35% within few months from April 2022 from 8%-15% before requires no macroeconomic models to prove both cost-pushed and contraction-pulled inflation as it is common business sense. There is no disagreement that massive supply side contraction in 2022 and 2023 was fueled by sugar high interest rates which is the opposite of monetary policies prescribed for crisis-hit economies.

• The fiscal tightening also has disrupted almost all supply chains surrounding fiscal spending as it is the major part of macroeconomic multiplier in any economy. Therefore, arbitrarily created fiscal disarray also has contributed to the supply side contraction and price escalation across the economy. 

In view of above, Sri Lankan economic crisis is the direct outcome of the failure of the CB in managing the foreign reserve and monetary policy for decades in public interest which largely caused high inflationary pressures. Therefore, tribal monetary faith behind high inflationary pressures in Sri Lanka is a gross myth and fiction.

Disinflation/inflation success lie

The inflation success story presented by Sri Lankan authorities simply lies on textbook version of fiscal and monetary tightening as required and supported by the IMF. However, the reality is that this success story is grossly incorrect due to several facts.

• First, the sort of interim political stability and protest control system has settled large uncertainties in civil society and markets. Therefore, price escalations have been dried up gradually. This is what policy authorities led by the CB Governor referrer to as significant disinflation due to prudent policy measures implemented by the government and central bank. Therefore, this is a sheer eye-wash. In contrast, central banks in the rest of the world are expected to stay on the tightening cycle for long time as global inflationary pressures have not been tamed so far. However, the fact that Sri Lankan Central Bank commenced cutting interest rates at the time of inflation stood at historic 35.5% in April 2023 after a rate hike by 1% in March 2023 on the advice of the IMF does not involve in any monetary theory.

• Second, prices and cost of living in the country have not eased by the disinflation path. The disinflation or inflation control refereed to by policymakers is a statistical calculation. That is the year-on-year growth of the consumer price index (CPI). Therefore, this calculation does not represent inflation or the increase in prices in general over the crisis period, i.e. from 2000 to present, and the prevailing cost of living escalated during the crisis period. Therefore, this is a dump calculation used to serve only those tribal monetarists who have no idea of ground conditions of living standards. This is revealed by continued increase in the CPI and high rate of period-based inflation. Following charts are self-explanatory in common sense. (CPI numbers are statistically integrated into CPI base 2013=100.). In that context, monetary policy inflation is a fictitious base-decided inflation and not a market phenomenon.

• Third, although brave talks are given on monetary tightening to control prices and inflation through the demand side of the economy, money stocks and credit creation have continued rise to fund basic economic activities at significantly rising credit and interest rate risks invoked by the CB’s monetary policy. However, sugar high interest rates and business bankruptcies have led to deceleration of credit creation for the private sector offset by the state sector which has saved the economy at least at this extent. Following charts are self-explanatory in common business sense without any monetary theories. Any of charts doesn’t show monetary reduction to cut down the demand in the economy and to control inflation. It is strange that monetary figures are lagged in more than two months despite the modern on-line banking IT systems.

• Furth, the fabricated story of fiscal tightening to control inflation is also a lie as fiscal spending and borrowing have continued to rise in 2022 to 2023 with increased gross borrowing requirement.
• Spending rose from Rs. 4,473 bn in 2021 to Rs.5,253 bn in 2022 and Rs. 6,978 bn in 2023.
• Gross borrowing limits rose from Rs. 3,200 bn in 2021 to Rs. 4,979 bn in 2022 and Rs. 7,350 bn in 2023.
• As shown by monetary charts above, the economy would have collapsed with many households begging on the road unless the Government had spent through money creation/monetary financing irrespective of its monetary label. It was the ground fact in all countries despite inflation monetary theories.

Public Concerns

• The face of above short presentation that does not involve in any serious economic research reveals that the inflation success story proclaimed by the Central Bank and Government is a baseless lie.

• In that context, the presentation made to Berlin Dialogue also seems to contain unethical motives.

• In the present crisis-hit economy, public officials are bound to serve in compliance with Directive Principles set out in the Constitution and public trust legislatively assigned to them in public mandates.

• Therefore, public officials must genuinely base their work on ground facts and current needs of the public for upliftment of living standards by setting aside untested tribal faith in economic theories and concepts.

• The present IMF-sponsored macroeconomic governance system built on separated monetary and fiscal spaces and demand control under the guise of debt unsustainability and restructuring is meaningless in terms of facts-based modern monetary and supply side approaches. Therefore, the country will not be able to come out of the present economic crisis of living standards and poverty for decades although the authorities will clean up the old set of macroeconomic numbers such as inflation estimates that fall within their purview to fabricate macroeconomic stability fictions.

• However, their task at hand is nothing but humanity that should help people to spend a respectable living span which is not dependent on faith in tribal monetary theories. This cannot have any more financial or number crunching games to be played with human lives.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)

Source: Economy Forward

By: Staff Writer

Colombo (LNW):IMF executive board has greenlighted the immediate disbursement of US$ 337 million second tranche of the US$2.9 billion Extended Fund Facility (EFF) arrangement for Sri Lanka.

The approval of the second tranche of the IMF loan follows its executive board’s completion of the first review under the 48-month EFF arrangement.

The IMF’s decision comes after the deal between Official Creditor Committee OCC and Sri Lanka came about a month after the island nation’s agreement with China’s Exim Bank covering about USD 4.2 billion of outstanding debt

On November 29, the Sri Lankan government and the OCC revealed that they had reached an agreement in principle on the financial terms of debt treatment.

The in-principle deal covers approximately USD 5.9 billion of outstanding public debt and consists of a mix of long-term maturity extension and reduction in interest rates.

On November 29, the Sri Lankan government and the OCC revealed that they had reached an agreement in principle on the financial terms of debt treatment.

The in-principle deal covers approximately USD 5.9 billion of outstanding public debt and consists of a mix of long-term maturity extension and reduction in interest rates.

In a statement issued following the Executive Board’s meeting, IMF’s Deputy Managing Director Kenji Okamura commended Sri Lanka’s performance under the EFF-supported program, saying that it has been ‘satisfactory’.

“All quantitative performance criteria for end-June were met, except the one on expenditure arrears. All indicative targets were met, except the one on tax revenues, he added. .”

The completion of the first review paves the way for an immediate disbursement of the much-anticipated second tranche of the IMF loan which amounts to SDR 254 million (approximately US$ 337 million).

This will bring the total IMF financial support disbursed thus far to SDR 508 million (approximately US$ 670 million).

The total amount of Sri Lanka’s EFF Arrangement is SDR 2.286 billion (about USD 3 billion) as of the time of program approval on March 20, 2023.

Sri Lanka plunged into its worst financial crisis in seven decades last year after its foreign exchange reserves dwindled to record lows.

But since locking down the IMF bailout of USD 2.9 billion in March 2023, the island nation has managed to partly stabilize its economy, bring down runaway inflation and rebuild currency reserves.

The EFF program supports Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms.

Meanwhile, Sri Lanka has reached in-principle deals with the Export-Import (Exim) Bank of China, its largest bilateral creditor, and the Official Creditor Committee (OCC) to restructure its debts.

By: Staff Writer

Colombo (LNW):The Government’s much publicized “digital” push is likely to be without home-grown Sri Lankan firms as they won’t be VAT exempted whilst foreign companies in the same field are let off due to the failure of the law.

Sri Lanka is ambitious in transforming the country’s economy and society through the full integration of digital technologies and be amongst the digital leader in the Asia – Pacific.

This involves ensuring that it can compete globally in areas such as innovation, entrepreneurship, and digital skills. It also includes promoting sustainability and inclusiveness in the digital economy to ensure that no one is left behind and that all citizens benefit from the opportunities provided by the digital revolution.

A National Digital Strategy for Sri Lanka will support the building of one of the three pillars identified for the new economy.

Through its implementation, the strategy shall accelerate Sri Lanka’s development trajectory towards becoming a developed country.

The apparent discriminatory regime for local e-commerce and digital services companies figured at a meeting of the Parliamentary oversight Committee on Public Finance (COPF) chaired by MP Dr. Harsha de Silva recently.

At the meeting, an advisor to the Inland Revenue Department confessed that come 1 January 2024, though local firms will be subject to the higher 18% VAT, due to the loophole in the over two-decade old law, transactions facilitated by foreign firms will be exempted.

He said that the VAT Act of 2002 only recognizes supply of goods and services by an entity or person physically present in Sri Lanka and the scope doesn’t include services locally offered by offshore companies.

A representative of Asia Internet Coalition (ACI) said via online at the COPF meeting the best practices in the region was taxing the consumption of goods or services locally. Representatives of Uber, PickMe were present at the COPF consultation.

Industry analysts expressed serious concern over the bizarre development. This in effect means, services of local digital economy firms for example PickMe will be 20.5% costlier than foreign owned Uber though registered in Sri Lanka is operated out of the Netherlands.

Same applies to Kapruka and other ecommerce portals which also compete with foreign firms operated platforms.

“Without amending or drafting a new Act these exemptions being removed is criminal. This creates a 20.5% cost disadvantage to all Sri Lankan domiciled businesses,” they said adding policy/law makers must address this immediately and ensure a level playing field will exist when these exemptions are removed.

Such a course would ensure a hyper competitive environment and make the industry more dynamic.

They warned that failure to address this serious anomaly and discrimination will create an unfair advantage to non-resident service providers.

By: Staff Writer

Colombo (LNW):State Minister of Finance Ranjith Siyambalapitiya yesterday admitted that the Ministry of Finance lacks a mechanism to identify internationally blacklisted companies that submit tenders to secure Government projects in Sri Lanka.

Responding to questions posed by Samagi Jana Balawegaya (SJB) MP Buddhika Pathirana on the tender granted to Madras Security Printers to print revenue stickers for bottles of alcohol, the State Minister said the company was chosen by the Cabinet Procurement Committee based on the Technical Committee Report.

The country is about to re-run a tender process for its national digital ID, after the company winning the first contract bid, Madras Security Printers (MSP), was disqualified. The first tender process was allegedly manipulated to favor MSP.

The Ministry also recently called for a tender to print 5 million national ID cards. Sri Lanka introduced fingerprint scans for passports with machine readable zones to support ICAO biometric comparisons back in 2015.

Despite now being revealed as an internationally blacklisted company in several countries, including Sudan, Kenya, and Liberia, for allegations and incidents of malpractice the State Minister said that Sri Lanka lacks a legal mechanism to probe into their backgrounds.

“This is why, on several occasions, including in Parliament, we emphasised the infiltration of liquor bottles with counterfeit revenue stickers into the Sri Lankan market. Unfortunately, our concerns were met with scepticism.

The question arises: How did counterfeit stickers end up in the possession of alcohol companies? It is either the Department of Excise or the printing company responsible for the stickers that must account for their distribution,” he pointed out.

The MP said however no action has been taken against the company or those responsible for the incident yet. “The Government must focus not on increasing taxes but rather collecting taxes due,” he noted.

In response, the State Minister of Finance said the Criminal Investigation Department has launched an investigation into the allegations while the officials of relevant agencies are being transferred every six months and spot checks are being carried out which has increased revenue since.

By: Staff Writer

Colombo (LNW):Sri Lanka hopes to double tourist arrivals to 1.5 million this year and bring in US $5 million in vital foreign exchange as the island nation seeks ways to tackle its worst financial crisis in seven decades, Tourism Minister Harin Fernado said.

In a promising start to December, Sri Lanka crossed the 1.3 million milestone welcoming a total of 57,394 tourists in the first 10 days. This is the highest tourist arrivals recorded post-pandemic.

With a target of 1.55 million tourists by the end of the year, Sri Lanka Tourism anticipates a robust month, aiming for a total of 242,135 arrivals.

Authorities express confidence in reaching the set target, hoping to attract an additional 184,741 tourists before the year concludes. The cumulative total as of 10 December was 1.33 million.

India (270,313), Russia (175,845) and the UK (116,814) emerged as the top source markets year to date (YTD) in 2023 so far.

During the first 10 days of December, India topped as the leading source market, contributing significantly with 11,442 arrivals, constituting 20% of the total. Following closely Russia accounts for 14% with 8,004 visitors, while the UK, Germany and China contribute 11%, 9%, and 5%, respectively.

On 10 December three cruise ships Vasco Da Gama, Mein Schiff 5 and MS Seven Seas Navigator were called at the port of Colombo with around 4,000 passengers from all three vessels.

Sri Lanka’s diverse attractions, coupled with marketing efforts, are seen as key factors driving this positive trend in tourism. As the year draws to a close, the industry remains optimistic about achieving its ambitious goals, marking a noteworthy recovery for Sri Lanka’s tourism sector.

Tourism earnings in the first 11 months of 2023 were over $ 1.79 billion, reflecting a 78.3% increase from the corresponding period of last year, whilst November earnings stood at $ 205.3 million, the latest Central Bank data released showed.

The authorities have set their sights on increasing arrivals to five million by 2029 and earning an impressive $ 21.6 billion within seven years.

As part of its long-term strategy to welcome five million visitors, it hopes to lift the average spending per visitor to $ 4,000, with 2.5 million of them spending over $ 500 per day, indicating a concentration on luring high-end tourists.