Economy Forward

As and when a country confronts a crisis, the habit of the bureaucracy across the world is to find scapegoats to coverup their lethargy, negligence and inefficiency in respective public duties. The frequent scapegoat is the lapses in relevant laws. Everybody knows that the present Sri Lankan economic crisis is the failure of the Central Bank bureaucracy which mismanaged the public debt and foreign currency markets. However,  the Central Bank bureaucracy has got the support of the IMF and political leaders to blame the Monetary Law (MLA) for the crisis by not giving the privacy or autonomy to Central Bank officials to run the monetary system and the central bank on the public funds as they wish. As a result, a new bill to reestablish the Central Bank of Sri Lanka as proposed by the Minister of Finance with the approval of the Cabinet of Ministers has been published in the gazette on 23 February 2023. This is known as one condition for the approval of the IMF loan of U...

The objective of this short article is to present key reasons why the CB Governor will miserably fail in stabilizing the economy and getting the inflation down to a single digit by the end of this year as he promises. Background of inflation control by the CB/Central Banks The CB like many other central banks believe that inflation inflation is a monetary phenomenon as a result of excess money stock causing excess demand for goods and services beyond the supply. Therefore, the strait forward answer that central banks have is to keep the monetary policy tightened in order to decelerate the monetary growth which will then decelerate the demand. They believe that this will drive inflation towards the target used for the conduct of the monetary policy. The inflation target in Sri Lanka is 4%-6% YoY as compared to 2% in developed countries. The present monetary policy is based on targeting the inter-bank overnight interest rates through central bank policy interest rates. Policy interes...

  This short article highlights Central Bank (CB) interventions in money market for the period 02 January - 03 February 2023 and resulting panic volatility in the market.  Such monetary interventions were carried out to reactivate money market and show a reduction in interest rates as part of new OMO rule imposed by Director, Domestic Operations, on 02 January 2023. However, systemic risks behind such questionable interventions in the current context could be considerable. Highlights  OMO and Liquidity Market liquidity in terms of both overnight and outstanding became highly volatile along with the volatility and reduction in volumes of standing deposits and standing lending (See image C1 and Table 01). Consequent to the new OMO rule, standing lending plummeted while standing deposits became highly volatile where deposits were zero on three days. SDFR is meaningless when deposits are zero. Although the CB injected a total of Rs. 432.9 bn of liquidity through outright and ...

  The objective of this article is to express some thoughts on how world monetary policies are flawed and why emerging countries in development struggle should seek alterative strategies for aligning their financial resources to development needs. A snapshot of present global monetary policy framework The present global monetary system is driven by global reserve currencies led by the US Dollar and global capital flows based on interest rates of reserve currencies. The IMF and World Bank remain as the system’s supervisor with the lender of last resort facilities (LOLR) and surveillance funded and governed by their rich members led by the US. This is the result of the global monetary system created by the Bretton Woods agreement in 1944 which linked the exchange rates of currencies to the USD in place of the gold standard. Later, IMF and World Bank established on this agreement promoted global private capital and financial markets which are now driven by the US monetary policy....