Economy Forward

  In last four weeks, advanced market economies led by the US showed clear signs of a banking turmoil created by deposit outflows. Financial experts attribute this to heightened interest rate risk confronted by banks consequent to rapid phase of interest rate hikes by central banks. They also alert a possible trigger of banking and financial crisis after 2008/09. Therefore, they  propose central banks to suspend rate hikes immediately and permit markets to stabilize gradually. Therefore, the objective of this short article is to present the phase of macroeconomic risks expected from present tight monetary policies and to alert policy authorities on the need for an alternative policy package to resolve such risks before they burst in the near future. Background of interest rates hikes The monetary policy story behind this is well articulated. Central banks commenced hiking interest rates beginning 2022 to tame rising inflation of four decades high. Present monetary policy model...

This fourth article in the series on the proposed Central Bank bill is to explore its legal provisions on the monetary policy. A careful review of new provisions show that the architects of the new bill, unlike John Exter who was the architect of the Monetary Law Act (MLA) and first Governor of the Central Bank of Sri Lanka (CB), have no idea of the purpose of the monetary policy or the central bank of a country. This article highlights that the proposed bill disconnects the monetary policy framework from the macroeconomic management and governance system as well as from mainstream economic principles and is likely to  disrupt the country's monetary system . How the purpose of central banks evolved At the origin, central banks were private commercial banks that gained the leading market position as the banker to banks where all banks printed own branded currency notes and coins in the monetary unit prescribed by the government for transactions as money. Such private currency based ...

By looking at the monetary policy press release issued by the Economic Research Department of the Central Bank (CB) on 3 March, I felt that the country now does not need a Monetary Board or a Central Bank if they are to implement monetary policy decisions made by the IMF staffers. Therefore, the Monetary Law Act after 72 years has now become an invalid piece of legal paper. I further felt whether macroeconomic management policy framework of the country and its economy have now been outsourced to the IMF as our internationally trained policy economists are incompetent. In every policy action whether fiscal or monetary, we hear the policy origin as the IMF in looking for 2.9 bn. USD. Therefore, one might interpret the IMF deal as the situation of the country's sovereignty being invaded by or rented out to the IMF by those who manage the economy. Monetary policy decision on 3 March The Monetary Board/CB on 3 March 2023 raised its policy interest rates by another 1% to 15.5%-16.5% band...

  When I was reading provisions in the new Central Bank Bill relevant to two new Boards proposed for the new Central Bank, it reminded me of the minute placed by Mr. A S Jayawardena on the top of the first page of the proposal for the current Monetary Policy Committee submitted to him by the Economic Research Department in 2001 in line with Central Bank Modernization program of the World Bank. It was a new technical mechanism proposed to help the Monetary Board to make monetary policy decisions on better macroeconomic grounds. His minute was, "Approved. This seems like හිසරදයට කොට්ටෙ මාරු කිරීමක්!"  The English version reads as " a change of the pillow for the headache." The new bill proposes two Boards for the Central Bank. Those are the Governing Board and the Monetary Policy Board. This short article, the third in the series, shows that the proposal for the two Boards is not only a change of the pillow for the Central Bank headache but also unacceptable in public...