Economy Forward

  Article's Background The purpose of this article is to highlight the irrationality and inappropriateness of the Monetary Policy Board (MPB)'s last policy rates decision to keep them unchanged at 8.25%-9.25% as announced on 27 September. The Central Bank (CB) announced the monetary policy decision at 7.30 morning of 27 September.  (press here to read the statement) . The prior MPB decision was 25 bps cut announced on 24 July.  I predicted on 25 September that either MPB would cut policy rates between 25-100 bps or else keep them unchanged at current level of 8.25%-9.25% as policy rate/monetary policy decision is a highly arbitrary bureaucratic decision. (press here to read my article) . Key consideration of the MPB for making the decision Some of those considerations are reproduced below as appeared in the CB press release.  The Board arrived at this decision after carefully considering the recent and expected macroeconomic developments and possible risks and uncer...

  Article's background The next policy interest rate decision of the  Monetary Policy Board (MPB)  is due on this Friday at 7.30 morning. It is a general fact that the MPB looks at the quarterly average inflation number based on Colombo Consumer Price Index (CPI) with a target of 3%-7% and changes the Central Bank policy interest rates (SDFR and SLFR) in order to keep the inflation in the target range. Accordingly, from May 2023, policy interest rates have followed a steady cutting cycle with inflation falling closer to zero below the lower bound target (see the Chart below). Quarterly average inflation has been continuously below 3% from April this year whereas it has been below 7% from September 2023.  However, policy rate cuts have been sluggish and rates now remain at 8.25%-9.25% as compared to 15.5%-16.5% level in May 2023. In this background, it is highly likely that the MPB may cut policy rates by 25-50 bps on Friday in view of supporting the economic growth a...

  Article's background I happened to see the attached press release on the title " Highlights of the Government Tax Policy and Expenditure Management Measures " issued by the Ministry of Finance on 30 August 2024 ( Press here to read the press release ) and found that its contents are not only inappropriate in economics but also misleads the public. I prove it by commenting on its opening section reproduced below. The rest of the press release contains a set of budgetary numbers mostly in meaningless percentages of GDP which has no meaning on the overall economy or living standards affected by a triple crises, i.e., global pandemic, political violence and foreign currency, which the country had never experienced before. Five contents selected for my comments I focus on following five contents from the highlighted above. Weak government revenue as one of the fundamental causes of the economic crisis. The ill-timed tax reduction in 2019 as the major contributor to the count...

Article's Background This article provides highlights on central bank operations on money printing during 1st 8 months of 2024. Earlier, I have been releasing articles on monetary operations (Read it here) .  Therefore, I redesigned this article to provide an overall assessment of monetary operations and monetary policy focusing on domestic price stability being the  primary goal of the central bank . Key observations and recommendations are as follows. Money printing operations are ad-hoc actions to provide reserves to banks and to purchase proceeds of govt. foreign loans. Re-dollarization of the monetary system on govt. foreign loans-based foreign reserve is evident. Data do not support the flexible inflation target story of the monetary policy. Therefore, the next government must seriously assess whether this is the model of money printing and monetary system the country needs to support the recovery from the present economic crisis and development of the economy and living...