Economy Forward

  Article's background The purpose of this article is to reveal a questionable provision of the brand new Public Debt Management Act certified on 18th June, 2024, i.e., section 14 that provides for public debt to serve as a monetary policy instrument for the autonomous Central Bank (CB). This is a strange provision in view of the brand new Central Bank of Sri Lanka Act certified on 14th September, 2023, which gave the full autonomy (operational and financial) to the CB. The autonomy is such that the CB is prohibited from even lending to the government directly or indirectly or to bailout (lender of last resort) banks in liquidity crises. Section 14 The section 14 is reproduced below. Highlights of the section 14 Government debt securities to be issued at the request of the CB to support the monetary policy objectives in terms of the CB Act. Proceeds of such securities to be deposited in a segregated account at the CB. The cost to be fully reimbursed by the CB. Outstanding amount to

  Article's background  The purpose of this article is is to reveal how the failure of the monetary concept that has been pursued for the past 73 years has caused the bankruptcy of Sri Lankan economy in 2022. Economic or business bankruptcy is essentially a monetary phenomenon. The background of this view is as follows. Central banks world-wide rest on the concept of old quantity theory to carry out their money printing operations despite the long rhetoric of underlying stories. This theory simply predicts that if the growth of money supply or stock runs faster than the growth of output (or real GDP), the economy will confront an inflation equal to the difference between money supply growth and output growth. For example, if money supply grows annually by 15% while output grows by 7%, inflation will be 8%. This is the famous monetary belief that inflation is always a result of too much quantity of money chasing after too little quantity of goods. This states that inflation is alway

  Article's background The purpose of this article is;  to prove through the monetary theory  how the super tight monetary policy pursued from April 2022 has caused the present deflationary condition of the Sri Lankan economy and  to recommend an urgent need of at least 300 bps policy interest rate cut to pre-empt deflation risk.  The relevant background is as follows. In the last monetary policy press release on 27 September, the Central Bank (CB) reported a deflationary path in the near-term without taking any monetary policy action to arrest it in advance. The CB stated that deflation path was due to the downward revision of administered prices. Therefore, it appears that the CB currently does not believe the CPI based inflation statistics for the conduct of inflation targeting monetary policy although its inflation target of 3%-7% is set on quarterly average CPI inflation basis. In the monetary policy theory, inflation is always everywhere a monetary phenomenon, that is, the ex