Economy Forward

  The Central Bank (CB) has released its Annual Report over the bankrupt economy in 2022. Unlike in the recent past, there was no photo shoot of presenting it to the Minister released to the media with a note of highlights. As such, the Monetary Board seems to have covered up its shame of driving the economy into bankruptcy while sleeping on the Monetary Law Act (MLA) by releasing the annual report covertly. As usual, this annual report is also just a report over the economy in 2020. Therefore, it is not a report of the Monetary Board as required in the MLA on the condition of the CB and a review of the policies and measures adopted by the Monetary Board in the economic context in 2022. This article only highlights how the Monetary Board has hidden the profit on money printing by not transferring the profit to the government as required in the MLA. MLA Requirement on Profit Distribution The Part IV of the MLA sets out the procedure for calculation and distribution of the CB's profi...

This article is to highlight the meaninglessness of the CB's last monetary policy decision (April 4, 2023) as reflected in the press statement . The statement is nothing but a bunch of words and sentences, not even understood by the writers. Policy decision To maintain policy interest rates at current levels of 15.5% and 16.5%. I predicted this outcome with possible underlying reasons in my article released in the early morning of April 4. However, contents in the press statement are highly misleading and erroneous and do not show any connection to the policy decision as highlighted below in 9 categories of contents of the policy statement. Content 1 "Having considered the recent and expected economic developments, and macroeconomic projections on domestic and global fronts, the Board viewed that the maintenance of the prevailing tight monetary policy stance is necessary to ensure that monetary conditions remain sufficiently tight to facilitate the continuation of the ongoi...

This purpose of this article is to predict that the CB will keep policy rates unchanged at current levels of 15.5% and 16.5% at today's Monetary Board meeting. What should the CB really do? In terms of the policy rates-based monetary policy model pursued solely for reducing inflation to the target of 4%-5% by contracting the economy at any cost, the CB should raise policy rates at least by another 100 bps. Key factors in this regard are as follows. Central banks in advanced market economies raised rates in the third week of March on gloomy concerns over broad-based inflationary pressures, despite accelerated path of rate hikes in 2022. Inflation in Sri Lanka also seems to be sticky around 50% despite the rapid hike of polcy rates so far by 1,100 bps so far since the begining of 2022. The decline in inflation March was only 0.30%, i.e., from 50.6% to 50.3%. For the first quarter 2023, it is marginal from 51.7% to 50.3%, despite the new CPI.  Therefore, there is no sign of being able...

  The Central Bank (CB) introduced a new monetary policy model with standard policy interest rates (SDFR and SLFR) added with restricted standing facilities (taking overnight deposits and overnight lending) (OMO) from mid January 2023. This article is to highlight outcomes of the new policy model  during the first quarter 2023  covering monetary operations and market developments through a short graphical presentation. However, an analysis of micro perspective behind such developments is not the purpose of this article. The article reveals the prevalence of monetary manipulations that could cause systemic triggers in the event the authorities delay the policy response. Monetary Operations Standing operations and liquidity level fluctuated in an unusual volatility. Money printing through the direct purchase of Treasury bills by the CB rose significantly to provide monetary liquidity to the economy through fiscal operations. Policy rates were raised by 1% to 15.5%-16.5% on ...

  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 ...