ECONOMYNEXT – Sri Lanka should set up a currency board to halt further currency slides, US economist Steve Hanke has said as the island’s currency plummeted from 203 to 290 to the US dollar in an attempt to float the currency which has yet to succeed.
“Since January 1, 2022, the Sri Lankan rupee has depreciated by around 26% against the US dollar. #SriLanka’s severe balance of payments crisis and recent fuel price hikes are sinking LKA” said Hanke, a professor of applied economics at Johns Hopkins University in Baltimore, in a post on twitter.com.
“To alleviate the crisis, LKA must install a currency board, like the one it had from 1884 to 1950.”
Sri Lanka – then Ceylon – set up the currency board after the Ceylon rupee issued by the Oriental Bank Corporation stopped exchanging money for rupee notes, the so-called technically a suspension of convertibility.
A modern central bank also attempts a float in the same way, although the bank is not closed.
A currency board is easy to set up and will end balance of payments problems forever, isolating the public and also politicians from the Keynesians who print money to manipulate interest rates.
Currency boards have very low interest rates about 50 basis points higher than those of the anchor currency by automatic tightening to prevent the build-up of imbalances.
The anchor currency of the currency board can be the US dollar, euro, Swiss franc, Swedish krona or Singapore dollar, which is among the countries with the best monetary policy in the world.
Hanke prepared a manual on how to set up a currency, including measures for war-torn countries where the monetary authority could be incorporated overseas to prevent any warlord from getting their hands on reservations.
In 2018, Sri Lanka was put in the extraordinary position of a ruling politician, then minister Harsha de Silva, publicly pleading with the central bank to raise rates as part of a stop-print bid. monetary policy, after having given it full operational independence to inject liquidity.
At the time, taxes were raising taxes to reduce the deficit and a politically expensive price or fuel formula was put in place, but money was printed to create balance of payments problems by the so-called saying “overnight money rate targeting”.
Money was also injected through rupee-to-dollar swaps of the style used to break East Asian ankles during the crisis by speculators (Soros-style swaps). Speculators were unable to break the Hong Kong currency board during the East Asian currency board, but instead suffered massive losses on swap costs.
In 2020, the policy took several steps forward by paralyzing note and bond auctions with price controls. Now the rupee is hit by a surrender rule, analysts have warned.
Analysts have called for tough laws to block the central bank’s “domestic operations” through which balance-of-payments troubles are created, or to set up an orthodox currency board.
When the Oriental Bank Corporation closed in Ceylon in the 19th century, the Mercantile Bank, which also issued notes, provided convertibility at par.
Oriental Bank Corporation ran out of cash reserves due to bad debts. A modern central bank is short of dollar reserves due to direct government financing of deficits, refinancing of credit programs, and sterilized interventions or provision of reserves for imports.
The central bank of Sri Lanka now holds more than two trillion treasury bills, some of which have been taken back from banks as part of private sector financing to maintain a key rate or price control at bond auctions.
Sri Lanka’s currency board, which had provided security for the island through two world wars and a Great Depression, was replaced by a Latin American-style central bank under technical advice from the United States in 1950.
Almost all of these central banks by Fed pundits led to social unrest and some central banks collapsed and led to spontaneous dollarization.
Analysts have warned this could also happen in Sri Lanka if the float is not established.
Currencies are depreciated by Keynesian interventionists for ‘competitive exchange rates’, which critics say is a ruthless zero-sum policy of transferring wealth from the working class to shareholders of export or substitution companies imports by destroying real wages.
The advantage remains until the workers go on strike to demand higher wages and until the prices of public services such as electricity, electricity or water are increased.
Knowledge of currency boards has been lost to most post-World War II “economists” who relentlessly favor depreciation of monetary central banks, whereby they attempt to stimulate growth with “stimuli” creating balance of payments problems, starving the poor, creating social unrest, people and overthrowing governments.
Rising global food and commodity prices hurting the world’s poor while strengthening the hands of authoritarian leaders in resource-rich countries after the US and the ECB printed huge sums of money. silver is the latest example according to analysts.
Steve Hanke was one of the few economists in the world who correctly warned that the Fed’s Jerome Powell would trigger an inflationary spiral.
Hanke helped set up several currency boards, especially in Eastern Europe.
Currency boards have a neutral policy and are still used in East Asia. However, most East Asian pegs, including Vietnam, are tighter than currency boards and collect foreign exchange reserves in excess of base money.
Sri Lanka had a 1 to 1 boar with the Indian rupee (which was originally money) with Mauritius and other South Asian countries.
Before the Reserve Bank of India was nationalized to print money for Nehru’s Gosplan-style programs, the Indian rupee was also used in Middle Eastern countries like Dubai.
The only economist who opposed the Nehrus economists was a lone classical economist, BR Shenoy, who issued a dissenting note on the plans that were to be financed by central bank credit.
Bhutan still maintains a fixed parity with the Indian rupee, which has been unbroken for decades. Nepal has also maintained a peg of 1.6 with the Indian rupee for over about 40 years. The Indian Rupee is however a depreciating currency and neither country benefits from it apart from avoiding currency crises.
IMF backs Maldives peg to US dollar, but encourages stimulus, open market operations and depreciation in big countries like Sri Lanka, believed to be due to misunderstanding of pegs held in US Treasury .