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Sri Lanka's crisis prone currency and sterilized intervention: fuss-budget
20 Aug, 2007 23:30:48
By Fuss-Budget
August 20, 2007 (LBO) – It seems incredible that Sri Lanka is on the brink of yet another currency crisis less than a year after we got over the last one and the official response and indeed its contribution, to the emerging crisis is comic as it is tragic.
This column has repeatedly warned authorities against the ills of sterilized intervention and its tendency to cause and worsen currency crises. See The Thrift Column - On the Brink , Thrift Column - Monetary Plunder , and Thrift column - Rate Signals.

However from the reactions of the authorities, senior central bankers in particular, as well as reader responses to this column, fuss-budget has come to realize that the deadly phenomenon of sterilized intervention is not very well understood in Sri Lanka.

This is probably why we keep having currency crises every few years.

To understand how a currency crises happens it is first necessary to understand how a currency regime works and what type of currency regime Sri Lanka really has. So here is a crash course on currency regimes.

At one end there are pure floating currencies, and at the other end the fixed ones. Countries that have 'dollarized' or even currency unions are a fixed type of system.

In the middle are pegged currencies or crawling pegs.


The simplest fixed currency regime is dollarization.

Under this regime a country will forgo all rights to independent monetary policy and simply use the money of a low inflation foreign country. Under such a system the monetary base - the basic money supply in the country - is the supply of dollars, or whichever low inflation hard currency that that is picked for circulation.

Since only dollars that are earned are spent by anyone on imports, there is absolutely no chance of a balance of payments crisis or a foreign currency 'shortage'. Such a country will have the same inflation as the foreign currency it circulates. Panama, a dollarized country, seems to have lower inflation than US, but that is another story.

But politicians who constantly want to expand government by printing money at the cost of private citizens do not like this. Socialists and nationalists will also say this is imperialism.

Another problem is that the government cannot even earn legitimate seigniorage revenues (the difference between the cost of issuing paper money and its nominal value) through dollarization. Seigniorage revenues will be earned in the issuing country.

But that is the cost of 'outsourcing' monetary policy and the price paid by the citizens for a hard currency, low inflation and economic stability.

The biggest benefit from dollarization to ordinary citizens is a smaller government. Without the ability to print money taxation suddenly becomes very, very visible.

Currency Board

A currency board is also a fixed exchange rate regime of a sort. Under this system, instead of letting dollars circulate, the currency board (this is a type of monetary authority) will purchase dollars that enter the country and give domestic currency to its citizens.

This is what Sri Lanka had before independence.

A currency board is a kind of diaphragm between the outside world and the domestic monetary system. Like the placenta between the baby and the mother it will take in the blood from the mother (dollars from international transactions) and make the baby's blood (rupees).

The rupee is 100 percent backed by foreign reserves and is exchangeable at a fixed rate. Only 'earned' dollars are used to create rupees. As a result money supply is market based at all times and fully backed by reserves.

While the monetary base fluctuates according to market forces (net foreign exchange earnings), the exchange rate will remain fixed in relation to an anchor currency.

So the system is always in equilibrium just like a dollarized economy, and a currency crisis does not occur again because only 'earned' dollars are used to create rupees.

But currency boards also earn some seigniorage revenues because the cost of the local issue of paper would always be less than the interest earnings of its foreign reserves.

Sri Lanka must be earning more than a hundred million dollars on its foreign reserves a year now.

Most successful financial centres in small economies have either a currency board or dollarization.

We will never become a financial centre unless we either have a currency board, or have a central bank with inflation targeting. Until we do either of that we will not be able to remove capital controls or have a stable economy.

Central Bank

A central bank is also an interface with the outside world like a currency board. But unlike the mother's placenta which will take nutrients out of the mother's blood, it will create blood out of a vacuum by printing money.

Here is where the trouble starts.

In a country which has a central bank with money printing powers, the domestic reserve money supply can be increased independent of the foreign earnings, by purchasing domestic assets.

Reserve money is therefore no longer market based (read real economic needs) but centrally planned.

A central bank that tries to fix or manipulate base money will have to allow the exchange rate to fluctuate according to market needs.

This is what America does. This is what Australia and UK and Europe does.

This allows independent monetary policy as reserve money can be increased to print money. This is politically important because it allows government to tax people secretly. An inflation targeting law will put the brakes on the volume of printing and the volume of the secret tax and bring some stability.

The so-called bi-polar view on currency regimes says that only truly floating exchange rates or a truly fixed exchange rate will work. In both cases only one variable (the rate or reserve money) is controlled.

A currency peg is in between, where both reserve money and the exchange rate is controlled. This is a dicey business and prone to crisis.

This is where sterilized intervention comes in.

Currency Peg

A currency peg also has an anchor currency like a truly fixed currency, but its room for independent monetary policy – read money printing – comes in the form of a mechanism for sterilized intervention.

So under a pegged exchange rate, the central bank will sterilize when dollars flow in as well as when dollars flow out.

One can argue that it is okay to sterilize when dollars flow in. This is why China and India have huge foreign currency reserves, whereas the US does not. This actually creates other problems but let's leave it aside.

The problem starts when the central bank resists pressure to depreciate. The Central Bank tries to control the exchange rate and money supply at the same time by printing money through sterilized intervention. The whole house of cards then starts to unwind, by creating a mis-match between dollars and rupees.

Currency crises seem to be triggered by bad budgets most of the time though not always. A loss of confidence that causes capital flight can also trigger a currency crisis which is then worsened by sterilized intervention.

In Sri Lanka budgets have caused every single currency crisis.

The creation of a central bank in 1951 by JR Jayawardene was the beginning of the end of this country's potential status as a leading nation in Asia. It was inevitable that inflation would go up, and that the exchange rate would fall leading to falling living standards of people.

If we wanted to print money we should have had inflation targeting to limit it and a floating rate to prevent currency pressure.

But floating rates were not in fashion at the time and inflation targeting was not 'invented'.

Those were the days of Breton Woods, fixed exchange rates, Keynesianism and the welfare state. Currency crises were barely understood. Every anti-colonialist politician driven by socialist ideals wanted to have a big government and money printing powers.

Eventually JR had his central bank to print money and he and most other leaders plundered the poor in the mistaken belief that monetary policy could drive growth.

After 1977 Sri Lanka did not try to fix the exchange rate. JR removed most of the exchange controls, kept capital controls and continued to print money.

But through a crawling peg and sometimes with devaluations he and later President Premadasa allowed the currency to constantly depreciate.

Floating Rupee

Sri Lanka 'floated' the rupee in January 2001 after severely worsening a currency crisis through sterilized intervention. International reserves were run to the ground in defending the rupee at one end and adding rupees at the other end to prevent a liquidity crunch.

It is intervention that creates the liquidity crunch, which requires sterilization to preserve base money.

A 'float' breaks this vicious cycle and it stops the currency crises in its tracks. However there were severe after effects in the immediate aftermath as economic activity collapsed.

But later we continued to sterilize, and the rupee never really floated freely on the upside, because there was a need to build up reserves. In 2004 there was sterilized intervention on the downward run again.

In 2005 there was some free float. But in 2006 we were back to sterilization on the down run as well, but pulled out just in time.

The growth in domestic assets in the monetary base (about 30 billion rupees since June) shows that Sri Lanka is engaging in extensive sterilized intervention and running a pegged exchange rate by definition, giving the lie to central bank claims of a 'floating' rupee.

That is partly why IMF re-classified Sri Lanka as a managed float from a free float.

"Directors encouraged the authorities to limit intervention in the foreign exchange market and allow greater flexibility in the exchange rate to help safeguard external reserves and maintain competitiveness," the IMF said last December after the August/September 2006 debacle (See The Thrift Column – On the Brink)

What this really means is "don't engage in sterilized intervention and run down your reserves, inflate the economy and drive the cost of locally produced goods up."

Sterilized Intervention

Kurt Schuler, a one time staffer at the US Treasury and a global authority on exchange regimes produced a lucid document for the United States Congress in 2002 on currency crises called Why Currency Crises Happen?

Because it is written for politicians Why Currency Crises Happen? is easy to understand and would prove valuable for policymakers and financial sector professionals.

Schuler also promoted a US bill to share seigniorage revenues with dollarized countries, which unfortunately never saw the light of day. He was also involved in setting up currency boards in several countries including Lithuania.

Whether sterilization takes place when there is upward pressure (like China is doing) or when there is downward pressure (like Sri Lanka) the monetary authority is sending misleading signals to the economy. Delaying adjustment only makes it worse.

"The sterilized intervention characteristic of a pegged exchange rate allows the central bank to control the real supply of money for a time and to hinder the real supply from adjusting to changes in the real demand," says Schuler.

"The delay reduces the accuracy of prices as signals for guiding economic activity."

Sterilizing capital flows makes locally produced goods artificially cheap – like in China. The injection of domestic money to sterilize central bank currency defence, Schuler points out, will make domestic goods more expensive and imports cheaper.

"The cycle continues as long as the central bank refuses to reduce the monetary base. The central bank eventually loses so many foreign reserves it either must finally reduce the monetary base or it must abandon the pegged exchange rate and go to a floating rate.

"The structure of prices that existed during the period of sterilized intervention contains mistakes that must now be corrected, perhaps at the cost of a recession."

We had a recession in 2001 after extensive sterilized intervention. That is how dangerous sterilized intervention is.

Indonesia was the country that engaged in sterilized intervention heavily and had the most severe recession during the Asian currency crises. (The IMF opposed the creation of a currency board in Indonesia for some reason).

The core causes of the global imbalances that are now unwinding was also partly caused by Chinese sterilized intervention and the purchase of US assets with the proceeds.

Real Money Demand

Argentina's 'currency board' collapsed due to sterilized intervention. There was a loophole in the law as base money had to be only two thirds backed by international reserves, making it a kind of central bank.

While speculators cannot cause a crisis, resisting speculation through sterilized intervention creates more pressure and causes a crisis.

"Mistakes in targeting the real supply of money create opportunities for arbitrage in foreign-currency markets and elsewhere: the bigger the mistakes, the bigger the opportunities," says Schuler.

"Monetary authorities that in effect target the real supply of money by maintaining pegged exchange rates encourage speculative pressure to build until it forces a devaluation."

The Central Bank has to let the rupee go now. It is suicidal to defend the rupee and keep adding cash to base money.

Clearly the economic activity has slowed and the monetary policy road map of the central bank is no longer in step with the real demand for money in the economy. That is why this column was earlier arguing against allowing excess liquidity to remain in the system.

However as pointed out in The Thrift Column – Fiscal Explosion , raising interest rates forever is not possible, because all the mistakes in the budget cannot be corrected with monetary policy without turning an economic slowdown into a recession.

Market pricing energy and cutting government expenditure is needed because the core triggers of currency crises here are fiscal in nature. However the rupee also has to be floated again.

"Sterilized intervention enables the central bank to leave unchanged its issue of local currency even when losses of foreign reserves signal lower demand for local currency," says Schuler.

"However, if the central bank persists in refusing to reduce its issue of local currency, it will eventually lose all its foreign reserves.

"It must choose among abandoning the exchange rate, restricting convertibility by imposing exchange controls, or giving up independence in monetary policy by allowing the money supply to shrink.

"Politically, devaluation is usually easiest because it can be done fastest and can be blamed on external forces."

Sri Lankans have now wised up to a lot of things. They know inflation is caused by money printing. They also know that depreciation is caused by economic mis-management, though not exactly how.

Oil Prices

Currency crises have nothing to do with oil prices. That is a blatant lie told by central bankers and government officials to innocent citizens who do not understand monetary policy.

It is as much a lie as saying oil prices cause inflation.

Hedging cannot 'save' foreign exchange either. Hedging is about fixing prices and giving certainty. Any 'profits' from hedging that is passed on as a subsidy will have no effect on the forex market.

Oil prices of course can worsen a crisis with subsidies which hurt the budget and cause money printing. High interest rates from a budget deficit can also slow an economy or cause bank loan defaults.

Standard & Poor's which upgraded our rating 'outlook' based on a promise to market price energy, despite an on-going war, said out loud that Sri Lanka's problems were more to do with economic policy and budgets rather than war.

But now our clever politicians are saying energy prices will not be raised.

The budget is usually the initial trigger for currency crises in Sri Lanka, but the drying up of tsunami aid flows – which had earlier pushed economic activity to a higher clip – may also be a cause.

Certainly Maldives and Sri Lanka seem to be having similar kinds of trouble according to reports.

Foreign Injection

Getting some foreign money into the system through a sovereign bond at this time will help now because it will help ease the pressure on the system from the budget and also boost reserves.

A bond may help keep the growth momentum and stave off a credit crunch, until fiscal policy is fixed.

UNP is making empty threats not to pay off the sovereign bond if it comes to power. In the unlikely event that it does come to power however, it will have to pay. Otherwise our credit rating will be downgraded to default. It is all a lot of hot air.

However their objections that the money is being wasted on bridging the deficit, is another issue.

When the IMF comes to a country hit by a currency crisis and sterilized intervention, it tells them to cut wasteful government spending, stop intervention and raise rates to the extent that the budget deficit is not cut.

Usually the World Bank will also come through with some cheap funding on the back of some improvements in economic policy that will promote growth and cut the deficit in the medium term.

IMF will also inject money to the central bank directly without affecting the domestic money supply to boost reserves.

However due to problems with our current economic policies we do not qualify for cheap money. So we need the bond dollars to soften the shock that is building up in the system.

One silver lining is that there is a chance that the headlong climb in oil prices will ease, with the collapse in global markets.

According to John Exter's 'inverse pyramid' a flight to quality should push up dollars and gold and cause a relative price collapse in practically everything else. It would be interesting to see if everything would fall in nominal terms under a 'deflationary collapse' scenario, so long predicted by the likes of Exter.

On the other hand the current turmoil may also raise the risk premium of any money that comes our way with investors now shy of investing in risky debt.

By delaying a correction of the exchange rate, the authorities are also giving unnecessary incentives for foreign bond holders to sell by making the exchange rate a sitting duck.

But in the long-term we need either inflation targeting with a truly independent central bank or a currency board to keep this economy stable and safeguard the future of our children.


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20. wije s. rathnayake Nov 20
Let me improve economic knowledge
19. Aug 30
Let me improve on that
We see no evil- for your eyes will be plucked
We hear no evil, for your ears will be blasted
We talk no evil for our security will be withdrawn
We talk no evil for our tongues will be chopped
18. Aug 29
We see no evil
we hear no evil
we talk no evil
17. j Aug 27
Don't you Sri Lankans see what is happening to your country, Whatever monies that comes in is almost immediately syphoned out into tax havens and in somebody elses name.

The money that is meant for you is actually taken and acquired by someone else.

It is useless arguing about all this and writing so much of interesting articles, you will be writing whist a certain segment in Sri Lankan society will be stealing the public's money.

So much has to be said about the corrupt political structure, there is in fact no end to it. The greed it has is beyond belief.

16. fuss-budget Aug 23
Hello Sunny
Well yes, the central bank is targeting reserve money. However it is almost impossible to find out what the demand for 'real money' is in the economy. This is the inflation adjusted demand.

The 'real money' demand in an economy fluctuates from day to day and not just because growth is slowing. The central bank has the choice of letting the reserve money adjust automatically or letting the foreign exchange adjust.

Currency Board countries allow the money supply to adjust every day. 'Floaters' allow it to blow off through the exchange rate.

We do neither because we have a soft pegged exchange rate regime. It is sometimes possible to continue like this for very long periods there is a surplus in what is called the basic balance of a country's BOP. But as soon as the worm turns things start to fall apart.

What is happening now is there is a serious mis-alignment between the real money demand and the reserve money target. The economy is trying to adjust itself through the exchange rate but the central bank has been resisting by sterilized intervention making the mis-alignment worse.

As you said yourself this also has impacts on interest rates. This phenomenon is generally recognized as the 'impossible trinity' of monetary policy goals.

The policy rate is the tool that the central bank is using to target the money supply. A policy rate is used to smooth out excessive volatility in rates and to have a stable yield curve which has many benefits.

But the problem is Sri Lanka's policy rate is too low and it is now useless and creating problems because it is out of line with the market. Policy rates have to be around 17. This has to be adjusted as soon as possible. See earlier answer to Peter.

But yield curves can also go out of line and have all kinds of funny effects like what is happening in the US and the rest of the world now.

This is why some people have been advocating free banking where ultimately the 'good' money will be selected by people. However this is illegal. Anyone who tries to print money gets put in jail.

A internet company called e-gold has been doing this in a different way recently but the US government is killing it with trumped up charges.


15. meagain Aug 22
Dear Peter,
As a businessman I can tell you something. I dont want any hand out or favour from the government. I am quite capable of handling my affairs.

How else do you explain the growth of the business community despite

1. A crippling war
2. Rigidity in the labour market
3. Structural reform being shot down
4. Tax rates that can reach as high as 55%
5. Having to spend time fuming in a vehicle while some sob passes by?
6. Having to py 300% duty on a vhicle

What drives me nuts is when some pen pusher sitting at a table in a government department who has not risked a single cent of his money tries to tell us to be more pro active.
They want us to be more national minded. How much taxes has Wimal Weerawansa paid during his life time? How much taxes do government servants pay? Do they get screwed out of their EPF like the private sector does?
Let me tell you Peter our mind set needs no change. If we were not resilient and nationalistic we wont be still here.
How can we not be politically aligned when we see blatent stupidity. That is like telling buinessmen in Zimbabwe not to support the opposition.

14. peter Aug 22
I don't agree with the JVP or JHU views but sometimes i feel that there are some substance in what they say also. It is important to develop and retail Sri Lankan identity. A country will never develop unless you get the people to be proud being the citizens of that country. This may be bit difficult Sri Lanka being a small nation.

I doubt that people do take seriously what JVP says now - they have themselves proven they are "weda bari tarzans with big talks only". So why bother even talking about them. Thanks to some political blunders they managed to get some very short term political power, i think.

Am hesitant to agree that systems in Sri Lanka is so bad that business people and investors need to get be so "negative"or need to lose confidence. Has the systems here have been so bad that its so disruptive or difficult to carry on business ?

I think one problem is that most of our business people are not "real smart" guys, they need the support or protection from the politicians to do their business. They infact corrupt the system.

13. harsha de silva Aug 22
if you read wimal weerawansa's new book 'batahira aarthikaya saha lankawe iranama' or something like that [cant remember exactly] he tries to show how globalization will ruin sri lanka.

he wants to maintain the 'ape kama' and develop this country within the 20m market. that is the political philosohy the jvp, jhu and some others are trying to spread amongst our people. but, the problem is who is countering these arguments and spreading the word about how we can actually fight poverty and increase the welfare of the 20 million of us?

in fact fact he is on a conspiracy theory track; translating entire segments of john perkins' 'confessions of an economic hitman'; 'fiction' at best!

also, peter, to change the mentality [and the way business is done] of business people and investors there MUST be confidence in the system.

first of all we need to create an environment where business can be done above board; without the help of politicians. the 'power' of the politian must be broken.

to do this we need a courageous set of business leaders. real business leaders; not ones who pander to the scum.

12. peter Aug 22
Thanks fuss-budget,
Your comments are good and i agree to most of it.

But more importantly, how do you recommend we change the midset of Sri Lanka people, particularly the business community and entreprenurs. Because most of them seem to be so much politically alligned and their thinking and actions are so much based on their political philosophy - and they seem to reluctant to change or update their views to changes that take place here of globally.

Of course there are exceptions - the sucessful few who have been able to make some impact on the economy without shouting.

how do you suggest that we make people to think positively, take risks, be innovative and create wealth - instead of asking donors or government to subsidize them through various means.

Sri Lankans over the years have become so much politically alligned and this has lead them to depend on same for all their lives fortunes.

11. sunny Aug 22
Our Central Bank mainly try to control the reserse money in the system. They have arrived at year end reserve money figuer of 267.6 Bn by assuming GDP growth of 7.5%,Inflation of 8.5% and extra 1.6% for the change in velocity.

1)What we can't understand is ,if the growth is below 7.5% ,why CB is keeping the reserve money target at initial levels without adjusting it?

2) Even we all know that extra volatility is bad for the economy, why CB try to control the interest rate by controlling the volume. Why the policy rate is used for interest rate control?

It is highly appreciated if some one could explain the same to us?

10. j Aug 22
It maybe a good opportunity to embrace the globalization principal of having a single currency, better do it now than later, no doubt Sri Lankan currency will lose it's value progressively and if we just keep pussyfooting and wasting our time on arguing issues further poverty will befall this nation, which will bring the Nation to total chaos.

What has happened has happened, no point dwelling in the past and past miseries. It is time to embrace this chance and make a quick move.

It is utterly stupid if we expect to stand on our own because we cannot.

9. fuss-budget Aug 22
Peter and Anon
Anon you are absolutely right.

Peter, the immediate policy measures are already in the column. Without a further delay sterilized intervention must stop for obvious reasons.

You can choose whether to 'float' the rupee or 'fix' it. If you 'fix' it the monetary base has to be allowed to change. That implies a currency board like situation. This is actually 'dollarization' with rupee notes.

However a structural shift has taken place in the economy with sterilization in the last few months, so fixing at the current rate may create problems. Better fix the rate --- if this country really wants to do it --- at a time when demand pressure is low.

Also with our fiscal policy it may not be able to operate in the longer term.

Floating looks a better option. It will then adjust to the structural shift in the economy that has taken place in the meantime.

Pegged exchange rates are a fair weather friend. It is ok as long as there is a BOP surplus. In that sense Central Bank is already on the right track in getting some foreign money in.

Use the money carefully and try to fix fiscal policy in the few months breathing space that it will give us by educating the people why it is necessary to do so. You will need the support of the mainstream media to combat the disinformation campaign that will inevitably be launched by the JVP. If you tell the truth media may support you. The UNP will of course say 'I told you so' but they will not be able to do any different if they come in.

You must realize that a pegged exchange rate cannot be sustained with official borrowing on the long-term. Most countries have done it with private flows and a current account surplus that comes in the wake of an implicit undervaluation of the currency.

Electricity prices have to be fixed now.

Reverse repo and repo rates have to be adjusted to the correct rate immediately. Rates are anyway 17. Bondholders are selling. Don't materialize rupees to pay for these, like President Mugabe did. Do not insulate their exchange losses at the cost of our economy and our poor people by intervening. They took a gamble and lost. Tough luck. Treat is as a foreign overdraft we got in the first two quarters. There is a bit more to this of course.

You may keep restricting access to the reverse repo window to a few times a month. Currency board countries work perfectly well without lender of last resort facilities and there are fewer bank collapses.

The reverse repo window is supposed to be for liquidity shortages, that is to bridge a maturity mismatch while some asset is being liquidated, not for funding assets. In other words to meet customer withdrawals, not to fund overdrafts, if you know what I mean.

Tell the politicians to shut up and not make damaging statements regarding fiscal policy that will scare off potential bond buyers. International conditions are tough enough already without stupid politicians adding to it.

I would also refer you to a little document called the PRSP devised I think in 1999 by the best brains of this country - including ASJ and PBJ - and abroad which was later re-named Regain Sri Lanka by a different administration. Update the numbers. Change the dates. Delete what has already been done - privatization etc. Then do it. Get the peace process going.

If you float the rupee now there is a chance that it may bounce up bit later when the dollars come. If you persist in sterilizing, the structural imbalances created in the economy will show up through the exchange rate, inflation, interest rates and growth and perhaps a recession if reserves fall steeply.

As anon said, problems are with budgets and economic policy. Monetary policy has been reactive, except for sterilization which is actually causing a problem.

Floating will help the country even if if there are problems with the bond. Forget the rhetoric and get a second opinion from the IMF if you are not sure. That is their job. They treat this kind of patient all the time. And tell them to speak English while they are at it and not engage in IMF-speak and treat us like half grown idiots who are too scared to hear the truth.

And when you find out the truth tell it. If not other people will tell it for you.

IMF doesn't like fixed exchange rates anyway for reasons that are too long to go into and they will likely you to float. If we persist in intervening and there are delays with the bond we will have to go to the IMF anyway.

Don't think any of this is easy. We are paying the price of going 'easy' up to now.


8. Raj Aug 22
Peter the unp fiscal and monetary policies in 2001 were quite productive. they tried to cut the public sector drain by a generous VRS but the JVP realized this would help move the country forward and got their unions to oppose this.

and they stopped printing money and inflation was under 2% before Madam took over the finance ministry.

if your running a war u will increase the deficit. but u can't do so while spending lavishly they way our "nayakayas" are doing.

streamline the public administration, make the Governer central bank a central banker who has legitamate legislative power to say NO to the govt. whent he govt demands money!

oh and i think this country can be run by no more than 100 MPs dont u peter? and a 7 man cabinet?

7. Aug 21
Actually I think it might be helpful if this can be further divided into two - what can be done by Central bank with the current economic policies of the government and what can be done by the government regarding economic policies.
6. peter Aug 21
Mr Fuzz and harsha:
Assuming all your analysis and hythotheses are correct, can you please spell out the correct policy and measures you would take if you run this country's economy.

Can you also specify how those measures will help to overcome the problems identified by you.

Please dont mention theories - tell practical steps and likely practical results.


5. j Aug 21
By the way, we also need to include quite a few, in fact, many Expatriate businessmen.

Some of these expatriate businessmen may also have addresses in Certain Tax Havens situated in the English Channel but but might be Living in places like Switzerland and may also be having companies elswhere as well.

and also may have been responsible of having raided companies in Sri Lanka by utilizing Offshore funds for the process off take overs.

Isn't this a form of tax evasion???
If so Investigations must take place.
If the central bank or exchange controller, or the securities exchange is realy interested in apprehending the big wigs in this trade they should do good by investigating all these people concerned.

So this talk about money has no value at all, because many or all of us Sri Lankans do not take these things seriously until it is far too late.

4. j Aug 21
It is a possibility that whatever currency that comes into Sri Lanka can also go out of the country through various means, into tax havens and off shore funds as well as swiss bank accounts.

There are many loopholes in the system

No doubt, this benifits the administration and the political structure the most, which explains the infighting and the clamour to aquire positions in administration where even murder is resorted to in order to aquire such positions.

It is also known that a lot of top businessmen depend on such funds to manipulate prices in the market place.

Namely stocks, commodities, real estate and the works.

The bad eggs probably are those who have cash and are corrupt and willing to resort to the worst possible principle to cheat and aquire what they so desire even to the point of selling the countries assets just to aquire more money which in the end does not remain in Sri Lanka but in off shore companies and Ttx havens in the Caribbean, Pacific, and British Virgin Islands.

No wonder there is no pride and love for our precious land. We are in the process of observing a great sell off of a nation.

3. Jack Point Aug 21
Yes, money printing (borrowing from the central bank) leads to currency depreciation.
2. ajw Aug 20
You mean to say currency pressure is actually caused by the central bank?
1. harsha de silva Aug 20
a most educative piece. well done. you are dead right on exactly what is going on.

you have been able to extract the ugly truth and expose the falsehoods that are being parroted by politicians and certain fake-professionals across the country and world!

there is a saying that goes something like 'little knowledge is very dangerous' and it looks like that is the problem at the top of the central bank; chasing after the recently half understood target which is suppossed to bring down inflation . [if targets are being met how come inflation is soaring?]

by the way, now there are only 3 members at the monetary board: cabraal, jayasundrere and thilak de soyza. and someone told me yesterday that even the advisory commitee to the board is also mainly buddy-buddy accountants and businessmen, not chaps who understand monetary and exchange rate policy [well, except for indraratne and rmb senanayake].

anyway, it is crystal clear why cabraal is desperate to borrow usd500 million. it is also crystal clear it has nothing to do with infrastructure projects. if we had decent relations with the imf, instead of kicking them out, perhaps we would have been to take less painfull medicine than the one that we are about to take. but we will have to grin and bear this one too; thanks to mr know it all...