ECONOMYNEXT – Sri Lankan President Gotabaya Rajapaksa has named three experts, former Central Bank Governor Indrajith Coomaraswamy, Shanta Devarajan, a former World Bank employee, and Sharmini Cooray, who recently retired from the International Monetary Fund.
All three have international experience, and two have worked in agencies that help countries with soft pegs (managed floats, sliding pegs, now called flexible exchange rates in their latest reincarnation) that enter repeated external crises by printing the currency.
Sri Lanka is currently experiencing the worst external crisis created by the island’s mid-term central bank in its 72-year history, when it operated a soft peg with “flexible” inflation targeting, a non-discretionary, after cutting taxes for stimulus purposes.
The Presidential Advisory Group on Multilateral Engagement and Debt Sustainability will engage with Sri Lankan institutions and officials working with the IMF, provide advice to address a debt crisis and drive towards a sustainable and inclusive recovery for Sri Lanka, the president’s office said.
The experts held a series of discussions with the president “on key issues to advance the IMF program, and continue to be in regular communication with related requirements,” the statement said.
Coomaraswamy, in addition to being a former Governor of the Central Bank, was Director of the Economic Affairs Division of the Commonwealth Secretariat.
Shanta Devarajan is Professor of Development Practice at Georgetown University and former Chief Economist at the World Bank.
Sharmini Coorey, former director of the IMF Institute’s Capacity Development Institute and former deputy director of the IMF’s African Department.
Sri Lanka’s central bank prints money to keep interest rates low on excess imports of printed money, triggers a balance of payments deficit and eventually breaks its uncredible peg after the exhaustion of reserves when redeeming printed money (using reserves for imports) .
Central bankers then blame external current account deficits and imports or any other global crisis unfolding at the time, to evade responsibility, critics say.
To prevent the currency from falling further, interest rates must be raised to very high levels, and people must pay higher taxes to pay the inflated salaries of civil servants by unemployed graduates when their incomes were reduced by currency depreciation and inflation under an IMF. program.
Business bankruptcies and bad bank loans increase as consumption falls due to a depreciating currency and capital inflows captured to replenish lost foreign exchange reserves.
The last Yahapalana administration was forced out after two central bank-triggered currency crises triggering import controls were introduced, making a joke of the administration’s free trade agenda.
There are now street protests calling for the removal of President Gotabaya Rajapaksa after energy and medicine shortages caused by the ‘flexible exchange rate’.
The public and politicians, who have allowed central bankers to craft changes to its monetary law themselves, are paying the price when inflation rises and the currency falls, critics say.
Under the last regime, attempts were made to pass a law legalizing “flexible inflation targeting” and “flexible exchange rate”, which are regimes that have peg conflicts and lead to a depreciation of currency and high inflation.
Any legalization of the flexible exchange rate or flexible inflation targeting removes the responsibility of the Monetary Board for the policy errors inherent in a regime that has no single anchor.
There have been calls for a single peg currency regime that will reduce central bankers’ room to print money and force them to keep the country stable, but it has so far been resisted. (Colombo/07Apr2022)