Sri Lanka central banks threatens stern action on victims after printing money
ECONOMYNEXT – Sri Lanka’s intermediate central bank after triggering the worst currency crisis in its history and deployed a wide range of controls to undermine the economic freedoms of the country has threatened stern action to anyone violating its rules.
As the money printing central bank triggered forex shortages the country’s legislature granted it wide powers to control what was previously completely legitimate activity under the currency board and still is in countries with single anchor consistent money regimes.
The legislator misled by Mercantilist fallacies, also enacted and import control law instead of taming the central bank and its open market operations with strict rules or punitive action to those who try control interest rates and trigger monetary instability.
The central bank admitted without apology that it had take away the economic freedoms of the populace and imposed draconian controls after printing money to create excess rupees leading to forex shortages.
The central bank also imposed a surrender requirement on banks to force-sell dollars to the central bank on peg that was severely under pressure and engaged in a failed attempt to float the currency leading to the worst currency collapse in its history.
“To ensure adequate foreign exchange liquidity in the banking system, the CBSL had to impose surrender requirements on export earnings,” the Monetary Authority said.
“Further, measures were taken by the Government and the CBSL to discourage foreign exchange outflows, such as imposing restrictions on certain imports and payment terms and introducing margin requirements, while encouraging foreign inflows through the banking system, rather than those being channelled through the grey market.”
The central bank threatened action against those who do not follow its orders.
“Against this backdrop, and in the best interest of the nation, the CBSL wishes to reiterate to all stakeholders of the economy, that, going forward, all efforts would be taken to strictly monitor and ensure compliance with all regulations on foreign exchange transactions, including repatriation requirements of export proceeds, conversions, and mandatory sales to the CBSL etc,” the statement said.
“Any instances of non-compliance will be dealt with stern action within the provisions of all applicable laws.”
Unlike countries like Singapore, Sri Lanka set up a Latin America style central bank in 1950 abolishing a currency board that had kept the country stable and money printing trigger happy ‘economists’ in check.
Prime Minister D S Senanayake opening the central bank had said many had warned against the setting up of a central bank, though most were outside Ceylon not it.
“We were fully aware that Central banking had been abused in many countries in the past,” the publication ‘Central bank in Retrospect’ reproduced a report on Prime Minister Senanayake’s speech at the inauguration of the soft-peg.
“We need only remind ourselves of how excessive use of central bank credit reduced the real value of the currency and resulted in the dissipation of foreign exchange reserves in countries like China and Greece after the war.”
How classical economic knowledge had been lost in Sri Lanka and the outright rejection of monetary phenomena clearly explained by David Ricardo, David Hume, Adam Smith or Henry Thornton took place in the subsequent years with legislators giving more more power to control the people instead of the liquidity injections and sterilized interventions of the central bank is not clear.
Since ending the currency board, the rupee had been busted from 4.70 to the US dollar to 360 so far.
The central bank however had now sharply raising rates to smash the private credit and the economy along with it to restore the credibility of its anchor conflicting soft-peg, now called a ‘flexible exchange rate’.
Inflation is now at 75 percent, interest rates around 30 percent, and people are in the streets. The police are now rounding up protestors.
The Fed had also printed money and has now belatedly raised rates as food prices soared leaving the poor hungry, and the International Monetary Fund had warned that unemployment would rise.
The full statement is reproduced below:
Importance of ‘fair play’ by all stakeholders of the economy in countering the current unprecedented economic crisis
The Government and the Central Bank of Sri Lanka (CBSL) have been implementing several measures to ease the burden of the current economic hardships on the people. One major factor that is contributing to the current crisis and the resultant hardships is the lack of foreign exchange liquidity in the banking system.
Such shortage of forex liquidity has affected the provision of essential imports, including fuel. To ensure adequate foreign exchange liquidity in the banking system, the CBSL had to impose surrender requirements on export earnings.
Further, measures were taken by the Government and the CBSL to discourage foreign exchange outflows, such as imposing restrictions on certain imports and payment terms and introducing margin requirements, while encouraging foreign inflows through the banking system, rather than those being channelled through the grey market.
The success of these regulatory measures and the ability to achieve the intended outcomes depend on the support and cooperation from the trading community and the banking system. However, it has been brought to the notice of the CBSL that certain market players are not being fully compliant with these regulations. Such practice, if continued, would deprive the people of the support expected from the Government in difficult times, while undermining the moral obligation of ‘equal burden sharing’ that is expected of all stakeholders under difficult and extraordinary circumstances.
Against this backdrop, and in the best interest of the nation, the CBSL wishes to reiterate to all stakeholders of the economy, that, going forward, all efforts would be taken to strictly monitor and ensure compliance with all regulations on foreign exchange transactions, including repatriation requirements of export proceeds, conversions, and mandatory sales to the CBSL etc. Any instances of non-compliance will be dealt with stern action within the provisions of all applicable laws.
Communications Department
It is noteworthy that the CBSL has strengthened its capacity in relation to monitoring of foreign exchange transactions through the implementation of the Export Proceeds Monitoring System (EPMS) and the International Transactions Reporting System (ITRS), which is a comprehensive monitoring system of cross-border transactions and domestic foreign currency transactions.
These systems facilitate regular monitoring of foreign exchange inflows and outflows. Further, assistance from independent professional bodies, including audit firms, is also being sought for the timely identification of any malpractices.
Hence, Licensed Banks and the trading community are urged to comply with the existing regulations and complement the efforts of the Government and the CBSL to provide much-needed assistance to all stakeholders of the economy under these extremely challenging circumstances. The export trading community is urged to continue to repatriate all export proceeds within the stipulated timeframe and surrender the residual earnings in accordance with the regulations. The banking community is requested to ensure strict adherence to all regulations in relation to foreign exchange transactions.
The Government and the CBSL are relentlessly pursuing efforts to secure bridging finance to reduce and alleviate economic stresses in the near term. A notable progress has been made in the ongoing negotiations for an economic adjustment programme with the International Monetary Fund. The debt restructuring process is also underway, capably assisted with the Legal and Financial Advisers. The Government and the CBSL remain committed to implementing much-needed reforms to overcome long-standing structural issues in the economy.
The Central Bank wishes to reiterate that overcoming current economic woes and distresses requires substantial and concerted efforts from all stakeholders of the economy. Foul play on the part of any group of stakeholders would inevitably result in the worsening of the crisis, thereby having widespread detrimental effects. It is the duty of everybody to act conscientiously and responsibly, and extend their unhindered support during this hour of need, for the nation to recover rapidly and emerge stronger from this crisis.
