Features
Money printing to repay govt. debt likely to increase economic instability
By Prof. Sirimevan Colombage
The notion that a sovereign government can print money to repay its debt without any financial limit has gained popularity in recent times, particularly in the US, based on a new approach to macroeconomics, known as Modern Monetary Theory (MMT). It was developed in a small corner of academia and it became famous when some US politicians endorsed it, reinforcing their own accommodative monetary policy viewpoints. MMT is now gaining attention in developing countries, too, as money printing is a convenient way to finance the budget deficits in the context of revenue shortfalls amidst the Covid-19 pandemic.
Central Bank’s tendency towards MMT
On similar lines mentioned above, Central Bank Governor Prof. W.D. Lakshman is reported to have stated at a recent economic forum that domestic currency debt in a country with sovereign powers of money printing is not a huge problem, as the modern monetary theorists would argue. Since rupee-denominated bonds are within the ‘sovereign powers’, money could be printed to repay them as indicated by MMT, he argues.
While recognizing the difficulties in repaying the government debt in the face of the pandemic-related economic setback and the country’s already heightened debt burden, it would be rather unwise to simply use money printing to finance fiscal deficits in Sri Lanka following the MMT, which is used as a means to boost aggregate demand in advanced countries.
Structural constraints
The primary long-run growth challenge faced by developing countries such as Sri Lanka is structural transformation – transition to knowledge-based economy – rather than aggregate demand deficiency. Hence, money printing itself does not promote economic growth, as I explained in my earlier columns in The Island.
In the background of the downward growth path which plunged to negative 5.3% in the first nine months of this year due to the pandemic in addition to the country’s inherent growth constraints, Sri Lanka needs persuasive structural adjustments, rather than liquidity injections, to revive its economy.
Further, it is common knowledge that excessive money growth accelerates inflation. High inflation not only aggravates the twin deficits – fiscal deficit and balance of payments deficit – but also adversely affects the living conditions of the people, particularly those who are in the bottom of the income pyramid.
Developing countries lack international monetary sovereignty
Three MMT proponents, William Mitchell and Martin Watts (both of University of Newcastle, Australia) and L. Randall Wray (Bard College, a private liberal arts college in the US) explain MMT in their textbook titled Macroeconomics published in 2019. According to them, the most important conclusion reached by MMT is that the issuer of a currency faces no financial constraints. Put simply, a country that issues its own currency can never run out of money and can never become insolvent in its own currency. It can make all payments as they come due. As a result, for most governments, there is no default risk on government debt, according to MMT advocates.
MMT works well in advanced countries such as the US or Japan which run debt levels far exceeding their GDP. Such countries can afford to print money continuously, as the hierarchical nature of the international monetary system enables their currencies to perform the fundamental functions of money (i.e. means of payment, unit of account and store of value) on an international scale. Hence, such currencies are known as reserve money, which means that they are acceptable for international transactions. On the contrary, developing countries such as Sri Lanka are placed at the bottom of the hierarchical structure, as their currencies are unable to perform the functions at international level. In other words, developing countries lack international monetary sovereignty.
Ramifications of money printing
In the case of Sri Lanka, the Central Bank can accommodate fiscal deficits by purchasing Treasury Bills directly from the primary market. In turn, the Central Bank prints money equivalent to the value of Treasury Bills purchased resulting in a rise in the country’s total money stock. These Treasury Bill purchases end up as Central Bank’s net credit to the government (NCG) on the asset side of its balance sheet. This leads to a rise in the monetary base or high-powered money which has multiplier effects on the aggregate money supply and overall liquidity of the economy. The Central Bank can also accommodate fiscal needs by purchasing Treasury Bonds and providing temporary advances to the government. These too raises the money stock. The Central Bank’s increasing lending to the government in this manner has had a steep positive impact on the monetary base since the second quarter of this year (Figure 1).
Thus, money printing is a straightforward way to provide lending to the government by the Central Bank. This does not mean that the Central Bank can continue printing money to finance the budget deficits indefinitely, as suggested by the proponents of MMT. The reason is that an ever-expanding monetary base will have adverse implications for the economy eventually speeding up inflation and causing severe macroeconomic imbalances.
Crowding out effects of domestic borrowings
It is reported that the government intends to restructure public debt so as to change the domestic to foreign debt component from 55:45 in 2020 to 60:40 in 2021. However, continuous increase in borrowings from the domestic market tends to raise interest rates causing difficulties in selling Treasury Bills at lower rates. This is reflected in the recent Treasury Bill auctions which were undersubscribed. At the December 16 auction, only Rs. 26.8 billion of Treasury Bills were sold out of the total offered amount of Rs. 40 billion, thus resulting in 33% undersubscription. This indicates that the ceiling yield rates pre-determined by the Central Bank at respective auctions are too low to attract the market to fully subscribe Treasury Bills.
The unsold Treasury Bills are usually purchased by the Central Bank printing new money, thus raising the money stock, as explained earlier. As a result, the money supply grew at a faster rate since early this year reaching the peak year-on-year growth rate of 21% by last October (Figure 2).
Excessive reliance on the domestic market to finance fiscal deficits exerts considerable pressures on scarce domestic savings, thus preempting resources from the private sector. While the ‘forced’ administrative ceilings on interest rates help to finance the fiscal deficits at low cost, they tend to create an environment of ‘financial repression’ characterized by low savings, further widening the investment-savings gap which is detrimental to economic growth.
Macroeconomic instability threats of MMT-style monetary policy
The recent monetary expansion points to imminent dangers in adopting MMT-style monetary policy in a country like Sri Lanka, though such policy stance might be unavoidable amidst the unprecedented economic setback caused by the Covid-19 pandemic. MMT completely ignores the critical importance of ensuring macroeconomic balances which is the very foundation of mainstream macroeconomics developed by leading economists over decades. MMT rests on the assumption that a government can simply finance its budget gap by printing money using the sovereign power, unlike an individual borrower who does not have such divine power.
Given the risks of exchange rate depreciation, weakening export competitiveness and capital outflows, MMT policies are bound to put developing countries like Sri Lanka in extremely vulnerable positions. High inflation emanating from the rising money supply weakens export competitiveness and encourages imports further widening the balance of payments deficit, unless the exchange rate depreciates adequately to compensate for inflation.
Prudent fiscal-monetary mix with structural adjustments essential
Hence, prudent monetary management linked with disciplined fiscal policy needs to be planned for the medium and long-run, phasing out the current expansionary monetary policy stance. Structural adjustments are essential in this process though they are neglected in current policy formulations.
(Prof. Sirimevan Colombage is Emeritus Professor in Economics at the Open University of Sri Lanka)
Features
‘Lord Edgware Dies’
It has been some time since I read an Agatha Christie, the plot of which I cannot remember. So, I was delighted to find on the shelves of a friend Lord Edgware Dies, which I had a vague memory of, but no certainty about who had done it.
When I read it, I found that my memory of who was probably the killer was correct, but I could not be certain and the red herrings Christie threw in were so diverting that until almost the very end I wondered if I had been wrong.
The plot is very simple. Jane Wilkinson, who is married to Lord Edgware, tells him that she is desperate for a divorce since she is in love with a very proper Anglo-Catholic peer, Lord Melton, but Edgware refuses to divorce her. She asks Poirot to talk to him, which he does, and is surprised to find that Edgware has told Jane he is prepared to give her a divorce. This was, after he had categorically refused, through a letter, which Jane said she had not received.
That night Edgware is murdered, after Jane had been to see him, or so the butler said, and also Edgware’s secretary. But Jane had been that evening at a grand dinner many miles away, where a dozen fellow guests could swear to her presence.
There was a solution however to the mystery of two Jane Wilkinsons, namely a skilful impersonator called Carlotta Adams who, in the opening chapter had impersonated Jane Wilkinson, who had also been at the performance. But when Poirot goes to see her, he finds that she had been found dead on the morning after Edgware had been killed, of an overdose. And in her bag was a gold case, with a strange inscription, that contained the drug, along with a pair of pince-nez.
Her maid said she had written a letter to her sister in America and posted it the previous night. Poirot asks Inspector Japp to get the letter, and a transcript is received from America, and in it the name of Edgware’s nephew Ronald Marsh is mentioned; he had taken Carlotta to dinner after her performance, with which the book opens, and had then set her a challenge. Japp arrests Marsh, but Poirot is not happy and asks for the original of the letter, which the sister sends him. That shows that a page is missing, and the tear is obvious, though that raises the question as to why it had not simply been cut.
Matters are further complicated by the fact that Marsh had gone in a taxi to the Edgware house, along with Edgware’s daughter Geraldine, in the interval of an opera which had previously seemed to provide them with cast iron alibis. Geraldine had gone in to fetch her pearls so that Marsh could raise money he needed, and thus had an opportunity to kill Edgware, as did Marsh, for the driver said he had got out of the taxi while waiting and gone into the house.
Marsh explained why he had gone to the house on the night of the murder as having followed Bryan Martin, an American actor, who had been in love with Jane, whom he saw go into the house with a key. But there was no one visible when he entered, and Geraldine almost immediately came down and they left together. And Martin too has become an object of suspicion to Poirot, for he had been to see him before the murders were discovered with a story of being followed by a man with a gold tooth – a story Poirot immediately realized was false when he was asked how old the man was, and was told he was young, for young people did not have gold teeth.
A heap of French money Edgware had got for a trip to Paris was missing, but since Marsh had no need for it after his cousin’s offer of help, Poirot deduces that it must have been taken by the butler, who has disappeared. Christie has stressed that he is astonishingly handsome, unusual in a butler, and Poirot notes a resemblance to Martin, so he thinks the mysterious man going into the house must have been him.
Incidentally, later Poirot assumes that Edgware’s change of mind was because he was involved in some scandal, and I believe Christie intends us to see the cause of this in his handsome butler, though this is not specified.
Meanwhile, Poirot has asked Japp to find out the provenance of the case found in Carlotta’s handbag, and it turns out to have been made in Paris, specially commissioned, and collected by a woman with pince-nez.
But then another murder occurs—that of another guest at the grand dinner, which provided Jane with her alibi. The victim is an actor who had been bemused when Jane, at a lunch, thought the Judgment of Paris referred to the city. He told Hastings he wanted to see Poirot, but was killed before he could get to the appointment. Poirot had rushed there when told about his request, but it was too late.
Meanwhile, Poirot has tried out the pince-nez on Edgware’s secretary, but she could not see through these. It was only a chance remark heard outside the theatre that led him to try them out on Wilkinson’s maid Ellis, a spare pair that had been appropriated for the night of the murders.
Poirot then lays things out, having summoned Martin and told him that he probably suppressed Edgware’s letter, as he had been dropped by then and he did not want Jane to marry another. But after teasing Martin, Poirot says that Jane was in fact the murderer, and she got Carlotta to impersonate her at the dinner while she went to the house and killed her husband. After meeting Carlotta later and checking with her through a call that she had
not been rumbled, Jane had gone ahead with the murder – she put veronal into her drink and the case with veronal into the handbag. She forgot to take out the pince-nez she had used earlier to imitate an American. Carlotta had registered as the American in a hotel and Jane had gone to see her, and there they exchanged identities. After seen the letter, she made use of it by tearing off the page that referred to her, and the S of She, so that the person who had challenged Carlotta to impersonate her seemed to be a man.
There is a coda in which Jane, condemned to death, writes to Hastings, still full of pride at her ingenuity hoping she will be remembered.
Features
Desilt reservoirs, learn from our ancient irrigation systems
by Prof. O. A. Ileperuma
Silting of reservoirs is a major problem today affecting our hydropower production and irrigation systems. The main Mahaweli reservoirs are silted to a considerable extent reducing the water holding capacity of them. Due to poor soil management practices, floodwaters deposit large amounts of silt in these reservoirs. When the Polgolla reservoir was fully drained about two years back, one could see mountains of silt in the lower reaches of the reservoir. A rough estimate is that 50% of the total capacity of these reservoirs has been lost to siltation. This is a serious issue which affects not only power and agriculture but also flood control.
Our ancient irrigation systems ensured that desilting of reservoirs took place under royal decree where all users of the reservoirs were ordered to carry out desilting of reservoirs during the dry season. The clay thus collected was used in making bricks for the construction of great stupas which dot the landscape of our ancient kingdoms. This ensured that the reservoirs had their full capacity filled with water for the next cultivating season. Our ancient kings were clever enough not to construct reservoirs by blocking main rivers such as the Mahaweli. A classic example is the Minipe left canal where they tapped only the surface water of Mahaweli. Even the bigger tanks such as Nuwara Wewa and Parakrama Samudraya were fed with minor rivulets. There were also other ingenious features in the cascade irrigation systems built by the ancient kings, such as mud sluice canals and forest reservations between the reservoirs in the cascade system. These reservations helped trap silt and remove excess nutrients, which could otherwise contribute to increasing salinity as water flowed from one reservoir to another.
- Parakrama Samudraya
- Kalawewa
- Kotmale
A classic engineering marvel is the former Yoda Ela, which carries water from Kalawewa to Nuwara Wewa and Tissa Wewa. It is 87 km long although the straight distance between these points is only about 40 km. The gradient of this canal is about 10 cm per km or 6 inches per mile. Yodha Ela functions as a moving reservoir and feeds about 4,600 hectares of paddy lands. It is a winding canal with about 120 smaller reservoirs on its way. It was constructed during the reign of King Dhatusena around 459 AD and later expanded by King Parakramabahu by connecting more reservoirs to the network. Unfortunately, during the Mahaweli project our modern-day engineers constructed a concrete canal replacing the winding path of this Yoda Ela also called Jaya Ganga. This effectively removed the ability of the old Yoda Ela to remove silt and nutrients. The bank of this Ela has wet zone trees such as jak and areca nut growing well. They take up the nutrients from the flowing stream making the water suitable for irrigation later.
Ancient Mesopotamian civilisations depended on dams constructed along the two main rivers, Euphrates and Tigris. After continuous irrigation of their fields over several thousand years, salinity of the irrigated lands increased making them unsuitable for agriculture. People died due to famine and this clearly illustrates the danger of blocking main rivers for agriculture. There is scientific evidence that the salinity of paddy soils in the Mahaweli C area is increasing.
We saw the devastation caused by Cyclone Ditwah. The sluice gates of the Kotmale Reservoir were opened, and Kandy and Peradeniya were flooded. If the reservoir had had greater storage capacity, couldn’t the opening of the gates have been delayed? This may not be an argument that modern-day engineers would readily accept, and I am not an irrigation expert. These ideas may well be naïve. But most of us tend to think of reservoirs mainly in terms of hydropower generation and irrigation, while their role in flood control receives much less attention. The question therefore deserves serious consideration. Could restoring lost reservoir capacity through desilting help improve our ability to manage extreme rainfall and reduce flood risks?
Desilting our reservoirs should be considered a national priority.
Features
Losing out to Ethiopia
Export diversification – Missing the wood for the trees – Part III
by Gomi Senadhira
In Sri Lanka, the word “Ethiopia” is often used as disparaging slang to describe individuals or areas experiencing extreme poverty, starvation, or severe economic hardship. This linguistic habit originated in the 1980s with the Western media coverage of the devastating Ethiopian famine of 1983-85. That media coverage shocked the world but also left an outdated and offensive global stereotype that the country is permanently starving. Much has changed since then. By now, with an annual growth rate of around 9%, it is the fastest-growing economy in sub-Saharan Africa. Ethiopia has also emerged as a highly competitive exporter and is challenging not only its competitors in the region but also countries like Sri Lanka. This article is on how Sri Lanka has lost ground to Ethiopia (and a few other countries) in the GCC markets for agricultural and floricultural products.
Sri Lanka – A Pioneer in the Agriculture and Floricultural Market in the GCC
As discussed in Part II of this article, by the mid-1980s Sri Lanka had established a strong foothold in the GCC’s fruit, vegetable, and floricultural market. Geographical proximity and well-established shipping and air links gave Sri Lanka a strong comparative advantage over Southeast Asian and African nations. Thailand, Vietnam, and Kenya were not even in the market. At that time, Ethiopia was experiencing (as BBC news reports described) “a biblical famine”.
The market was not very large, but it was lucrative and growing. Trade Minister Lalith Athulathmudali as well as the Chairman of the Export Development Board, Victor Santiapillai, who visited Kuwait (and the GCC countries), recognised the market potential for these products and encouraged us to continue with our work. The minister was particularly keen to further develop links between the market for these products, exporters, and his Export Production Villages (EPVs). So, it was becoming a successful case not only for export diversification but also for transferring gains from exports directly to rural households.
From Trailblazer to Tailender
As a result, even by the beginning of this century Sri Lanka had a larger market share than most of its competitors from Asia or Africa. But since then, our competitiveness has weakened significantly. The tables below provide a comparative snapshot of Sri Lanka’s performance vis-à-vis Thailand, Vietnam, Kenya and Ethiopia in the GCC market for vegetables, fruits and floricultural products. As illustrated therein, in 2001 Sri Lanka was ahead of Thailand, Kenya and Ethiopia in this small but rapidly growing market. Since then, we have fallen behind Thailand, Kenya and many other countries in that lucrative market. If this trend continues, Sri Lanka will fall behind Ethiopia within the next few years. (See Table 1)
In the GCC market for vegetables (covered in HS chapter 07), Sri Lanka was ahead of most other competitors in 2001. As illustrated in Table 1 , Sri Lanka had failed to develop this market, while Thailand, Kenya, and even Ethiopia had very efficiently increased their market shares. The GCC is a market to which Sri Lanka can supply some vegetables, like cabbages, by sea. It appears Sri Lanka had also failed to exploit this mode of supply.
We can see a similar trend in the market for fruits. Vietnam, Kenya, and Thailand have emerged as major players, while exports from Sri Lanka have staggered on slowly. In this segment, Vietnam has emerged as a leading player during the last twenty years and the GCC imports from Viet Nam have shot up from US$44 thousand in 2001 to US$346 million by 2024. In part one of these articles, I discussed the remarkable increase of jackfruit exports from Vietnam “…just $3 million in 2015 to an impressive $236.8 million in 2023” while most of our jackfruit production rots under the trees. This explains how countries develop their markets, geographically and product-wise. (See Table 2)
Sri Lanka’s performance has been weakest in the market for floricultural products (HS Chapter 06), which groups live trees, cut flowers, and ornamental foliage. When we first entered the market in the 1980s, the market was dominated by the Netherlands, and Kenya and Ethiopia were not even in the market. At that time, we identified the Gulf states as a market where Sri Lanka could have a dominant presence due to geographical proximity. Even in 2001, Sri Lanka was ahead of Kenya, Ethiopia, and Thailand. But by now, Kenya has emerged as the dominant supplier. Ethiopia is also expanding its market share and is the third-largest exporter. (See Table 3)
Missing the Wood for the Trees
In the mid-1980s, Sri Lanka first established its foothold in the GCC market. Since then, Thailand, Vietnam, Kenya, and even Ethiopia have moved well ahead of us and have become leading players. Why did we lag behind in our export diversification efforts in general and, more particularly, in the GCC market?
The reasons are very clear. After the initial attempts in the 1980s and early 1990s, Sri Lanka has not been proactively involved in identifying, developing, and promoting new products and markets, or protecting and further developing new markets already established. The focus has simply been on traditional exports: tea, coconut, cinnamon, and garments, while other products were almost ignored. In essence, we have been and continue to focus intensely on a narrow group of products and markets, and we have lost sight of the bigger picture.
(The writer can be reached at senadhiragomi@gmail.com)
-
News6 days agoNamal remanded until Sept. 18 over Airbus deal investigation
-
Latest News5 days agoTharanga creates history with Diamond League crown in Brussels
-
News5 days agoDispute which triggered listed company director being detained at BIA resolved
-
Features4 days agoAfter the parade: What a traffic OIC’s walk-out tells us
-
Editorial6 days agoPower vs Equality
-
Editorial4 days agoArrests as theatre
-
Latest News4 days agoHarshitha’s composed knock seals Sri Lanka’s semi-final berth
-
Latest News7 days agoSLPP MP Namal Rajapaksa arrested by CIABOC






