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Double-edged sword of modern alchemy: Quantitative Easing in focus

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If MMT (Modern Monetary Theory) was a controversial theory, QE was a giant, real-world experiment that started with a bang and has since become a fixture of global finance. It’s the central bank’s version of a superhero arriving to save the day when all else has failed.

A New Era of Money Creation

The 21st century has been marked by crises that shook economies across the globe—the 2008 Global Financial Crisis and the COVID-19 pandemic being the most notable. To fight back, central banks turned to an extraordinary tool: Quantitative Easing (QE).

Although often called “money printing,” QE isn’t about running printing presses. Instead, central banks create new digital money in their accounts and use it to buy government bonds and other financial assets. This injects cash into the banking system, lowers interest rates, and aims to revive economic activity.

Then What About That Rs. 2000 Note?

A hot topic in recent months has been the special Rs. 2000 note printed by the Central Bank of Sri Lanka (CBSL), carrying the signature of President Anura Kumara Dissanayaka.

Many people quickly asked: “Is this another round of money printing?”

The truth is more symbolic than economic. Issuing a higher denomination note does not automatically increase money supply—it simply replaces or reorganizes existing currency in circulation. The Rs. 2000.00 note was largely a commemorative and administrative move.

The real danger lies not in producing a new note but in unchecked expansion of digital money to finance government deficits. That’s what caused Sri Lanka’s past inflation spiral, not the physical design of currency.

A new note doesn’t reflect money printing. What matters is whether the central bank is responsibly managing overall monetary policy.

From 2008 to 2022, the U.S. Federal Reserve’s balance sheet exploded from less than $1 trillion to almost $9 trillion—an ocean of newly created dollars flowing into the system.

At first, QE looked like a miracle cure. It stabilized collapsing financial markets, restored confidence, and helped prevent deep recessions. But over time, the glow faded and criticisms mounted.

How QE Works

QE has three main purposes:

*  Lower borrowing costs – by pushing down long-term interest rates.

*  Encourage spending and investment – by making loans cheaper and increasing liquidity.

*  Prevent deflation – by injecting money into the economy during downturns.

In the short term, it often worked. After both 2008 and 2020, markets stabilized, unemployment fell, and economies got back on track faster than many feared.

But QE has also proven to be a double-edged sword. (See Figure 01)

Figure 1

The Unintended Consequences

1. Widening Inequality: By raising the value of financial assets like stocks and bonds, QE disproportionately benefits wealthy households who already own these assets. Meanwhile, ordinary workers and savers see fewer direct gains.

2. Asset Bubbles: Cheap money can fuel risky investments and inflate bubbles in housing, stocks, and bonds. These bubbles risk bursting later, potentially causing another crisis.

3. Inflation Returns: For years, economists debated whether QE would spark inflation. During the post-2008 period, it didn’t. But after COVID-19, when QE was combined with massive government spending, inflation roared back worldwide.

4. Exit Problem: Unwinding QE—by selling off bonds or raising rates—can rattle financial markets. Central banks risk triggering instability if they move too quickly or lose credibility.

Lessons from Sri Lanka: Printing Without Capacity

While advanced economies managed QE with mixed success, Sri Lanka’s recent experience shows what happens when money creation is misapplied.

Between 2019 and 2021, Sri Lanka’s central bank printed nearly Rs. 2.8 trillion to finance government spending while also defending a fixed exchange rate. This contradicted basic principles: printing money while trying to keep the currency pegged draining foreign reserves.

The result? A collapse of imports, hyperinflation, and eventually sovereign default. This failure highlights a crucial point: money printing is not the same everywhere. Context matters.

A New Way to Think About QE: Contextual Monetary Capacity

Synthesizing the evidence from the global experience and the Sri Lankan case study, this article proposes a new creative argument: The Theory of Contextual Monetary Capacity.

This theory posits that the efficacy and safety of unconventional monetary policy tools like QE are not inherent to the tools themselves but are strictly contingent upon a country’s specific economic and institutional context. This context defines a nation’s “monetary capacity” – its ability to engage in large-scale money creation without triggering catastrophic negative consequences.

The theory identifies three pillars of this capacity:

Institutional Pillar: The absolute independence of the central bank from fiscal dominance, a clear and credible inflation-targeting mandate, and a strong regulatory framework. Without this, money printing quickly devolves into fiscal financing, destroying confidence and triggering inflation (as seen in Sri Lanka).

*  Structural Pillar: Deep and liquid domestic capital markets, a high degree of trade openness, and, critically, the exorbitant privilege of issuing a reserve currency. The US could engage in massive QE with muted initial inflationary effects partly because the dollar’s status created global demand for its assets. Sri Lanka, lacking this structural advantage, faced immediate external sector pressures.

*  Credibility Pillar: The market’s perception of the central bank’s commitment and ability to eventually normalize policy and control inflation. The Fed’s credibility, built over decades, allowed it to experiment with QE. The CBSL’s credibility, already weakened, was shattered by its direct financing of the deficit, leading to a swift currency and confidence crisis.

The 2021-2023 global inflation surge supports this theory. It demonstrated that even for high-capacity countries like the US, there are limits. When monetary expansion (QE) is combined with massive concurrent fiscal stimulus (violating the institutional pillar by blurring monetary/fiscal boundaries) and major supply shocks, it can exceed even their substantial monetary capacity, unleashing inflation.

The Global Inflation Wake-Up Call: Even powerful economies have limits. In 2021–2023, the U.S. and Europe faced a surge in inflation as QE combined with massive fiscal spending and supply chain shocks.This showed that no country has unlimited capacity to print money without consequences. Even the strongest central banks must tread carefully.

Conclusions

Quantitative Easing is neither miracle medicine nor pure poison. It is a powerful but risky tool.

*  In times of crisis, it can save jobs, stabilize markets, and prevent collapse.

*  But if used carelessly or for too long, it can fuel inequality, bubbles, and inflation.

*  And for countries without strong institutions or reserve currency status, large-scale money printing is economic dynamite.

The question policymakers must ask is not “Should we print money?” but “Do we have the capacity to do so safely?”

QE’s story reminds us of the timeless truth: in economics, there are no free lunches. “Money printing” is not free. Used wisely, QE can be a lifeline in crises. Used recklessly, it can be an economic time bomb.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT, Malabe. The views and opinions expressed in this article are personal.)



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Partnering India without dependence

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President Dissanayake with Indian PM Modi

Indian Prime Minister Narendra Modi once again signaled the priority India places on Sri Lanka by swiftly dispatching a shipload of petrol following a telephone conversation with President Anura Kumara Dissanayake. The Indian Prime Minister’s gesture came at a cost to India, where there have been periodic supply constraints and regional imbalances in fuel distribution, even if not a countrywide shortage. Under Prime Minister Modi, India has demonstrated to Sri Lanka an abundance of goodwill, whether it be the USD 4 billion it extended in assistance to Sri Lanka when it faced international bankruptcy in 2022 or its support in the aftermath of the Ditwah cyclone disaster that affected large parts of the country four months ago. India’s assistance in 2022 was widely acknowledged as critical in stabilising Sri Lanka at a moment of acute crisis.

This record of assistance suggests that India sees Sri Lanka not merely as a neighbour but as a partner whose stability is in its own interest. In contrast to Sri Lanka’s roughly USD 90 billion economy, India’s USD 4,500 billion economy, growing at over 6 percent, underlines the vast asymmetry in economic scale and the importance of Sri Lanka engaging India. A study by the Germany-based Kiel Institute for the World Economy identifies Sri Lanka as the second most vulnerable country in the world to severe food price surges due to its heavy reliance on imported energy and fertilisers. Income per capita remains around the 2018 level after the economic collapse of 2022. The poverty level has risen sharply and includes a quarter of the population. These indicators underline the urgency of sustained economic recovery and the importance of external partnerships, including with India.

It is, however, important for Sri Lanka not to abdicate its own responsibilities for improving the lives of its people or become dependent and take this Indian assistance for granted. A long unresolved issue that Sri Lanka has been content to leave the burden to India concerns the approximately 90,000 Sri Lankan refugees who continue to live in India, many of them for over three decades. Only recently has a government leader, Minister Bimal Rathnayake, publicly acknowledged their existence and called on them to return. This is a reminder that even as Sri Lanka receives support, it must also take ownership of its own unfinished responsibilities.

Missing Investment

A missing factor in Sri Lanka’s economic development has long been the paucity of foreign investment. In the past this was due to political instability caused by internal conflict, weaknesses in the rule of law, and high levels of corruption. There are now significant improvements in this regard. There is now a window to attract investment from development partners, including India. In his discussions with President Dissanayake, Prime Minister Modi is reported to have referred to the British era oil storage tanks in Trincomalee. These were originally constructed to service the British naval fleet in the Indian Ocean. In 1987, under the Indo Lanka Peace Accord, Sri Lanka agreed to develop these tanks in partnership with India. A further agreement was signed in 2022 involving the Ceylon Petroleum Corporation and the Lanka Indian Oil Corporation to jointly develop the facility.

However, progress has been slow and the project remains only partially implemented. The value of these oil storage tanks has become clearer in the context of global energy uncertainty and tensions in the Middle East. Energy analysts have pointed out that strategic storage facilities can provide countries with greater resilience in times of supply disruption. The Trincomalee tanks could become a significant strategic asset not only for Sri Lanka but also for regional energy security. However, historical baggage continues to stand in the way of Sri Lanka’s deeper economic linkage with India. Both ancient and modern history shape perceptions on both sides.

The asymmetry in size and power between the two countries is a persistent concern within Sri Lanka. India is a regional power, while Sri Lanka is a small country. This imbalance creates both opportunities for partnership and anxieties about overdependence. The present government too has entered into economic and infrastructure agreements with India, but many of these have yet to move beyond initial stages. This has caused frustration to the Indian government, which sees its efforts to support Sri Lanka’s development as not being sufficiently appreciated or effectively utilised. From India’s perspective, delays and hesitation can appear as a lack of commitment. From Sri Lanka’s perspective, caution is often driven by domestic political sensitivities and concerns about sovereignty.

Power Imbalance

At the same time, global developments offer a cautionary lesson. The behaviour of major powers in the contemporary international system shows that states often act in their own interests, sometimes at the expense of smaller partners. What is being seen in the world today is that past friendships and commitments can be abandoned if a bigger and more powerful country can see an opportunity for itself. The plight of Denmark (Greenland) and Canada (51st state) give disturbing messages. Analysts in the field of International Relations frequently point out that power asymmetries shape outcomes in bilateral relations. As one widely cited observation by Lord Parlmeston, a 19th century prime minister of Great Britain is that “nations have no permanent friends or allies, they only have permanent interests.” While this may be an overly stark formulation, it captures an underlying reality that small states must navigate carefully.

For Sri Lanka, this means maintaining a balance. It needs to clearly acknowledge the partnership that India is offering in the area of economic development, as well as in education, connectivity, and technological advancement. India has extended scholarships, supported digital infrastructure, and promoted cross border links that can contribute to Sri Lanka’s long term growth. These are tangible benefits that should not be undervalued. At the same time, Sri Lanka needs to ensure that it does not become overly dependent on Indian largesse or drift into a position where it functions as an appendage of its much larger neighbour. Economic dependence can translate into political vulnerability if not carefully managed. The appropriate response is not to distance itself from India, but to broaden its partnerships. Engaging with a diverse range of countries and institutions can provide Sri Lanka with greater autonomy and resilience.

A hard headed assessment would recognise that India’s support is both genuine and interest driven. India has a clear stake in ensuring that Sri Lanka remains stable, prosperous, and aligned with its broader regional outlook. Sri Lanka needs to move forward with agreed projects such as the Trincomalee oil tanks, improve implementation capacity, and demonstrate reliability as a partner. This does not preclude it from actively seeking investment and cooperation from other partners in Asia and beyond. The path ahead is therefore one of balanced engagement. Sri Lanka can and should welcome India’s partnership while strengthening its own institutions, fulfilling its domestic responsibilities, and diversifying its external relations. This approach can transform a relationship shaped by asymmetry into one defined by mutual benefit and confidence.

by Jehan Perera

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The university student

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A file photo of a university students’ protest against private medical colleges

This Article is formed from listening to university students from across the country for two research initiatives, one on academic freedom and another on higher education policy. In speaking with students, the fears they carry could not be ignored. Students navigate university education, with anxieties about their future and fears that they and their university education are inadequate, all while managing their families’ daily struggles. I explore students’ anxieties and the extent to which we, the public, and higher education policies must take responsibility for their experiences.

The Neoliberal University

For decades, universities have been transforming. Neoliberal policies, promoted by the World Bank, have reduced public education expenditure and weakened the State’s commitment to public institutions. These policies frame individuals as responsible for their success and failure, minimising structural realities, such as poverty and precarity. They instrumentalise education, treat students as “products” for a “competitive’ job market, while education markets feed on students’ insecurities. Students are made to feel lacking in “soft skills”, or skills seemingly necessary to navigate classed-corporate structures, and lacking in technical skills, or those needed to operate technologies used within the private sector.

Student activists and, sometimes teachers, have challenged this worldview, demanding State commitment to free education. Governments sometimes yield but also fear the consequences of student politics and have long waged campaigns to discredit student activism. It is within this context that students pursue education.

Portrayal of students

A Peradeniya student told me student-organised events must meet “high standards”, because of the negative public perceptions of university students. I understood what she meant; I had heard of our ‘ungrateful’, ‘wasteful’, ‘unemployable’, and ‘entitled’ students. The media and decades of government propaganda have reinforced these depictions.

About 10 years ago, when government moves to privatise higher education were strong, a corporate executive, complaining about traffic caused by “yet another useless protest”, was unable to explain why they protested. News coverage, I realised, framed these protests as public inconveniences, rarely addressing students’ demands. A prominent advocate, of neoliberal educational policy, reinforced this narrative, saying “state university students make up just 10 percent of their cohorts”, gesturing dismissively as if to say their concerns were insignificant. Such language belittles student activists and youth, renders them voiceless and allows their concerns, such as classed worldviews, and access barriers to and privatisation of education, to be easily dismissed.

It is in this environment that the conception of the useless university student, fighting for no reason, has developed. Students must carry this misrepresentation, irrespective of their own involvement in activism.

Not being good enough

Attacks on free higher education and the absence of meaningful reforms designed to address students’ problems, now weigh on students’ minds. Students question whether their education is relevant and current, pointing to outdated equipment, software, and curricula. University administrators acknowledge these constraints, which reflect Sri Lanka’s ranking as one of the lowest in the world for the public funding of education and higher education.

Rarely has the World Bank, so influential in driving educational policy, highlighted the public funding crisis and, instead, emphasises technological deficiencies, the public sector’s “monopoly” of higher education and limited private sector involvement. It downplays the reality that few families can privately afford such funding arrangements.

Students are also bombarded with fee-levying programmes, promising skills and access to jobs, preying on students’ insecurities. Many, while struggling to make ends meet, enrol in off-campus pricy professional courses, such as in accountancy, marketing, or English.

The arts student

Some students worry their education is too theoretical and “Arts-focused.” A student from the University of Colombo described having to justify her decision to pursue an arts degree. The public, she said, saw this as a waste of her time and the country’s resources. She courageously wore this identity, yet questioned if she was, in fact, unemployable as she was being led to believe.

She does not, however, draw on the fact that arts education has long been the “cheap” option that governments have offered when pressured to expand higher education. While arts education may need fewer laboratories and equipment, they require adequate investments on teachers, strong on content and pedagogy, to closely engage with individual students; aspects of arts education which have systematically been disregarded.

As access broadens, particularly in the arts, more students from marginalised backgrounds have entered universities; students who may feel alien in systems aligned with corporate interests. Thus, students quite different from the classed conception of the “employable graduate,” whose education has systematically been under-funded, graduate from arts programmes frustrated, diffident, and ill-suited for jobs to which they are expected to aspire.

The dysfunctional university

Students voice criticisms of their teachers, as myopic, unworldly, and unfair. Their perspective reflects the universities’ culture of hierarchy and its intolerance of difference, on the one hand, and the weak institutional structures on the other. They are symptoms of years of neglect and attempts by governments to delegitimise universities, to shed themselves of the burden of funding higher education through anti-public sector rhetoric.

Some students, marginalised for being anti-rag, women, or ethnic minorities, feel an added layer of burdens. Anti-rag students, or more often, students who do not submit to university hierarchies, whether enforced by students or staff, are ostracised, demeaned and sometimes subjected to violence. Students unable to speak the institution’s dominant language face inadequate institutional support. Women describe being ignored and silenced in student union activities and left out of student leadership positions.

Furthermore, quality assurance processes rarely prioritise academic freedom or students’ right to exist as they wish, except when they complement the process of creating a desirable graduate for the job market. These processes focus on moulding professionals and technicians, as one would form clay, disregarding students’ anxieties from being alienated from themselves by such efforts.

Problems at home

Beyond the campus, parents face debt, illness, and precarious work. Students are acutely aware of these struggles. Some describe parents collapsing from the strain and sometimes leaving them to carry the family’s difficulties. A student described feeling guilty for being at the University while his family struggled to survive. To ease the burden on their families, students earn incomes by providing tuition, delivering food, and carrying out microbusinesses.

Tied to their concerns over having to depend on their families, is their fear of being “unemployable”, a term that places the blame of unemployment on students’ skill deficiencies. Little in this discourse connects the lack of decent work and jobs for them and their parents to the weak economy and job markets into which successive batches of graduates must transition. Much of the available jobs in the country are those that require little in the form of education, and those, too do little to provide a living wage. Students must, therefore, compete for a limited number and breadth of frankly not very desirable work. Yet, it is they who must feel the weight of unemployability.

Committing to students

Universities frequently fail to recognise students’ worries. Instead, we, coopt neoliberal discourses, telling students to become more marketable and competitive, do and learn more, be confident, improve English, learn to inhabit those classed spaces with ease; often without the support that should accompany these messages.

We expect these students, insecure and anxious, to think critically, and demonstrate curiosity and higher-order analyses. When they collapse under the pressure, universities respond by providing mental health services. While such services are needed, they risk individualising and pathologising systemic problems. They represent yet again the inherent flaws with solutions that emerge from neoliberal ideological positions that treat individuals as the source of all success and failure. Such perspectives are likely to reinforce students’ anxieties, rather than address them.

As Sri Lanka revisits education policy reforms, there is an opportunity to change our framings of education and to recognise these concerns of students as central to any policy. The state must renew its commitment to free education and move from the neoliberal logic that has guided successive reform efforts; we, as the public, must restore our hope and expectations from free education. Education across disciplines, the arts, as well as STEM (science, technology, engineering and mathematics), must be strengthened. Students’ freedom to inhabit university spaces as they wish, must be respected and protected by institutions. Education policies must be tied to broader economic and labour reforms that ensure families can safely earn a living wage and graduates can access a rich range of decent meaningful work.

(Shamala Kumar teaches at the University of Peradeniya)

Kuppi is a politics and pedagogy happening on the margins of the lecture hall that parodies, subverts, and simultaneously reaffirms social hierarchies.

by Shamala Kumar

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On the right track … as a solo artiste

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Mihiri: Worked with several top local band

Mihiri Chethana Gunawardena is certainly on the right track, in the music scene.

The plus factor, where Mihiri is concerned, is that she has music deeply rooted in her upbringing, and is now doing her thing in the Maldives.

Her father, Clifton Gunawardena, was a student of the legendary Premasiri Kemadasa and former rhythm guitarist of the Super 7 band.

Mihiri took to music, after her higher studies, and her first performance was with her father, while employed.

Mihiri Chethana Gunawardena

After eight years of balancing both worlds – working and music – she chose to follow her true calling and embraced music as her full-time profession.

Over the years, Mihiri has worked with some of the top bands in the local scene, including D Major, C Plus from Negombo, Heat with Aubrey, Mirage, D Zone Warehouse Project and Freeze.

In fact, she even put together her own band, Faith, in 2017, performing at numerous events, and weddings, before the Covid pandemic paused their journey.

What’s more, her singing career has taken her across borders –performing twice in Dhaka, Bangladesh, with the late Anil Bharathi and the late Roney Leitch, and multiple times in the Maldives, including a special New Year’s Eve performance with D Major.

In the Maldives, on a one-month contract

Last year, Mihiri was in Dubai, along with the group Knights, for the Ananda UAE 2025 dance.

She continues to grow as a solo artiste, now working closely with the renowned Wildfire guitarist Derek Wikramanayake, and performing, as a freelance musician, travelling around the world.

Right now, she is in the Maldives, on a one-month contract, marking a new chapter in her evolution as a solo vocalist.

On her return, she says, she hopes to create fresh cover songs and original music for her fans.

Mihiri believes in spreading joy and positivity through her singing, and peace and happiness for everyone around her, and for the world, through music.

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