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Lanka should set up a currency board to stop rupee depreciation: US economist
ECONOMYNEXT – Sri Lanka should set up a currency board to stop further currency falls, US economist Steve Hanke has said as the island’s currency collapsed from 203 to 290 to the US dollar in an attempt to float the currency which has not yet succeeded.
“Since January 1st 2022, the Sri Lankan rupee has depreciated ~26% against the USD. #SriLanka’s severe balance of payments crisis and recent fuel price hikes are sinking LKA,” Hanke, who is professor of Applied Economics at Johns Hopkins University in Baltimore, said in a twitter.com message.
“To ease the crisis, LKA needs to install a currency board, like the one it had from 1884 until 1950.”
Sri Lanka – then Ceylon – set up the currency board after the Ceylon Rupee issued by the Oriental Bank Corporation stopped exchanging silver for rupee notes, technically called a suspension of convertibility.
A modern day central bank attempts a float also in a similar fashion, though the bank is not closed.
A currency board is easy to set up and will end balance of payments trouble for ever, insulating the public and also politicians from Keynesians who print money to manipulate interest rates.
Currency boards have very low interest rates just about 50 basis points higher than the anchor currency by automatic tightening to prevent imbalances from building up.
The anchor currency for the currency board can be the US dollar, Euro, Swiss Franc, Swedish Kroner or Singapore dollar, which is among countries with the best monetary policy in the world.
Hanke has prepared a handbook on how to set up a currency including measures for war torn countries where the monetary authority could be incorporated abroad to prevent any warlord from getting hold of reserves.
In 2018 Sri Lanka was put on the extraordinarily situation of a ruling politician, then-Minister Harsha de Silva, pleading with central bank in public, to raise rates in a bid stop money printing, after giving it full operational independence to inject liquidity.
At the time taxes raised taxes to reduce the deficit and a political costly price formula or fuel was set up, but money was printed to create balance of payments trouble by so-called ‘call money rate targeting’.
Money was also injected through dollar rupee swaps of the style used to bust East Asian pegs during the crisis by speculators (Soros style swaps). Speculators could not break the Hong Kong currency board during the East Asian currency board, but instead mad massive losses on swap costs.
In 2020 the policy was taken several steps ahead by crippling bill and bond auctions with price controls. Now the rupee has been hit by a surrender rule, analysts have warned.
Analysts have called for strict laws to block the ‘domestic operations’ of the central bank through which balance of payments troubles are created, or set up an orthodox currency board.
When the Oriental Bank Corporation shut its doors in 19th century Ceylon, the Mercantile Bank which also issued notes provided convertibility at par.
Oriental Bank Corporation ran out of silver reserves following bad loans. A modern day central bank runs out of dollar reserves due to direct government financing of deficits, re-financed credit schemes and sterilized interventions or giving reserves for imports.
The central bank of Sri Lanka today holds over two trillion in Treasury bills a part of which was taken back from banks in the course of private sector finance to maintain a policy rate or price controls of bond auctions.
Sri Lanka’s currency board, which had kept the island safe through two World Wars and a Great Depression was replaced with a Latin America style central bank under US technical advice in 1950.
Almost all such central bank by Fed experts have led to social unrest and some central banks have collapsed and led to spontaneous dollarization.
Analysts have warned it may happen in Sri Lanka as well if the float is not established.
Currencies are depreciated by Keynesian interventionists for ‘competitive exchange rates’, which critics say is a merciless a zero-sum policy of transferring wealth from the working class to shareholders of export or import substitution companies by destroying real wages.
The advantage remains until workers go on strike demanding higher wages and until utility prices such as electricity, power or water rates are raised.
Knowledge of currency boards have been lost to most post World War II ‘economists’ who relentlessly favour depreciating currency central banks, through which they try to boost growth with ‘stimulus’ create balance of payments trouble, starve the poor, create social unrest, boat people, and bring down governments.
The rising world food and commodity prices hurting the poor around the world while strengthening the hands of authoritarian leaders of natural-resource rich countries after the US and ECB printed vast amount of money is the latest example analysts say.
Steve Hanke was one of the few economists in the world who correctly warned that Fed’s Jerome Powell would set off an inflationary spiral.
Hanke has helped set up several currency boards including in Eastern Europe.
Currency boards have neutral policy and are still in use in East Asia. However most East Asian pegs including Vietnam are tighter than currency boards and collect forex reserves exceeding the monetary base.
Sri Lanka used to have a 1 to 1 currency boar with the Indian rupee (which was originally silver) along with Mauritius and other South Asian nations.
Before the Reserve Bank of India was nationalised to print money for Nehru’s Gosplan style programs, the Indian rupee was also used in the Middle East countries like Dubai.
The only economist who opposed Nehrus economists was a lone classical economist, BR Shenoy who issued a note of dissent on the plans which were to be financed with central bank credit.
Bhutan still retains it one to one peg with the India rupee which has been unbroken for decades. Nepal has also kept a 1.6 peg with the Indian rupee for more around 40 years. The Indian rupee is however a depreciating currency and neither country benefits much except avoiding currency crises.
The IMF supports Maldives peg with the US dollar but encourages stimulus, open market operations and depreciation in larger countries like Sri Lanka which is believed to due to a mis-understanding about pegs held in the US Treasury.
News
Senior citizens above 70 years to receive March allowances on Thursday (26)
The Welfare Benefits Board has announced that the March allowance for senior citizens over 70 years of age will be credited to each beneficiaries account on Thursday (26th).
693,801 senior citizens over the age of 70 years are set to benifit under this welfare scheme
News
CEB Engineers warn public to be prepared for power cuts after New Year
A looming power crisis is casting an ominous shadow over the country, with engineers warning that the current “no power cut” situation may not last beyond the Sinhala and Tamil New Year due to worsening diesel shortages and ongoing coal-related disruptions.
A senior electrical engineer, attached to the Ceylon Electricity Board Engineers Union, cautioned that while authorities appear to be managing the system for now, the underlying fuel constraints are reaching a critical point.
He told The Island: “At the moment, there are no scheduled power cuts across the country. But this is being maintained under significant strain. With the diesel shortage and unresolved coal issues, sustaining uninterrupted supply, beyond the New Year period, will be extremely challenging.”
The engineer noted that thermal power generation — particularly diesel-based plants — has become increasingly difficult to sustain due to limited fuel stocks and logistical bottlenecks. At the same time, the substandard quality coal supply issues that have plagued recent shipments continue to undermine the efficiency of base-load generation.
“We are stretching available resources to avoid immediate outages. owever, unless there is a rapid improvement in fuel availability, the system will be forced into load shedding soon after the New Year,” he warned.
According to him, authorities are likely to delay any scheduled outages until after the festive season to avoid public backlash and economic disruption during a traditionally sensitive period.
“Most probably, they will try to continue like this until the New Year. But after that, daytime or peak-time load shedding becomes almost inevitable if the situation remains unchanged,” he added.
Energy analysts say the warning reflects a deeper structural vulnerability within the power sector, where over-reliance on imported fossil fuels — particularly diesel and coal — continues to expose the system to external shocks and procurement failures.
The recent use of substandard coal has already resulted in reduced generation capacity at the country’s sole coal power plant at Norochcholai, compounding the pressure on thermal plants to bridge the shortfall. Engineers say this has forced operators to depend more heavily on costly diesel generation — an option now constrained by supply shortages.
Industry sources indicate that demand is also on the rise, particularly during night peak hours, possibly driven by increased reliance on electricity for cooking, amid gas shortages, further tightening the supply-demand balance.
Despite the absence of official announcements, insiders suggest contingency planning for load shedding is already underway.
“If the fuel situation does not improve within the next few weeks, controlled power cuts will be the only viable option to protect the grid from a total system failure,” the engineer stressed.
The warning comes at a time when the country is attempting to maintain economic stability following successive crises, with uninterrupted power supply considered critical for industry, commerce, and daily life.
However, unless urgent corrective measures are taken to secure reliable fuel supplies and stabilise generation capacity, the return of power cuts — including during daytime hours — appears increasingly unavoidable, an expert said.
By Ifham Nizam
News
Japanese boost to Sri J’pura Hospital, an outright gift from Tokyo during JRJ rule
Japanese Ambassador to Colombo, Akio Isomata, on 24 March, handed over the newly established dental unit and 4D Angio CT suite at Sri Jayewardenepura General Hospital. Health Minister Dr. Nalinda Jayatissa and other senior officials from the Ministry of Health and the hospital attended the event.
Highlighting the strong partnership between Japan and Sri Lanka in the health sector, the Embassy issued the following press release yesterday: “This handover marks the second phase of the project, following the initial provision of ophthalmic equipment in December 2023. The current phase represents a significant milestone, featuring the introduction of a state-of-the-art CT Angiography system – the first of its kind in South Asia – as well as dental units. These contributions are expected to enhance Sri Lanka’s capacity to address non-communicable diseases (NCDs), including cancer, stroke, and diabetes, thereby saving lives, reducing long-term complications, and improving the quality of life of patients.
The CT Angiography system integrates CT scanning and angiography functions, enabling highly accurate and timely diagnosis and treatment. It is expected to further strengthen the hospital’s role as a key medical hub in Sri Lanka and the wider region.
In addition, the provision of 10 dental units will support the establishment and enhancement of dental services at the hospital. In Japan, oral health is considered closely linked to overall health and plays an important role in extending healthy life expectancy. This support is, therefore, also expected to contribute to the promotion of preventive healthcare in Sri Lanka.
The Sri Jayewardenepura General Hospital was constructed in 1984 with grant assistance from the Government of Japan. The well-known “1001-bed” story—originating from former President J.R. Jayewardene’s remark to add one more bed to the originally planned 1,000—remains a memorable episode reflecting the history of this cooperation.
Japan has consistently supported Sri Lanka’s health sector over the decades, including the development of medical facilities, strengthening of blood supply systems, and support during the COVID-19 pandemic through vaccine delivery assistance. Furthermore, during Sri Lanka’s recent economic crisis, Japan provided fuel essential for maintaining healthcare services, and in times of natural disasters, dispatched emergency medical teams to deliver urgent care. These efforts demonstrate Japan’s continued commitment to standing by Sri Lanka, especially in times of need. These efforts reflect Japan’s commitment to “investment in people” and “human security,” supporting a healthcare system in which all individuals can live healthy and dignified lives.

Japanese Ambassador Isomata with Minister Dr Jayatissa and officials (pic courtesy Japanese Embassy)
Ambassador Isomata remarked, “This support is not merely for the provision of equipment, but also for the consolidation of the foundation for safeguarding lives and livelihoods. Sri Jayewardenepura General Hospital, built with the support of Japan, stands as a symbol of the longstanding friendship between our two countries. We sincerely hope that this project will contribute to building a sustainable healthcare system that benefits future generations in the field of medicine and further strengthen our partnership.”
Minister Jayatissa highlighted,” This is not just a donation of machines. It is an investment in the lives and futures of our patients. By establishing this modern dental unit, we are addressing a critical need in the prevention and treatment of oral diseases for our population. I wish to express our deepest gratitude to the Government and people of Japan for this generous assistance. These are acts of true friendship, and the people of Sri Lanka will always remember them with gratitude.”
Japan will continue to work closely with Sri Lanka to further strengthen the healthcare sector and deepen the longstanding friendship between the two countries.”
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