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Lanka should set up a currency board to stop rupee depreciation: US economist

Published

4 years ago

2022/03/27

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.

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Thambuttegama Water Supply Project Commissioned by the President

Published

3 hours ago

2026/07/12

Priyan

The Thambuttegama Water Supply Project, which will benefit 91,810 people in the Thambuttegama, Thalawa and Galnewa Divisional Secretariat divisions, was officially commissioned by President Anura Kumara Dissanayake on Friday (10) afternoon .

The project, which was launched under a concessional loan from the China Development Bank (CDB), was suspended between May 2022 and May 2024 due to the country’s debt restructuring process. However, recognising its national importance, the current Government allocated additional funding from the Government of Sri Lanka to successfully complete the project.

Constructed as a long-term solution to the chronic kidney disease that has spread rapidly across the region, the water supply project is also expected to improve the social and economic well-being of local communities.

The project aims to provide 25,000 new household with water connections.

Built at a cost of Rs. 32 billion, the project comprises a water treatment plant with a daily capacity of 18,000 cubic metres, three water towers with a capacity of 1,500 cubic metres each, a 12.75-kilometre water transmission pipeline and a 158-kilometre water distribution network.

Speaking at the event, Minister of Housing, Construction and Water Supply Susil Ranasinghe said:

“The Thambuttegama Water Supply Project, which was declared open today by the President, has the capacity to provide safe drinking water to 25,000 families. The project has been completed at a cost of Rs. 32 billion. It was implemented with the assistance of the China Development Bank, but construction came to a standstill due to the economic crisis experienced in recent years. Over the past two years, we allocated funds through the national budget and have now successfully completed the project.

At the initial stage of the project, concerns were raised over drawing water from the Rajanganaya Reservoir. Farmers protested against the proposal. However, today this project is being commissioned with the blessing and support of the Rajanganaya farmer leaders, who are present here. They presented their concerns to us and we are committed to addressing them.

Their foremost concern was to ensure that no farmer in Rajanganaya would face a shortage of irrigation water as a result of water being diverted for this project. I can assure you without hesitation that there is absolutely no reason for concern. Not even a single drop of water required for agriculture will be denied in order to supply drinking water. This project is, after all, intended to provide clean drinking water to farming families themselves.

They also requested that compensation be paid if cultivation is affected due to any water-related issue. I assure you that there is no cause for concern on that front either. This Government has consistently compensated farmers affected by disasters. We paid Rs. 1.2 billion in compensation for losses suffered by farmers over the past seven cultivation seasons due to the Nilwala saltwater barrier. We also resolved long-standing issues relating to land acquisition under the Yan Oya Project and allocated Rs. 180 million to the District Secretary to compensate the affected landowners. In addition, Rs. 12 billion has been paid in compensation to around 200,000 farmers whose farmlands were damaged by Cyclone Ditwah. Therefore, if farmers suffer any losses or damage to their lands in the future, this Government stands ready to provide compensation.

Another request made by the farming community was the construction of the Ginipetti Bridge if water is to be drawn for this project. We have already allocated Rs. 240 million to build a new bridge capable of accommodating vehicular traffic and foundation work will commence shortly. At the same time, a team of experts has been appointed to determine whether the existing Ginipetti Bridge can be rehabilitated or whether an entirely new bridge is required. Therefore, I assure the farming community once again that we will not allow them to suffer any hardship or loss as a result of this project.”

Minister of Trade, Commerce, Food Security and Cooperative Development Wasantha Samarasinghe, Governor of the North Central Province Wasantha Jinadasa, public representatives of the province, Chinese Ambassador Qi Zhenhong, officials of the Ministry of Housing, Construction and Water Supply and the National Water Supply and Drainage Board, together with a large number of local residents, were also present at the event.

[PMD]

News

New Chairman and members appointed to the Public Service Commission

Published

3 hours ago

2026/07/12

Priyan

President Anura Kumara Dissanayake has appointed S. A. Nimal Saranatissa as the new Chairman of the Public Service Commission.

The other members appointed to the Commission are B. Sanath Poojitha, E. R. Weerakoon, R. Ketheeswaran, J. M. R. Jayasundara, E. A. P. N. Edirisinghe, Dr S. A. A. N. Jayasekara and M. H. Mohammed Sameel.

The letters of appointment were presented to the newly appointed Chairman and members by Secretary to the President Dr Nandika Sanath Kumanayake at the Presidential Secretariat Thursday (09) afternoon .

The appointments have been made to fill the vacancies that arose following the expiry of the previous term of office of the Public Service Commission

[PMD]

News

Negombo Prison bloodbath: Autopsies reveal brutal assaults

Published

9 hours ago

2026/07/12

Thilina Walpola

Post-mortem examinations conducted on prison officers killed during the violent unrest at Negombo Prison have revealed that the victims were subjected to severe and brutal assaults, according to preliminary findings of the ongoing investigation.

A five-member team of Judicial Medical Officers carried out the examinations at the Negombo Hospital, uncovering evidence of extensive injuries caused by the violence.

Investigators have so far determined that the clash erupted after a group allegedly led by Suresh Pushpakumara, also known as “Katuwellegama Suresh”, who is suspected of links to narcotics trafficking and organised crime, attacked another group of inmates inside the prison.

Preliminary inquiries indicate that the victims of the assault were inmates suspected of providing information to prison authorities regarding illegal activities, including the smuggling of prohibited items into the facility.

One of the first victims of the violence was inmate Ganegoda Arachchilage Gayan Sampath, who died after being attacked during the initial stages of the confrontation.

The 31-year-old resident of Ashokapura, Naththandiya, had been remanded for about three and a half months over drug-related allegations. His elder brother is also currently in custody at Negombo Prison.

Relatives claimed that Gayan had provided information to prison officials about narcotics and other contraband allegedly being brought into the prison following his admission.

His mother alleged that her son had been subjected to a savage attack, claiming that he suffered severe head injuries and fractures to his limbs after being assaulted with iron rods by a group of inmates.

She said a senior police officer had informed her that her son had assisted prison authorities by providing information about illegal activities within the facility and that his actions may have made him a target.

According to her, authorities had identified around 15 suspects in connection with the attack and assured her that legal action would be taken.Meanwhile, prison authorities have decided not to house inmates at the Negombo Prison premises as the facility remains an active crime scene.