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

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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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Sangha reform drives stymied from within: CBK

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Chandrika

Former President Chandrika Bandaranaike Kumaratunga has called for a comprehensive reform programme within Sri Lanka’s Buddhist clergy, warning that repeated efforts to strengthen the Sasana have in the past been derailed by opposition from within sections of the Sangha itself.

In a statement addressed to the Mahanayake Theras of the three Buddhist chapters, Kumaratunga stressed that the long-term preservation of Buddhism depends on safeguarding both the Dhamma and Vinaya, or disciplinary code, and urged urgent internal reform to address what she described as deep-rooted structural weaknesses.

She noted that Buddhist history has consistently demonstrated that periods of institutional crisis were addressed through reform processes, citing precedents from the First Buddhist Council to reforms during the Kandyan era under Welivita Sri Saranankara Thera.

Referring to post-independence efforts, Kumaratunga said initiatives taken during the 1956 Bandaranaike administration to strengthen Buddhism were left incomplete following the assassination of former Prime Minister S.W.R.D. Bandaranaike.

She further stated that during her own presidency, plans to convene a Buddhist Council under the guidance of the late Madihe Pannasiha Mahanayake Thera had received government backing but were ultimately abandoned due to resistance from certain sections within the clergy.

The former President alleged that, on both occasions, vested interests benefiting from existing weaknesses within the Buddhist establishment had worked to obstruct meaningful reform efforts.

Warning that Buddhism in Sri Lanka is currently facing serious challenges, she called for a broad internal dialogue within the Sangha to identify root causes and implement both short- and long-term corrective measures.

Kumaratunga urged the Mahanayake Theras to take the lead in convening a Dharma Sanghayana, or Buddhist Council, and said she was prepared to work with senior lay Buddhist leaders to support such an initiative.

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Court orders arrest of Basil

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The Colombo Fort Magistrate’s Court on Friday ordered the arrest of former Minister Basil Rajapaksa, Tourism Promotion Bureau Chairman Bhashwara Gunaratne, Managing Director Rumi Jauffer and several others over the alleged misuse of Rs. 7.8 million belonging to the Tourism Promotion Authority during the 2014 Uva Provincial Council election campaign.

Magistrate Pasan Amarasena directed the Criminal Investigation Department (CID) to arrest and produce the suspects before court, after it was informed that they would be named under the Public Property Act on the advice of the Attorney General.

The CID told court that attempts to take the suspects into custody from their residences had been unsuccessful as they were not present.

The Magistrate also imposed an overseas travel ban on the suspects and ordered that the Controller of Immigration and Emigration be notified.

Investigations have reportedly revealed that the funds were used to print 12,000 T-shirts bearing an image of former President Mahinda Rajapaksa on one side and the name of a political party on the other.

According to the CID, the T-shirts were later distributed at a political event held in the Monaragala District.

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Dayasiri raises alarm over ‘coal cartel’, flags national security risks

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Dayasiri

Kurunegala District SJB MP Dayasiri Jayasekera last week lodged a detailed submission before the Special Presidential Commission probing coal imports, alleging that Sri Lanka’s power sector is being exposed to serious national security risks due to irregularities, collusion and sanctions-related vulnerabilities in the coal procurement process for the Norochcholai Lakvijaya Power Plant.

In a dossier submitted last week, the MP called for a comprehensive investigation into the ongoing 2026/2027 tender for 2.28 million metric tonnes of coal, warning that the awarding of contracts to certain bidders could jeopardise the stability of the country’s electricity supply and trigger risks reminiscent of the 2022 power crisis.

The Lakvijaya Power Plant, Sri Lanka’s largest coal-fired power station, contributes nearly 40 percent of the national electricity generation.

Jayasekera alleged that the procurement process has been compromised by what he described as a “network of disreputable international commodity traders” and urged the Commission to examine patterns of alleged corruption, collusion and sanctions circumvention linked to coal supply chains.

Among the companies flagged in his submission was Potencia LLC-FZ, which he claimed is involved in ongoing legal proceedings against the Lanka Coal Company (LCC) while simultaneously participating in the current tender process. The MP questioned the propriety of such participation and further warned that the company’s alleged links to Russian supply networks could expose Sri Lanka to secondary sanctions risks, potentially affecting letters of credit, shipping arrangements and marine insurance coverage.

Jayasekera also called for the immediate exclusion of Taranjot Resources from the tender, citing its reported suspension by India’s state-owned NTPC Limited since March 2024. He further alleged that the company has a track record of supplying coal with sub-standard calorific value in previous shipments, which he said had contributed to operational disruptions in power generation.

Raising further concerns over possible bid rigging, the MP pointed to what he described as corporate interlinkages between Mohit Minerals and Taranjot Resources through a common associated entity, Trona Minerals. According to his submission, shared directorships and corporate overlaps suggested coordinated participation in the tender process, which he claimed could amount to a breach of national procurement guidelines.

The dossier also referred to several other international suppliers, raising concerns over their past records. These included allegations relating to shipping practices, arbitration disputes, quality certification issues and exposure to sanctioned supply chains. The MP cited instances involving alleged “dark shipping” practices, quality disputes in past deliveries, and contractual disputes that had led to arbitration proceedings in international forums.

Jayasekera also urged the Commission to revisit the Trident Chemphar coal procurement controversy of 2025/2026, alleging that a contract had been signed prior to obtaining Attorney General clearance. He claimed the episode had resulted in significant shortfalls in power generation, estimating a loss of around 250 gigawatt-hours.

Describing the matter as one of “national security rather than a commercial dispute”, the MP warned that any compromise in coal procurement could destabilise the country’s power supply, particularly at a time when Sri Lanka remains under an IMF-supported economic reform programme.

He urged the Commission to take a firm stance on procurement integrity and ensure that only credible and compliant suppliers are considered in future tenders.

The Commission is expected to examine the submissions as part of its wider inquiry into coal procurement practices dating back to 2009.

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