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MMT, deficit financing and printing money



By sumanasiri liyanage


“We need a mechanism where money flows out to the economy directly and permanently.” -Kikuo Iwata

Two prominent economists in Sri Lanka, Dr W A Wijewardene, a former Deputy Governor of the Central Bank of Sri Lanka and Prof Sirimevan Colombage, Professor of Economics, Open University of Sri Lanka, published two articles in The Island and Daily FT last week criticizing the extant monetary policy paradigm of the Central Bank of Sri Lanka (CBSL) alleging that the CBSL while distancing itself from inflation-oriented policies has begun to follow closely the policy framework that derived from the main tenets of Modern Monetary Theory (MMT). MMT as new discourse on the monetary-fiscal policy mix gained credence among left leaning Democrats especially during the presidential campaign in the US. Why is the issue of MMT raised in the Sri Lankan discourse? According to Prof. Colombage, Central Bank Governor Prof. W.D. Lakshman’s recent statement at an economic forum that domestic currency debt in a country with sovereign powers of money printing is not a huge problem is in close affinity with MMT argument.

The two economists agree that the continuation of present policy paradigm of the CBSL will necessarily lead to disaster. Dr. Wijewardene in the form of a conversation between two popular tele- drama characters, Ashini and Sarath Mahattaya, gave a clear and lucid narrative on the MMT, tracing its historical roots. This is very useful to economic students. At the end of the conversation with his granddaughter, Sarath Mahattaya, Dr Wijewardene’s narrator had concluded: “So, the present Government’s reliance on MMT is like getting a demon to work for it. If it does not play the game within limits, the demon will turn back and swallow it. This should be properly understood by the present Government’s top policymakers who advocate printing of money to pay for Government spending”. Of course, Dr Wijewardene has admitted that the government may borrow moderately. “What I mean by moderately is that money printing should not cause unwarranted unaffordable inflation”.

Prof Colombage seems to be more reserved giving the impression that MMT may be okay for advanced countries like the USA and Japan with reserved currency, but not for a small country like Sri Lanka. I am sure he may be thinking of the proposal by the former deputy governor at the Bank of Japan Kikuo Iwata. Moreover, he seems to think that MMT like policies are unavoidable at present conjuncture. He writes: “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.” 

This article intends neither to defend the extant monetary policy of the CBSL nor to posit that the main arguments of the MMT are correct. For myriad of reasons, it is hard to say that the CBSL policy per se is governed by MMT. Nonetheless, the interpretation of the MMT given by Dr. Wijewardene and Prof Colombage appears to have missed some of the complexities of the MMT argument as their contestation of the MMT seems to be based on the neo-classical and monetarist premise that money supply is exogeneous. On the contrary, post-Keynesians and MMT theorists posit that money supply is endogenous and linked with the effective demand. Hence, deficit financing does not necessarily lead to inflation.


Modern Monetary Theory

MMT proposes to bring the government to the fore. According to Randall Wray, the main weakness of macroeconomics texts and teaching today is that they start with unanswered question. Where does money come from? Modern macroeconomics skips this question leaving it to circular reasoning. As a result, in present day macroeconomics textbooks the government is brought in not in Chapter 1 as it should be, but in Chapter 8 or 10.

Secondly, the MMT may not be reduced to a notion that upholds deficit financing through printing money. It posits referring to historical evidence a nexus between printing money and redemption of tax. Hence, Dr. Wijewardene’s following statement is a result of simplistic reading of the MMT. Critiquing Stephanie Kelton, he writes: “One of the bold statements of Kelton is that taxes are charged for paying for government expenditure is mere fantasy. That is because there are many other ways of paying for such expenditure such as printing money. Governments can pay for expenditure by borrowing. When it comes to repaying, they can print money and repay the debt. So, there is no problem.”

Thirdly, MMT does not totally neglect as critics say the possibility of inflationary pressure as a result of deficit financing. It has its own explanation of the phenomena of inflationary pressure before achieving full employment and hyper-inflationary situations.

A simple MMT macro model is adequate enough to demonstrate the complexities of its basic postulates. Scott Fullwiler’s MMT macro model as summarized by Michael Roberts is presented below:

Basically, he starts off with a Keynes/Kalecki post-Keynesian macro model of aggregate demand.  This model is simply an identity.  There are two ways of looking at an economy, by total income or by total spending and they must equal each other.

Thus National Income (NI) = National Expenditure (NE).

Following the ‘Keynesian Marxist’ Michal Kalecki, we can break this down into:

(NI) Profits + Wages = (NE) Investment + Consumption. 

Now there are two sorts of income and two sorts of spending. Since rent and interest are paid from Profit, those payments may be excluded.

If we assume that all Wages are spent then and all Profits are saved, we can delete Wages and Consumption from the identity.  So

Profits = Investment

But Scott re-expands the parts on the right-hand side to look at flows, so that wages that are saved are added back with profits to get Private Saving (so assuming some household saving); and he also adds in Government saving (taxation less spending) and Foreign Saving (net imports or current account deficit).

Thus, Profits as a separate category disappears into Private Savings and we get:

Investment = Private Saving + (Taxation – Government Spending) + (Imports – Exports)

But then Scott also dispenses with the separate category Investment and converts it into Private Saving less Investment or the Private Sector Surplus.  So now we have Private Sector Savings (Wages saved plus Profits less Investment).  So Scott continues:

Private Sector Surplus = Government Deficit + Current Account Balance


Private Sector Surplus – Current Account Balance = Government Deficit

This is the key MMT identity.  It argues that if the Government deficit rises, then assuming the Current Account balance does not change, the Private Sector Surplus (Wages saved +Profits less Investment) rises.  The MMT conclusion (assertion) is that increasing the Government deficit will increase the Private Sector Surplus . And if we exclude Wages saved (the MMT identity does not) and the Current Account balance, then we have:

Net Profits (ie Profits after Investment) = Government deficit

And we can conclude that Government deficits determine Net Profits ie Profits less Investment.

Suppose that the Current Account Balance remains unchanged, an increase in Government Deficit leads to increase in PSS that equals Wages Saved + (Profit – Investment). Assuming that all wages are consumed we may write the fundamental equation of MMT as follows:

Net Profit = (Profit – Investment) = Government Deficit

The above equation shows that Government Deficit increases net Profit.

MMT posits that an increase in government deficit leads to expand the economy that in turn leads to increase the tax base.


Deficit Finance and Inflation

Can deficit finance lead to inflation? MMT has two answers to this question. Agreeing with the post-Keynesians, MMT posits that a continuous increase in money printing through deficit finance after achieving full employment would generate an inflationary pressure. If the resources are not fully employed, deficit financing would not necessarily lead to inflation. Besides, this full employment inflation, Randall shows that inflationary pressure may occur if increased government expenditure focuses on elite projects and highly skilled employment. Such an expenditure may create more what David Graeber called “bullshit jobs”.

MMT has multiple weaknesses. However, those weaknesses have nothing to with the critique of MMT by mainstream economists. If a country like Sri Lanka adopts deficit financing and printing money in a crisis situation, it is imperative such policies should be accompanied by import restrictions, proper direction of government expenditure and increase of direct taxation. Nonetheless, the government decision to dispossess Eastern Container Terminal (ECT) shows that its directionality is fundamentally wrong.

In lieu of conclusion, it is imperative to note without giving room for a misunderstanding that MMT as well as all the varieties of Keynesianism suffer from basic flaw. They seem to inverse the nexus between human labour, value and money. Michael Roberts has highlighted this in the following words: “They ignore that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (ie for money over the costs of production), not need, then money represents the socially necessary labor time expended. We see only money, not value, but money is only the representation of value in its universal form, namely abstract labour as measured in socially necessary labour time. It is a fetish to think that money is something that is outside and separate from value.” Anyway, this would be a subject for another article.

(The writer is a retired university teacher in political economy.)

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Govt.’s choice is dialogue over confrontation



By Jehan Perera

Preparing for the forthcoming UN Human Rights Council cannot be easy for a government elected on a nationalist platform that was very critical of international intervention. When the government declared its intention to withdraw from Sri Lanka’s co-sponsorship of the October 2015 resolution No. 30/1 last February, it may have been hoping that this would be the end of the matter. However, this is not to be. The UN Human Rights High Commissioner’s report that will be taken up at the forthcoming UNHRC session in March contains a slate of proposals that are severely punitive in nature and will need to be mitigated. These include targeted economic sanctions, travel bans and even the involvement of the International Criminal Court.

Since UN Secretary General Ban Ki-Moon’s visit in May 2009 just a few days after the three-decade long war came to its bloody termination, Sri Lanka has been a regular part of the UNHRC’s formal discussion and sometimes even taking the centre stage. Three resolutions were passed on Sri Lanka under acrimonious circumstances, with Sri Lanka winning the very first one, but losing the next two. As the country became internationally known for its opposition to revisiting the past, sanctions and hostile propaganda against it began to mount. It was only after the then Sri Lankan government in 2015 agreed to co-sponsor a fresh resolution did the clouds begin to dispel.

Clearly in preparation for the forthcoming UNHRC session in Geneva in March, the government has finally delivered on a promise it made a year ago at the same venue. In February 2020 Foreign Minister Dinesh Gunawardena sought to prepare the ground for Sri Lanka’s withdrawal from co-sponsorship of UN Human Rights Council resolution No 30/1 of 2015. His speech in Geneva highlighted two important issues. The first, and most important to Sri Lanka’s future, was that the government did not wish to break its relationships with the UN system and its mechanisms. He said, “Sri Lanka will continue to remain engaged with, and seek as required, the assistance of the UN and its agencies including the regular human rights mandates/bodies and mechanisms in capacity building and technical assistance, in keeping with domestic priorities and policies.”

Second, the Foreign Minister concluding his speech at the UNHRC session in Geneva saying “No one has the well-being of the multi-ethnic, multi-lingual, multi-religious and multi-cultural people of Sri Lanka closer to their heart, than the Government of Sri Lanka. It is this motivation that guides our commitment and resolve to move towards comprehensive reconciliation and an era of stable peace and prosperity for our people.” On that occasion the government pledged to set up a commission of inquiry to inquire into the findings of previous commissions of inquiry. The government’s action of appointing a sitting Supreme Court judge as the chairperson of a three-member presidential commission of inquiry into the findings and recommendations of earlier commissions and official bodies can be seen as the start point of its response to the UNHRC.





The government’s setting up of a Commission of Inquiry has yet to find a positive response from the international and national human rights community and may not find it at all. The national legal commentator Kishali Pinto Jayawardene has written that “the tasks encompassed within its mandate have already been performed by the Lessons Learnt and Reconciliation Commission (LLRC, 2011) under the term of this President’s brother, himself the country’s Executive President at the time, Mahinda Rajapaksa.” Amnesty International has stated that “Sri Lanka has a litany of such failed COIs that Amnesty International has extensively documented.” It goes on to quote from the UN High Commissioner for Human Rights that “Domestic processes have consistently failed to deliver accountability in the past and I am not convinced the appointment of yet another Commission of Inquiry will advance this agenda. As a result, victims remain denied justice and Sri Lankans from all communities have no guarantee that past patterns of human rights violations will not recur.”

It appears that the government intends its appointment of the COI to meet the demand for accountability in regard to past human rights violations. Its mandate includes to “Find out whether preceding Commissions of Inquiry and Committees which have been appointed to investigate into human rights violations, have revealed any human rights violations, serious violations of the international humanitarian law and other such serious offences.” In the past the government has not been prepared to accept that such violations took place in a way that is deserving of so much of international scrutiny. Time and again the point has been made in Sri Lanka that there are no clean wars fought anywhere in the world.

International organisations that stands for the principles of international human rights will necessarily be acting according to their mandates. These include seeking the intervention of international judicial mechanisms or seeking to promote hybrid international and national joint mechanisms within countries in which the legal structures have not been successful in ensuring justice. The latter was on the cards in regard to Resolution 30/1 from which the government withdrew its co-sponsorship. The previous government leaders who agreed to this resolution had to publicly deny any such intention in view of overwhelming political and public opposition to such a hybrid mechanism. The present government has made it clear that it will not accept international or hybrid mechanisms.





In the preamble to the establishment of the COI the government has made some very constructive statements that open up the space for dialogue on issues of accountability, human rights and reconciliation. It states that “the policy of the Government of Sri Lanka is to continue to work with the United Nations and its Agencies to achieve accountability and human resource development for achieving sustainable peace and reconciliation, even though Sri Lanka withdrew from the co-sponsorship of the aforesaid resolutions” and further goes on to say that “the Government of Sri Lanka is committed to ensure that, other issues remain to be resolved through democratic and legal processes and to make institutional reforms where necessary to ensure justice and reconciliation.”

As the representative of a sovereign state, the government cannot be compelled to either accept international mechanisms or to prosecute those it does not wish to prosecute. At the same time its willingness to discuss the issues of accountability, justice and reconciliation as outlined in the preamble can be considered positively. The concept of transitional justice on which Resolution No 30/1 was built consists of the four pillars of truth, accountability, reparations and institutional reform. There is international debate on whether these four pillars should be implemented simultaneously or whether it is acceptable that they be implemented sequentially depending on the country context.

The government has already commenced the reparations process by establishing the Office for Reparations and to allocate a monthly sum of Rs 6000 to all those who have obtained Certificates of Absence (of their relatives) from the Office of Missing Persons. This process of compensation can be speeded up, widened and improved. It is also reported that the government is willing to consider the plight of suspected members of the LTTE who have been in detention without trial, and in some cases without even being indicted, for more than 10 years. The sooner action is taken the better. The government can also seek the assistance of the international community, and India in particular, to develop the war affected parts of the country on the lines of the Marshall Plan that the United States utilized to rebuild war destroyed parts of Europe. Member countries of the UNHRC need to be convinced that the government’s actions will take forward the national reconciliation process to vote to close the chapter on UNHRC resolution 30/1 in March 2021.

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Album to celebrate 30 years



Rajiv Sebastian had mega plans to celebrate 30 years, in showbiz, and the plans included concerts, both local and foreign. But, with the pandemic, the singer had to put everything on hold.

However, in order to remember this great occasion, the singer has done an album, made up of 12 songs, featuring several well known artistes, including Sunil of the Gypsies.

All the songs have been composed, very specially for this album.

Among the highlights will be a duet, featuring Rajiv and the Derena DreamStar winner, Andrea Fallen.

Andrea, I’m told, will also be featured, doing a solo spot, on the album.

Rajiv and his band The Clan handle the Friday night scene at The Cinnamon Grand Breeze Bar, from 07.30 pm, onwards.

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LET’S DO IT … in the new normal



The local showbiz scene is certainly brightening up – of course, in the ‘new normal’ format (and we hope so!)

Going back to the old format would be disastrous, especially as the country is experiencing a surge in Covid-19 cases, and the Western Province is said to be high on the list of new cases.

But…life has to go on, and with the necessary precautions taken, we can certainly enjoy what the ‘new normal’ has to offer us…by way of entertainment.

Bassist Benjy, who leads the band Aquarius, is happy that is hard work is finally bringing the band the desired results – where work is concerned.

Although new to the entertainment scene, Aquarius had lots of good things coming their way, but the pandemic ruined it all – not only for Aquarius but also for everyone connected with showbiz.

However, there are positive signs, on the horizon, and Benjy indicated to us that he is enthusiastically looking forward to making it a happening scene – wherever they perform.

And, this Friday night (January 29th), Aquarius will be doing their thing at The Show By O, Mount Lavinia – a beach front venue.

Benjy says he is planning out something extra special for this particular night.

“This is our very first outing, as a band, at The Show By O, so we want to make it memorable for all those who turn up this Friday.”

The legendary bassist, who lights up the stage, whenever he booms into action, is looking forward to seeing music lovers, and all those who missed out on being entertained for quite a while, at the Mount Lavinia venue, this Friday.

“I assure you, it will be a night to be remembered.”

Benjy and Aquarius will also be doing their thing, every Saturday evening, at the Darley rd. Pub & Restaurant, Colombo 10.

In fact, they were featured at this particular venue, late last year, but the second wave of Covid-19 ended their gigs.

Also new to the scene – very new, I would say – is Ishini and her band, The Branch.

Of course, Ishini is a singer of repute, having performed with Mirage, but as Ishini and The Branch, they are brand new!

Nevertheless, they were featured at certain five-star venues, during the past few weeks…of their existence.



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