By Prof. Sirimevan Colombage
The notion that a sovereign government can print money to repay its debt without any financial limit has gained popularity in recent times, particularly in the US, based on a new approach to macroeconomics, known as Modern Monetary Theory (MMT). It was developed in a small corner of academia and it became famous when some US politicians endorsed it, reinforcing their own accommodative monetary policy viewpoints. MMT is now gaining attention in developing countries, too, as money printing is a convenient way to finance the budget deficits in the context of revenue shortfalls amidst the Covid-19 pandemic.
Central Bank’s tendency towards MMT
On similar lines mentioned above, Central Bank Governor Prof. W.D. Lakshman is reported to have stated at a recent economic forum that domestic currency debt in a country with sovereign powers of money printing is not a huge problem, as the modern monetary theorists would argue. Since rupee-denominated bonds are within the ‘sovereign powers’, money could be printed to repay them as indicated by MMT, he argues.
While recognizing the difficulties in repaying the government debt in the face of the pandemic-related economic setback and the country’s already heightened debt burden, it would be rather unwise to simply use money printing to finance fiscal deficits in Sri Lanka following the MMT, which is used as a means to boost aggregate demand in advanced countries.
The primary long-run growth challenge faced by developing countries such as Sri Lanka is structural transformation – transition to knowledge-based economy – rather than aggregate demand deficiency. Hence, money printing itself does not promote economic growth, as I explained in my earlier columns in The Island.
In the background of the downward growth path which plunged to negative 5.3% in the first nine months of this year due to the pandemic in addition to the country’s inherent growth constraints, Sri Lanka needs persuasive structural adjustments, rather than liquidity injections, to revive its economy.
Further, it is common knowledge that excessive money growth accelerates inflation. High inflation not only aggravates the twin deficits – fiscal deficit and balance of payments deficit – but also adversely affects the living conditions of the people, particularly those who are in the bottom of the income pyramid.
Developing countries lack international monetary sovereignty
Three MMT proponents, William Mitchell and Martin Watts (both of University of Newcastle, Australia) and L. Randall Wray (Bard College, a private liberal arts college in the US) explain MMT in their textbook titled Macroeconomics published in 2019. According to them, the most important conclusion reached by MMT is that the issuer of a currency faces no financial constraints. Put simply, a country that issues its own currency can never run out of money and can never become insolvent in its own currency. It can make all payments as they come due. As a result, for most governments, there is no default risk on government debt, according to MMT advocates.
MMT works well in advanced countries such as the US or Japan which run debt levels far exceeding their GDP. Such countries can afford to print money continuously, as the hierarchical nature of the international monetary system enables their currencies to perform the fundamental functions of money (i.e. means of payment, unit of account and store of value) on an international scale. Hence, such currencies are known as reserve money, which means that they are acceptable for international transactions. On the contrary, developing countries such as Sri Lanka are placed at the bottom of the hierarchical structure, as their currencies are unable to perform the functions at international level. In other words, developing countries lack international monetary sovereignty.
Ramifications of money printing
In the case of Sri Lanka, the Central Bank can accommodate fiscal deficits by purchasing Treasury Bills directly from the primary market. In turn, the Central Bank prints money equivalent to the value of Treasury Bills purchased resulting in a rise in the country’s total money stock. These Treasury Bill purchases end up as Central Bank’s net credit to the government (NCG) on the asset side of its balance sheet. This leads to a rise in the monetary base or high-powered money which has multiplier effects on the aggregate money supply and overall liquidity of the economy. The Central Bank can also accommodate fiscal needs by purchasing Treasury Bonds and providing temporary advances to the government. These too raises the money stock. The Central Bank’s increasing lending to the government in this manner has had a steep positive impact on the monetary base since the second quarter of this year (Figure 1).
Thus, money printing is a straightforward way to provide lending to the government by the Central Bank. This does not mean that the Central Bank can continue printing money to finance the budget deficits indefinitely, as suggested by the proponents of MMT. The reason is that an ever-expanding monetary base will have adverse implications for the economy eventually speeding up inflation and causing severe macroeconomic imbalances.
Crowding out effects of domestic borrowings
It is reported that the government intends to restructure public debt so as to change the domestic to foreign debt component from 55:45 in 2020 to 60:40 in 2021. However, continuous increase in borrowings from the domestic market tends to raise interest rates causing difficulties in selling Treasury Bills at lower rates. This is reflected in the recent Treasury Bill auctions which were undersubscribed. At the December 16 auction, only Rs. 26.8 billion of Treasury Bills were sold out of the total offered amount of Rs. 40 billion, thus resulting in 33% undersubscription. This indicates that the ceiling yield rates pre-determined by the Central Bank at respective auctions are too low to attract the market to fully subscribe Treasury Bills.
The unsold Treasury Bills are usually purchased by the Central Bank printing new money, thus raising the money stock, as explained earlier. As a result, the money supply grew at a faster rate since early this year reaching the peak year-on-year growth rate of 21% by last October (Figure 2).
Excessive reliance on the domestic market to finance fiscal deficits exerts considerable pressures on scarce domestic savings, thus preempting resources from the private sector. While the ‘forced’ administrative ceilings on interest rates help to finance the fiscal deficits at low cost, they tend to create an environment of ‘financial repression’ characterized by low savings, further widening the investment-savings gap which is detrimental to economic growth.
Macroeconomic instability threats of MMT-style monetary policy
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. MMT completely ignores the critical importance of ensuring macroeconomic balances which is the very foundation of mainstream macroeconomics developed by leading economists over decades. MMT rests on the assumption that a government can simply finance its budget gap by printing money using the sovereign power, unlike an individual borrower who does not have such divine power.
Given the risks of exchange rate depreciation, weakening export competitiveness and capital outflows, MMT policies are bound to put developing countries like Sri Lanka in extremely vulnerable positions. High inflation emanating from the rising money supply weakens export competitiveness and encourages imports further widening the balance of payments deficit, unless the exchange rate depreciates adequately to compensate for inflation.
Prudent fiscal-monetary mix with structural adjustments essential
Hence, prudent monetary management linked with disciplined fiscal policy needs to be planned for the medium and long-run, phasing out the current expansionary monetary policy stance. Structural adjustments are essential in this process though they are neglected in current policy formulations.
(Prof. Sirimevan Colombage is Emeritus Professor in Economics at the Open University of Sri Lanka)
To recognise and reward Women Entrepreneur
by Zanita Careem
WCIC “Prathibhabis-heka” national awards will be given to outstanding women entrepreneurs of Sri Lanka and the SAARC said Anoji de Silva, the chairperson of Women’s Chamber of Industry and Commerce WCIC at a press conference held at the Jetwing hotel Ward PlaceThis year the Women Entrepreneur Awards 2022 is powered by DFCS Aloka.This National Award which is recognised globally will help women to market their products to international buyers
“As a country we have faced many difficulties over the last few years. Now this is the time to reflect and ensure that local women can contribute and progress to be on par with international entrepreneurs She also noted that this award ceremony is a great opportunity for all since it’s an absolutely empowering platform. “You hear success stories of women from different walks of life and it’s very empowering and inspiring. I’m sure that the younger generation of women who will watch the ceremony wii be inspired to be sucessful entrepreneurs in the future S
“Our women entrepreneurs have the potential to help our economy to grow. They have made vast strides to build companies on a set of values and they have created diverse working environments.
The WCIC Prathibhabisheka Women Entrepreneur Awards will be held in January 22. To the question how financial records of small businesses headed by women could deter their ability to apply the chairperson said.
“We have a startup category which is under five years where they can submit documents for consideration. She responded “These women can apply but must submit proper records to back their applications or else they will be rejected wholeheartedly.The Women Entrepreneur Awards 2022
“Prathibha” depicts excellence in Sanskrit and WCIC will showcase the excellence of outstanding women entrepreneurs through WCIC Prathibhabisheka –
“The relaunched property is structured to assess the businesses in a holistic manner. We invite outstanding women entrepreneurs, especially the ones who have braved the challenges in the past years to share their story of resilience and achievements to compete for the coveted – WCIC Prathibhabisheka The Awards will honour women entrepreneurs for their tenacity to scale and grow, and for their contribution and impact on the economy. Whilst the competition is primarily for Sri Lankan Entrepreneurs, we have also included an opportunity for women in the SAARC region to compete in a special category” stated Anoji De Silva, the Chairperson of the WCIC.
The members of WCIC Ramani Ponnambalam and Tusitha Kumarakul-asingam, said”. We will be accepting applications under the categories – Start-up, Micro, Small, Medium and Large. Each category will have a specified revenue for the year under review – 2021/22. Gold, Silver and Bronze Awards will be presented for each category. With the view to identify and promote regional women entrepreneurs, we will encourage applications from all the provinces in the country and select the “Best of the Region” from each province.
The women will also be considered for the coveted special awards – Young Woman Entrepreneur, Outstanding Start- up, Most Positively Abled Woman Entrepreneur, The Most Outstanding Export Oriented Entrepreneur, The Best of the SAARC Region. The ceremony will culminate with the selection of the “Women Entrepreneur of the year -2022”.
“The entry kit can be downloaded from www.wcicsl.lk and completed and submitted to the WCIC along with all the material required to substantiate the applicant’s story. Entries close on the 31st of October.” stated Tusitha Kumarak-ulasingam.
WCIC Prathibabisheka – Woman Entrepreneur Awards 2022 is powered by– DFCC Aloka, as the Platinum Sponsor, with Gold Sponsors – Mclarens Group, LOLL Holdings Plc, Hayleys Leisure Pic, and AIA Insurance Lanka Ltd (Exclusive Insurance Partner), Silver – Finez Capital Ventures Print and Social Media Partners will be the Wijeya Group and Electronic Media Partner–ABC Network with Triad as our Creative Partner and Ernst & Young as Knowledge Partner.
Women’s Chamber of Industry and Commerce (WCIC) is the premier organization supporting entrepreneurs and professional business-women. The membership is open to women who believe they can contribute to society as well as benefit from the many facilities the organization creates. WCIC Prathibhasheka is relaunched this year as a flagship property, to recognize and reward outstanding women enterpreneurs who make a contribution to the SL economy.
For further information Contact- Janitha Stephens – 0766848080
Marmalade sandwich in Queen’s handbag!
In this period of national mourning, it may seem frivolous to comment on the late Queen’s handbag. After seven decades of selfless service to the nation, fashion is but a footnote to Her Majesty’s glorious reign.And yet her style is something that helped to create the powerful majestic image of Queen Elizabeth II, and which made her instantly recognisable worldwide. A key part of that image, and a constant presence in her working life, was her black Launer handbag.
Launer London was Her Majesty’s handbag maker for more than 50 years and has held the Royal Warrant since 1968. Launer bags are formal and structured, and proved to be the ideal regal accessory for public engagements. Its first royal patronage came from HM Queen Elizabeth the Queen Mother in the 1950s. Where others might have bought the latest ‘It’ bag, Queen Elizabeth exercised characteristic restraint with her handbags throughout her life, focusing on quality over quantity in her loyalty to Launer.
Her Majesty was known for her love of colour in her working wardrobe, wearing rainbow brights in order to be better seen by the public, but her accessories were always muted. Black mostly, sometimes beige or white in summer, gold or silver in the evening: neutrals that matched with every colour, allowing her to dress with ease. The timeless style of her trusty Traviata top-handle bag suited the Queen’s no-nonsense nature and symbolised her steadfast reign. The late Baroness Thatcher shared the Queen’s love of a strong top handle from classic British labels such as Launer and Asprey. These bags helped promote a look of someone in control. Like Queen Elizabeth, Thatcher’s handbags were such a part of her identity that they have earned their own special place in history and have been described as the former PM’s ‘secret weapon’. One such bag has been exhibited at the V&A alongside Sir Winston Churchill’s red despatch box. Both are artefacts of cultural and historic importance.
It has been said that there was another purpose to the Queen’s handbag on public engagements, namely that she used it as a secret signalling device. According to royal historian Hugo Vickers, Her Majesty would switch the bag from her left arm to her right to signal for an aide to come to her rescue if she tired of the conversation in which she was engaged. If she placed the bag on the table, this was a sign that she wanted to leave. Ever-practical, HM needed a bag that focused on functionality over fashion, choosing styles with slightly longer top handles that comfortably looped over the monarch’s arm, freeing her hands to accept bouquets and greet the public. Even in her final photograph, meeting her 15th prime minister in her sitting room at Balmoral Castle, just two days before her death last week, the Queen’s handbag can be seen on her left arm. Perhaps at this stage it was part armour, part comfort blanket.Even at the age of 96, Queen Elizabeth II did not lose her ability to surprise. She delighted the public by taking tea with Paddington Bear at her Platinum Jubilee celebrations and finally revealed what she keeps in her handbag: a marmalade sandwich, ‘for later’.
Cinnamon Grand, Colombo welcomes You to the SEQUEL
The next best thing in Colombo!
What would you get if you took the decadence of yesterday and paired it with the flavours of right now? Something bold and jazzy or rich and snazzy. Something we’d like to call the next best thing. All this and more at Cinnamon City Hotels to the SEQUEL at Cinnamon Grand, Colombo said a press release.
The release said the SEQUEL is where the old meets new, where charm meets sophistication and having a good time gets a new meaning. Colombo’s latest speakeasy cocktail bar is ready to welcome the discerning guest that is looking for that perfectly curated night.
“The SEQUEL will be a novel addition to Colombo’s nightlife catered to enthralling guests with our performances and showmanship,” said Kamal Munasinghe, Area Vice-President, Cinnamon City Hotels.
What do we mean when we say performance? It means that every little detail is tailored to those who appreciate elegance, and a bespoke experience like no other. Think walking into a vintage space accompanied by the sounds of Sinatra and Fitzgerald inviting you to do it your way or for once in your life. Think of the soul-searching and eclectic mix of Winehouse classics that you can drown your sorrows in.
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