ECONOMYNEXT – Sri Lanka’s intermediary central bank, after triggering the worst currency crisis in its history and rolling out a wide range of controls to undermine the country’s economic freedoms, has threatened to take tough action against anyone who breaks its rules.
As the money-printing central bank triggered currency shortages, the country’s legislature granted it sweeping powers to control what had previously been entirely legitimate currency board activity and which l is always in countries with coherent single-peg monetary regimes.
The legislator, misled by mercantilist errors, also enacted an import control law instead of taming the central bank and its open market operations with strict rules or punitive measures against those who try to control interest rates and trigger monetary instability.
The central bank has admitted without apology that it took away economic freedoms from the people and imposed draconian controls after printing money to create an excess of rupees leading to currency shortages.
The central bank also imposed a buy-back obligation on the banks to forcibly sell dollars to the central bank which was under great pressure and engaged in an unsuccessful attempt to float the currency, which led to the worst monetary collapse in its history.
“To ensure adequate foreign exchange liquidity in the banking system, the CBSL had to impose redemption requirements on export earnings,” the Monetary Authority said.
“Furthermore, measures have been taken by the government and the CBSL to discourage the outflow of foreign currency, such as imposing restrictions on certain imports and payment terms and introducing margin requirements, while encouraging foreign inflows through the banking system, rather than those channeled through the gray. market.”
The central bank has threatened to take action against those who do not follow its orders.
“In this context, and in the best interest of the nation, CBSL wishes to reiterate to all actors in the economy, that in the future, every effort will be made to strictly monitor and ensure compliance with all regulations. on foreign exchange transactions, including requirements for repatriation of export proceeds, mandatory conversions and sales to CBSL, etc.,” the statement read.
“Any instances of non-compliance will be subject to severe action under the provisions of all applicable laws.”
Unlike countries like Singapore, Sri Lanka set up a Latin American-style central bank in 1950, abolishing the currency board that had kept the country stable and money printing sparked happy “economists” in check.
Prime Minister DS Senanayake, opening the central bank, said many had warned against establishing a central bank, although most were outside Ceylon.
“We were fully aware that the central bank had been abused in many countries in the past,” the publication “Central Bank in Retrospect” reproduced a report on Prime Minister Senanayake’s speech at the inauguration of the soft-peg.
“We need only remember how the excessive use of central bank credit reduced the real value of currency and led to the dissipation of foreign exchange reserves in countries like China and Greece after the war. .”
How classical economic knowledge had been lost in Sri Lanka and the outright rejection of monetary phenomena clearly explained by David Ricardo, David Hume, Adam Smith or Henry Thornton happened in the following years with legislators giving more power to controlling the people instead of liquidity injections and sterilized central bank interventions is unclear.
Since the end of the currency board, the rupee has risen from 4.70 per US dollar to 360 so far.
However, the central bank now had to raise rates sharply to crush private credit and the economy with it to restore credibility to its contentious soft peg, now called the “flexible exchange rate”.
Inflation is now at 75%, interest rates around 30% and people are on the streets. The police are now rounding up the demonstrators.
The Fed had also printed money and now raised rates belatedly as food prices soared, leaving the poor hungry, and the International Monetary Fund had warned that unemployment would rise.
The full statement is reproduced below:
Importance of “fair play” by all players in the economy in the fight against the current unprecedented economic crisis
The government and the Central Bank of Sri Lanka (CBSL) have implemented several measures to ease the burden of the current economic difficulties on the people. One of the main factors contributing to the current crisis and the resulting difficulties is the lack of foreign exchange liquidity in the banking system.
This shortage of foreign exchange liquidity has affected the supply of essential imports, including fuel. In order to ensure adequate foreign exchange liquidity in the banking system, the CBSL had to impose redemption obligations on export earnings.
In addition, measures have been taken by the government and the CBSL to discourage outflows of foreign currency, such as imposing restrictions on certain imports and payment terms and introducing margin requirements, while encouraging inflows. through the banking system, rather than through the gray market. .
The success of these regulatory measures and the ability to achieve the intended results depends on the support and cooperation of the trading community and the banking system. However, it has come to the attention of the CBSL that some market participants do not fully comply with these regulations. Such a practice, if continued, would deprive the population of the support expected from the government in difficult times, while undermining the moral obligation of “equal burden sharing” that is expected of all stakeholders in difficult and extraordinary circumstances. .
In this context, and in the best interests of the nation, the CBSL wishes to reiterate to all players in the economy that, in the future, every effort will be made to strictly monitor and ensure compliance with all regulations on foreign exchange transactions, including export earnings repatriation requirements, mandatory conversions and sales to the CBSL, etc. Any instances of non-compliance will be subject to severe action under the provisions of all applicable laws.
It should be noted that the CBSL has enhanced its capacity in foreign exchange monitoring through the implementation of the Export Commodity Monitoring System (EPMS) and the International Transaction Reporting System (ITRS), which is a comprehensive cross-border transaction monitoring system. domestic transactions and transactions in foreign currencies.
These systems facilitate regular monitoring of currency inflows and outflows. In addition, the assistance of independent professional bodies, including audit firms, is also sought for the timely identification of any malpractice.
Therefore, licensed banks and the trading community are urged to comply with existing regulations and complement the efforts of the government and CBSL to provide much needed assistance to all stakeholders in the economy under these extremely difficult circumstances. The export trading community is urged to continue to repatriate all export proceeds within the stipulated timeframes and return residual earnings in accordance with regulations. The banking community is requested to ensure strict compliance with all foreign exchange regulations.
The government and CBSL are continuing their relentless efforts to secure bridge financing to reduce and ease short-term economic strains. Significant progress has been made in the ongoing negotiations on an economic adjustment program with the International Monetary Fund. The debt restructuring process is also underway, with the competent assistance of legal and financial advisers. The government and CBSL remain committed to implementing much-needed reforms to overcome long-standing structural problems in the economy.
The Central Bank wishes to reiterate that overcoming the current economic difficulties and difficulties requires substantial and concerted efforts by all players in the economy. Foul play by any stakeholder group would inevitably lead to a deepening of the crisis, with widespread detrimental effects. It is everyone’s duty to act conscientiously and responsibly, and to lend unhindered support during this hour of need, so that the nation recovers quickly and emerges stronger from this crisis.