‘Modern Monetary Theory’ (MMT) has become a popular topic on Sri Lanka’s business pages with many column inches devoted to this macro-economic theory. Prof. Sirimevan Colombage, Mr. Sumanasiri Liyanage, Dr. W.A. Wijewardena, Prof. Sirimal Abeyratne have all articulated balanced and sober viewpoints on the strengths, weaknesses and context, both political and historical, surrounding MMT, monetary policy and money printing.
Prof. Wijewardena emphasized the rate of increase in supply during the first 7 months of 2020; the Government had borrowed Rs. 1,400 Bn, and also points out the Rs. 500 Bn borrowed by state corporations which takes the total to 1,900 Bn. The critical point in his analysis is that “In contrast, the borrowings by the private sector, made up of companies and individuals, had been only Rs. 454 billion though they account for about 80% of the total output in the country”.
Prof. Colambage is more critical of the policy stating that “monetary expansion points to imminent dangers in adopting MMT-style monetary policy in a country like Sri Lanka” but accepting that this is “unavoidable amidst the unprecedented economic setback” caused by the pandemic.
The opposition in Sri Lanka along with various economists and commentators have been especially critical of the government’s expansionary monetary policy. The resignations of two senior members of the CBSL Monetary Board, former CEO of DFCC Bank PLC Mr. Nihal Fonseka and Executive Director of the Institute of Policy Studies Dr. Dushni Weerakoon in May 2020 also raised eyebrows.
In a March 2021 interview with the DailyFT, Dr. Kenneth De Zilva, Chairman of the Financial System Stability Consultative Committee (FSSCC) stated: “Firstly, money printing does not lead to inflation and that myth has been proven globally… used by neo-liberal economists… in Sri Lanka to invoke baseless fears about price inflation…”. Dr. De Zilva provides a strong defense of the current administration’s monetary policy. Yet it is noticeable that Dr. De Zilva’s narrative surrounding the Government’s economic policies is overly optimistic with a hint of cheer-leading. In referring to the recent Yuan currency swap, Mr. De Zilva exclaims “Now, this is a double body blow to the sleepy foreign investment banks, credit rating agencies, and our very own doomsday advocates who wanted Sri Lanka to go bust”. He further stated that with the swap “Sri Lanka has shown that it still has friends it can depend on”.
State Minister of Money and Capital Markets Ajith Nivard Cabraal, the former Govenor of the CBSL, stated on the 27th of April this year: “We forecast that the rupee will value at around Rs.180 by end 2021 and if coronavirus threat reduces as expected, we should be able to achieve an economic growth rate of 7% by end of 2021”. Writing in the second week of May, these quotes already seem farfetched.
Another subtle point raised by Mr. De Zilva on the purpose of the CBSL and monetary policy: “Sri Lanka too for the first time seems to be managing its monetary policy based on growth objectives as opposed to the traditional inflation targeting framework…”. Dr. Wijewardena has in the past stated that “output gap targeting does not comply with the original intention of the economic and price stability objective that has been incorporated in the (monetary law) Act”.
Public-interest activist Mr. Chandra Jayaratne penned an open letter to the Governor of the CBSL in February 2021 requesting an open intellectual debate/ dialogue on the current state of monetary policy in Sri Lanka; the CBSL has not as yet obliged.
“The Purpose of studying Economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists” — Joan Robinson (British Economist)
In recent history, economists have made some legendary missteps. Mr. Irving Fisher predicted a stock market boom, just before the crash of 1929. Mr. Paul Ehrlich and the population bomb, Mr. Alan Greenspan on interest rates during the 90s.
On the 10th of January 2008, Mr. Ben Bernanke stated “The Federal Reserve is not currently forecasting a recession”. In June that same year he stated: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so”. Yet in September 2008, Lehman Brothers, the 4th largest investment bank in the United States, declared bankruptcy. Around this time, Mr. Alan Greenspan was quoted as saying there was “no cause for alarm”. Baron Mervyn King, Governor of the Bank of England stated in December 2008 that he expected “breakaway wage growth”.
There was widespread belief that the UK economy and currency would crash if the UK left the EU. Speaking post-Brexit in Feb 2018, the Minister in charge of Brexit, Mr. David Davis stated in Parliament that “every forecasting model on the performance of the British economy post referendum by every major organization, the banks, the government organizations and, indeed, international organizations, has proven wrong”.
The era-defining, celebrity economist, Mr. Milton Friedman, a crusader of free markets and free trade, lived to see the beginning of the trend away from monetarism in the 80s and 90s. There is some reporting that Mr. Friedman had all but abandoned his belief in free trade towards the end of his life. Mr. Paul Krugman on the opposite wing to Mr. Friendman, had completely missed the effects of neo-liberalism on the American jobs market.
Mr. Larry Kudlow and Mr. Stephen Moore, both economic advisors during the Trump administration made bullish but hasty statements about the fate of the economic revival during the pandemic. Mr. Moore’s expectation of a “Trump super recovery” or Mr. Kudlow’s “V-shaped” recovery are both still pending.
Turkey v. Sri Lanka
The on-going currency and debt crisis in Turkey draws interesting parallels with Sri Lanka. In the decade leading up to 2018, Turkey experienced a construction boom fueled by foreign borrowings, cheap credit and government spending. Like Sri Lanka, Turkey has incurred consistent, large and growing current account deficits over an extended period of time. Since 2002, the Erdogan administration has focused on state-awarded construction contracts and stimulus measures. Unlike Sri Lanka, the Turkish military has a long history of political interference, however some commentators have pointed to the increased militarization of Sri Lanka’s civilian administration.
Erdogan appointed his son-in-law Berat Albayrak as his Chief Economic Advisor, in charge of the Ministry of Treasury and Finance. He also appointed a close advisor, Mustafa Varank, to lead the key ministerial portfolio of Industry.
Turkey’s diplomatic image has suffered due to its foreign policy. Sri Lanka too has faced economic and diplomatic issues related to geopolitical considerations with India, China and the US.
There are ongoing diplomatic disputes between Turkey and two major economic partners, Germany and France. Sri Lanka may also face further friction with the US, its main export destination. While Turkey gets regular funding and bailouts from Qatar, Sri Lanka does so from China.
A report from May 2018 estimated that some 2 million houses remain unsold. On the outskirts of Istanbul and other major cities, large numbers of construction projects, buildings, houses and related infrastructure remain incomplete. The comparisons do not end there. The Turkish Government’s figures related to debt and the deficit have also been called into question.
President Erdogan regularly interferes with institutions that are meant to operate independently of the executive. In the past he has referred to interest rate increases as “the mother and father of all evil” and called it treasonous. When the crisis began in 2018, the Turkish government charged that financial instability was the result of a global conspiracy.
In a 2018 interview with Bloomberg, Mr. Erdogan stated that “the central bank can’t take this independence and set aside the signals given by the president”. As the economy overheated, the Lira plunged almost 20% against the US Dollar in August 2018 alone. In the year leading up to this, the Lira had plunged 40% against the Dollar. Turkey is a historically significant keystone state between Europe and the Middle East. Sri Lanka may not be Turkey, but its importance on the geopolitical global stage is rising.
The Central Bank of Sri Lanka and monetary policy are becoming increasingly politicized. Sri Lanka has a recent history of significant losses on financial transactions. The CBSL bond scam, the oil hedge, the investment in Greek Bonds before even mentioning the recent drama over oil tankers, port terminals, substandard cooking oil and over-priced sugar imports. Sri Lanka also has a history of spending large sums of borrowed money on mega-projects that were overpriced then and remain under-utilized now.
As seen during the financial crisis, Brexit and beyond, economics is complicated and economists often get things very wrong. The complexities in an economic system must be taken seriously and absolutist statements regarding economic performance, which ignore realities, must be qualified in a sober and rational manner lest we become the latest example in a list that includes, Venezuela, Turkey, Argentina and Zimbabwe.
Kusum Wijetilleke
(kusumw@gmail.com)
