Increased money supply cause of SL’s soaring inflation – Snr global economist

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A Senior global economist recently pointed out that Sri Lanka, during the current regime, had excessively increased money supply which has led to soaring of the country’s inflation.

Steve H. Hanke, a professor of applied economics, at the Johns Hopkins University in Baltimore, says that following the 2019 and 2020 landslide victory of the Sri Lanka Podujana Peramuna, President Gotabaya Rajapaksa and his brother Mahinda Rajapaksa, the Prime Minister, went on a spending spree that was financed in part by Sri Lanka’s Central Bank, which led to an economic devastation.

“The rupee has lost 44 per cent of its value since President Rajapaksa took the reins, and inflation, according to my measure, is running at a stunning 74.5 per cent per year,” he said.

“According to my calculations, for the period 2010–2019, Sri Lanka’s golden-growth rate was: 5 per cent + 4.4 per cent – (-6.4) per cent = 15.8 per cent,” he said.

To calculate the golden-growth rate, he has used the quantity theory of money (QTM).

For 2010–2019, the average growth rate of the money supply, which was 15.5 per cent, essentially matched the golden-growth rate of 15.8 per cent, resulting in an average inflation rate of 5.2 per cent per year for that period — right on Sri Lanka’s average inflation target of 5 per cent per year, he said.

“But once the Rajapaksas came to power, the growth rate in money supply began to skyrocket and peaked at 23.8 per cent per year in February 2021” he said.

Money supply growth exceeded the golden-growth rate of 15.8 per cent per year from August 2020 to October 2021, which led to soaring inflation, he said.

According to him to save Sri Lanka, It should adopt a currency board, like the one it had from 1884 to 1950, before it changed its name in 1972 from Ceylon to Sri Lanka.

Ceylon established a currency board in response to the failure of the Oriental Bank Corporation on 3 May 1884.

Ceylon’s Paper Currency Ordinance (No. 32 of 1884), passed on 10 December 1884, and with that, a currency board was established.

The currency board held anchor-currency reserves equal to 110 per cent of its monetary liabilities and most importantly the board could not loan money to the fiscal authorities, imposing a hard budget on Ceylon’s fiscal system, which gave the country economic stability.

By Mario Andree

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