Money printing, inflation and inflation targeting

I write this in response to the full page personal attack on me in The Sunday Times FT of April 6 titled “Money printing, Inflation and Inflation Targeting” by Anil Perera of the Central Bank of Sri Lanka [CBSL]. Many senior professionals at the CBSL, both past and present, have expressed shock at the choice of words of this ‘senior officer.’ This is more so after I said in my article that “Even though I disagree with the arguments… the manner in which it was written was most professional and due credit is given” referring to Mr Perera’s previous piece that actually was on money printing and inflation. Unable to address the academic arguments raised by me the second time around, he seem to have thought that it would benefit his cause if he plunged into a personal attack.

Facts are stubborn

The only way the Governor and Mr Perera can defend their policy is by the actual turnout of inflation. If inflation turns out to be low and under control then there is nothing for critics to complain. But high and out of control inflation can and should come in for criticism. After all, this country is still a democracy and if the actions of a few persons’ actions are causing misery to millions, then civil society has the right to question them on their strategies. One does not need a Ph.D. in economics to see that CBSL monetary policy has been a complete failure with the turnout of inflation at 28 percent several fold higher than their own forecast. As professionals, officials of CBSL must have the maturity to appreciate contrasting views instead of attempting to abuse their power to silence their critics.

Regional Comparison of Inflation

Unlike in the past, the new and much politicized regime at CBSL continues to blame external reasons for the runaway inflation in Sri Lanka. But a simple comparison of countries in the region that face similar external conditions would convince anyone with the ability to read that we are a complete outlier.

Why this is so is the pertinent question. Is Sri Lanka such a special case that external factors somehow impact us much more than, say Thailand or Philippines or Bangladesh? It is nothing less than hilarious that Mr Perera in his ‘article’ says that ‘eminent economists’ do not compare inflation across countries and more so, that it cannot be done. I remember the old Sinhala saying about the dancer and the gradient of the surface!

All Knowing CBSL

The overconfident regime has now gone one step further. It has started accusing everyone who does not agree with their theories of somehow trying to work against the sovereign interest of Sri Lanka. The latest is the episode involving the IMF which began with a working paper released last month. This paper suggested that only 25 percent of the variation in inflation in Sri Lanka could be explained by external shocks using fairly standard econometric models.

This unfortunately burst the CBSL ‘inflation-in-Sri Lanka- is-externally-driven’ bubble. It was reported that a couple of days back that the Governor has already written to the Managing Director of the IMF claiming that its paper is technically flawed and that the conclusions therein are wrong. He had also said, as strange it may sound; he was going to complain to the IMF boss about irresponsible economists at the IMF producing garbage reports using erroneous models. I shall stay away from this debate and merely watch from the sidelines lest I be called a traitor once more.

CBSL Independence and Inflation Targeting

I do not wish to get back in to the money printing debate which is now closed for all practical purposes. It has been proved beyond any doubt that the CBSL had printed massive amounts of money to accommodate a profligate government over the last few years.

The evidence is crystal clear and professional economists, both local and international, have advised the CBSL that unless urgent steps are taken to halt this irresponsible behaviour the inflation problem in Sri Lanka will get worse.

The only practical way to get there is to move to an inflation targeting [IT] regime where the CBSL can say no to the government’s never ending requests for printed money. The need for an IT regime is something I, among others, have been promoting over the years producing evidence for its success from a number of academic studies. Now the bank has suddenly become the biggest supporters of IT with even an entire box on it in the CBSL annual report. I am overjoyed. As soon as the CBSL becomes independent we can move towards an IT regime.

Deception once more

One of the first steps towards IT was taken in 2002 with the amendment to the Monetary Law Act [MLA] where three of the five members of the Monetary Board were to be appointed with the concurrence of the Constitutional Council. This was to rid, or if not reduce substantially, the politicization of the Monetary Board where appointments are made on the whims and fancies of the President and the Governor. But as it is now customary officials have made a disgraceful attempt to twist the facts by saying the MLA expanded the Monetary Board by having the majority of the members; three out of five, from the “private sector” instead of the “Constitutional Council”. No one needs to take my word for it, just look in the 2008 CBSL Annual Report; it is there in black and white.

It is time that the top of the CBSL starts behaving like professional central bankers. Perhaps it is high time someone told the Governor that unlike in accountancy there can be more than one way to look at an economics problem. Reading a book on economic history perhaps would help in understanding the evolution of the subject and also the various different schools of thought.

Just because one does not agree with the theories of the CBSL does not mean they are wrong or that those with such views are terrorists. That is quite normal. It is time these people grew up. (The writer is Lead Economist of LIRNEasia, a regional think tank active in 10 emerging countries in the Asia Pacific region.)

Report on community-based tourism

The Advisory Panel on Community Based Tourism presented its report on community based sustainable tourism development in Sri Lanka to Tourism Minister Milinda Moragoda last week, in which it suggests that a national level awareness programme for all stakeholders of community based tourism development should be introduced.

The report identifies two categories of community based tourism projects - those recommended by the advisory panel for implementation and those reviewed by the panel for future consideration, according to a Tourism Ministry press release.

The recommendation of the proposed projects for the implementation is primarily based on the principles of community based sustainable tourism development. In addition, availability of tourism related resources, location-based comparative advantages, marketability of the proposed service/products, time duration for implementation, life duration of the project, size of the budget and components of the budget, self financing of the project at the beginning of the project, economic and financial viability and other important criteria have been considered for this recommendation. Multi ethnic and multi religious community representation has also been accounted.

The report also presents the panel’s policy recommendations for the development of community based tourism in Sri Lanka with the vision that “Stand Together for Rekindling the Flames of Heritage and Pride of Our Communities”. The panel was jointly headed by Dr. D.A.C. Silva, Senior Lecturer, University of Colombo and Palitha Gurusinghe, President of Sri Lanka Eco Tourism Foundation, and included Rev. Dr. Wimalarathana, Senior Lecturer, University of Colombo, Dr. Thilak T Ranasinghe, Director, Dept. of Agriculture, Western Province, Palitha Wijemanne, General Manager, Confifi Hotel supplies, Gehan de Silva Wijeyeratne, CEO - Jetwing Eco Holidays, Ms Sepalika Sudasinghe, Consultant, SLIDA, U. P.S. Pathirana, Director, Sri Lanka Tourism Development Authority, D.L.A.H. Shammika Lecturer,University of Ruhuna and M S M Aslem,, Senior Lecturer, Sabaragamuwa University.