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Sri Lanka’s inflation 6th highest globally: Foreign economist 

30 Mar 2022

  • Prof. Steve Hanke analyses SL’s 55% annual inflation
  • Recommends installation of currency board to ‘crush’ inflation
    By Shenal Fernando American economist Steve Hanke yesterday (29) on his official Twitter handle claimed that as of last Thursday (24), Sri Lanka has climbed to the sixth position in the weekly global Inflation Dashboard computed by him and Johns Hopkins University. Hanke, who is a Professor of Applied Economics at Johns Hopkins University and a Senior Fellow at the Cato Institute, Tweeted: “In this week’s inflation table, Sri Lanka is moving up the ranks. On 24 March, I measured Sri Lanka’s inflation at a sky-high 55%/year. To crush inflation and save the rupee, Sri Lanka needs to install a currency board, like the one it had from 1884 until 1950. It worked like a charm.” According to the Inflation Dashboard computed by Hanke, the annual inflation rate of Sri Lanka was the sixth highest in the world, behind only Venezuela with an annual inflation rate of 140%, followed by Zimbabwe with an annual inflation rate of 134%, Lebanon with an annual inflation rate of 117%, Turkey with an annual inflation rate of 101%, and Sudan with an annual inflation rate of 96%. Therefore, according to this Inflation Dashboard computed by Hanke, the annual inflation rate exceeds that of countries such as Argentina, Pakistan, Nigeria, Russia, and Ukraine. Over the past few weeks, the Sri Lankan rupee has depreciated significantly by over 47.3%, leading to an across-the-board increase in commodity prices. As of yesterday (29), the average buying and selling telegraphic transfers (TT) exchange rates published by the CBSL, the selling rate of a US dollar stood at Rs. 299.0 while the buying rate of a US dollar stood at Rs. 288.7. According to the Department Of Census And Statistics, Sri Lanka’s inflation on a year-on-year (YoY) basis reached a 13-year high of 15.1% in February 2022 as per the Colombo Consumers’ Price Index (CCPI), increasing from 14.2% in January 2022. Similarly, food inflation reached 25.7%, increasing from 25.0% in January. The CCPI had increased by 1.7 index points during the month of February compared to January, reaching 160.1, which represents an increase of expenditure value by Rs. 1009.47 in the “Market Basket”. A currency board, as proposed by Hanke for Sri Lanka, is a monetary institution that issues notes and coins (and, in some cases, deposits) fully backed by a foreign “reserve” currency and is fully convertible into the reserve currency at a fixed rate and on demand. The reserve currency is a convertible foreign currency or a commodity chosen for its expected stability. According to the Currency Boards for Developing Countries: A Handbook prepared by Hanke and Kurt Schuler, a currency board shall hold as reserves, low-risk, interest-earning securities and other assets payable in the reserve currency. A currency board holds reserves equal to 100% or slightly more of its notes and coins in circulation, as set by law.  The simplest type of currency board accepts no deposits and issues no securities; if a currency board does accept deposits or issue securities, they too must be backed 100% or slightly more by assets payable in the reserve currency. A currency board earns profits from the difference between the return on the reserve currency securities it holds and the expense of maintaining its notes and coins in circulation. It remits to the government profits beyond what it needs to pay its expenses and to maintain its reserves at the level set by law. A currency board does not have discretionary control over the quantity of notes, coins, and deposits it supplies. Market forces determine the quantity of notes, coins, and deposits it supplies, and hence, the overall money supply in a currency board system. 


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