The meltdown faced by the government, led by the strongman president Gotabaya Rajapaksa, is in part caused by the immediate impact of the Covid crisis and the loss of tourism but is compounded by high government spending and tax cuts eroding state revenues, vast debt repayments to China and foreign exchange reserves at their lowest levels in a decade. Inflation has meanwhile been spurred by the government printing money to pay off domestic loans and foreign bonds.

Yep, MMT. Not aided by he government announcing that all agriculture would go organic overnight of course. Nor aided by the usual spendthriftness.

In August the central bank imposed a ceiling rate of 5.0 percent on dollar deposits, discouraging the active raising of deposits by banks.

Sri Lanka’s dollar yields have risen sharply as liquidity tightened after downgrades and counterparty risks rose.

Sri Lanka is currently facing a currency crisis due to low interest rates enforced with liquidity injections.

During the ousted ‘Yahapalana’ administration when the currency collapsed from 131 to 181 in two crises, deposit rate controls were slapped on rupee deposits of hapless poor savers after printing money to bust the currency peg and drive inflation up.

The rupee is now on a 200 to the US dollar peg which has lost credibility and parallel exchange rates are around 250 to the dollar.

Yep. They’re trying to control all three. The interest rate, the money supply and the FX rate. As the Murphmeister says a central bank and government together can.

And as reality keeps proving you can’t. You can, at best, control two of the three and the third will be the balancing item. As with supply, demand and prices. The third is always the derivative of the interactions of the other two which is why all three can’t be controlled at the same time.

8 thoughts on “MMT”

  1. And the key statement there is the throwaway line

    “vast debt repayments to China”

    China already owns entire nations like Zambia and key assets in other countries. SL soundd ripe to fall off of the tree.

  2. The China debt trap is now part’n’parcel off international economic affairs. What i really dunt get is what China has to gain from this arrangement with Sri Lanka. If it were obvious then I would expect the US or India to be in some kind of bidding war with China. But they aren’t and have no intention of becoming embroiled in one.

  3. Ironman, I’ve a vague notion that I read somewhere about China wanting a naval base in Sri Lanka. But that might simply be the guess of someone who has no more of a clue than I do.

  4. Bloke in the Fourth Reich

    World domination, Ironman, world domination. Xi is interested only in total Chinese supremacy and he doesn’t care about any rules of any game, he is playing to win. Forever. And unless we wake the fuck up soon, is likely to.

  5. When a poorly-managed country drowns in debt, the next step is usually an exodus of migrant workers from borrower to lender nation.

  6. Andrew M, I doubt that the Chinese’d let them in. I suspect they’ll all go to the wicked white West as usual.

  7. Andrew and Boganboy

    Exactly, China has enough slaves of its own to allow any Sri Lankans in. The island is a nuce strategic asset, for the moment it us just enough for the Chinese to own it and then use it to threaten India.

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