Sri Lanka is printing money to pay salaries but this could cause a further economic implosion

Name: Sri Lanka is printing money to pay salaries but this could cause a further economic implosion
Uploaded: 2022-05-17T12:37:01+05:30
Duration: 11 min 56 s
Description: Sri Lankan Prime Minister Ranil Wickremesinghe said he is forced to print money to pay salaries for government employees. In the first quarter of 2022, the nation printed 588 billion rupees. It started to print money extensively in February 2020, leading, coupled with other blunders, to the current economic implosion.

Sri Lankan Prime Minister Ranil Wickremesinghe said he is forced to print money to pay salaries for government employees. In the first quarter of 2022, the nation printed 588 billion rupees. It started to print money extensively in February 2020, leading, coupled with other blunders, to the current economic implosion.

Dipavali Hazra

Updated May 17, 2022, 12:37 IST

To manage the economic crisis in Sri Lanka, newly inducted Prime Minister Ranil Wickremesinghe said he is forced to print money to pay the salaries of government employees, continuing a vicious cycle that led the country to debt in the first place.

Sri Lanka printed 1.2 trillion rupees in 2021 and, in the first quarter of 2022, it has printed 588 billion rupees. Between December 2019 and August 2021, Sri Lanka’s money supply increased by 42%.

This cash surplus was deliberately caused to bridge the deficit and keep tax rates low. Sri Lanka’s former populist regime justified its economic policies under the so-called Modern Monetary Theory, which mainstream economists shun as a “crank idea” and suggest is better off as theory than applied in practice.

Sri Lanka started to print money extensively in February 2020. The Rajapaksa government had cut taxes in December 2019 just ahead of the pandemic-induced lockdowns that choked tourism, the fifth largest source of foreign revenue in the country.

The Rajapaksa government then promoted organic farming to cut off dependence on imported chemical fertilizers that the country could not afford any longer. This devastated the country’s crucial tea and rice harvests. A captive of its own economic mismanagement, the Rajapaksa government also resisted seeking IMF aid, pushing the country into a deeper crisis.

Perils of printing money

The Modern Monetary Theory, which Sri Lanka experimented with leading to catastrophic consequences, is a theory that suggests that government s can simply print money instead of raising revenue through taxes and borrowing.

Sri Lanka had been borrowing heavily for years but squandered the money on China-funded infrastructure projects, many of which now lie largely defunct. Its deficit (the difference between borrowing and income) became massive. Without raising taxes, the populist Rajapaksa regime intensified currency printing to finance the deficit.

The Sri Lankan central bank governor WD Lakshman and his successor Ajith Nivard Cabraal both permitted printing presses to operate 24/7 and denied the link between printing money and inflation or currency depreciation.

The consequence

Sri Lanka sped towards its worst economic crisis since independence without anyone applying the brakes.

While printing money to avert short-term crisis might seem like an appealing idea, it is a trap. Printing more money doesn’t increase economic output: it only increases the amount of cash circulating in the economy.

With more money in hand, consumers can demand more goods. However, if the goods are in limited supply then this leads to inflation and, ofcourse, shortage. For example, Sri Lanka is running out of fuel (an import), and it does not have foreign currency to buy it since its forex reserves have been severely depleted. Sri Lanka desperately needs credit lines from allies like India and China and an IMF bailout to survive.

Yet, Sri Lanka is printing money because to not do so would be “a bigger crisis” according to the current sentral bank governor Nandalal Weerasinghe. State employees are the first beneficiaries of the printed money but that later causes higher prices as the currency depreciates and inflation rises.

“If money printing is stopped and salaries are not paid there will be a bigger crisis,” said Weerasinghe. “I can clearly say there is no worry of paying state workers salary and pension. Because, we can give money which are paid in rupees. But we should do it with some responsibility and we should not do it like it was done previously and increase the inflation to around 40 per cent.”

Meanwhile, Sri Lanka appears headed for its first default on foreign debt as it is unlikely to be able to make an interest payment to bondholders by Wednesday (May 18) when its grace period to do so ends.

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