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Sri Lanka records world’s third-highest inflation 

26 Apr 2022

  • Inflation at 119% per year, points out economist Steve Hanke
  • Behind only Zimbabwe and Lebanon
    BY Shenal Fernando According to American economist Steve Hanke yesterday (25), as of 21 April 2022, inflation in Sri Lanka reached the third position in the weekly global inflation dashboard computed by him and John Hopkins University, surpassing countries such as Turkey, Venezuela, and Sudan. Hanke, who is a professor of applied economics at The Johns Hopkins University and a senior fellow at the Cato Institute, stated on his official Twitter handle that: “In this week’s inflation table, Sri Lanka is in the spotlight again. On 21 April, I measured Sri Lanka’s inflation at a sky-high 119% per 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.” Speaking to The Morning Business yesterday, former Central Bank of Sri Lanka (CBSL) Deputy Governor Dr. W.A. Wijewardena stated that Hanke is measuring Sri Lanka’s inflation by considering its purchasing power parity (PPP), which, he claimed, is a better way of calculating inflation compared to the current method employed by the Department of Census and Statistics in measuring inflation. Explaining further he stated: “The index through which the Department of Census and Statistics calculates inflation consists of several weaknesses. It has given arbitrary weight to various items in the index. For example, changes in insurance policies of motor cars has been given 1% weight, whereas rice is also given a 1% weight in the index. Food items are given only a weight of 28%, while non-food items are given the balance 72% of the weight. So when prices of food items increase by twofold, it isn’t reflected in the index issued by the census department. Therefore, Hanke’s calculation is more accurate.” However, Wijewardena stated that Hanke had erred in assuming that the official exchange rate of Sri Lanka is equal to the black market rate. However, in Sri Lanka there exists a significant difference between the two exchange rates. Therefore, Wijewardena claimed that if Hanke had considered the black market rate due to increased reliance on the black market as result of the liquidity crisis in the official domestic forex market, inflation would be much higher. According to the inflation dashboard computed by Hanke, the annual inflation rate of Sri Lanka was the third-highest in the world, behind only Zimbabwe with an annual inflation rate of 207%, and Lebanon with an annual inflation rate of 150%. Therefore, according to this inflation dashboard computed by Hanke, the annual inflation rate exceeds that of countries such as Venezuela, Argentina, Turkey, Sudan, Pakistan, Nigeria, and Syria. Over the past few weeks, the Sri Lankan rupee has depreciated significantly by around 69% leading to an across-the-board increase in commodity prices. As of 25 April 2022, according to the average buying and selling telegraphic transfers (TT) exchange rates published by the CBSL yesterday, the selling rate of a US dollar stood at Rs. 342.5 while the buying rate of a US dollar stood at Rs. 330. 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 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 Currency Boards for Developing Countries: A Handbook 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 profits to the Government 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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