This is a brief reply to the article "Money Printing, Inflation and Inflation Targeting" by one Anil Perera of the Central Bank of Sri Lanka [CBSL] which appeared in The Island of 26 and 27 March 2008.
Finally the CBSL agrees
Most of the time right-of-reply opportunities are used to say "I did not say this or that". But this is none of that. In fact, this is to say "Thank you". There is nothing to reply to. The CBSL has accepted the key arguments that I forwarded; to stop irresponsible money printing [for various unproductive government expenditure programmes] and to move towards a regime of inflation targeting with a floating exchange rate. In fact, these two arguments are two sides of the same coin. Now, the gist of Mr Perera’s long and winding article is that yes, the CBSL is reducing money printing and moving towards an inflation targeting regime, but only that it cannot be done like a ‘switch’ and will take a little time. It makes me content that my writing on the subject for many years has finally made a difference.
IT means no ifs, buts, perhaps
Given I have pretty much got all I wanted to get across on the subject and provided references to a number of more technical articles, I will not regurgitate. However, I would like to reiterate that once the CBSL moves into an inflation targeting [IT] regime as has been promised by Mr Perera, it can no longer give the kind of sorry-excuses it continues to give now to extricate itself from soaring inflation. In an IT regime, the CBSL will be fully responsible for inflation. No ifs, buts and perhaps. No supply-side and cost-push arguments. No oil prices and droughts. Once the CBSL agrees to a target [upon discussion with Parliament] it has to meet the target; the Governor is accountable. This will be like night-and-day from now where no one is accountable for the soaring inflation today which is among the highest in the world.
Critical omission: the Constitutional Council
In agreeing with me on inflation targeting, Mr Perera lists the various actions taken by the CBSL in the last few years towards a more disciplined monetary policy regime. What is disturbing however is his leaving out perhaps the most critical aspect of the amendment to the 2002 Monetary Law Act which was the real start to grant independence to the CBSL without which IT will only be distant dream. What he says is that the Act "expanded the Monetary Board to strengthen the independence [of the CBSL] by having the majority of the Monetary Board members; 3 out of 5, from the private sector". What he does not say is that according to the Act, these three members [the Act does not say private sector] must be appointed with the concurrence of the Constitutional Council [CC]. It is strange how he missed this crucial component in an article spanning two-pages. This is particularly so when the entirety of civil society is asking for the appointment of the CC and calls are being made for the Governor’s appointment also to have the concurrence of the CC.
The last laugh, please
Finally, I must say I was quite amused at the tone Mr Perera used in the article with vile words, sarcasm and personal attacks against me galore. This is after I said in my article that "Even though I disagree with what was said the manner in which it was written was most professional and was a welcome change…" Anyway, I hope he got the relevant brownie points from the Governor. However, I must be given the pleasure of one last laugh. Here it goes. "During the recent months, we noticed several newspaper articles… on the causality of money printing and inflation which, had been originated by a "leading economist" Dr. Harsha de Silva." [Paragraph 1] Then 10 paragraphs later, "We have controlled money printing, which leads to inflation…" I never ‘originated’ the causality of money printing and inflation; Friedman got the Nobel for that long time ago, but it does not matter, I am glad I was able to help. Thank you.
Harsha de Silva