STEVE H. HANKE ,professor of applied economics at the Johns Hopkins University in Baltimore has calculated inflation in Sri Lanka at 120%. He provides an insight as to what can be done to arrest the situation.
What can the country do to address its soaring inflation?
What can be done to end Sri Lanka’s economic crisis? It should adopt a currency board, like the one it had from 1854 to 1950, before it changed its name in 1972 from Ceylon to Sri Lanka. Ceylon established a currency board in response to the failure of the Oriental Bank Corporation on May 3, 1884. At the urging of the Madras Bank and other businesses, the governor proposed a government-note issue so that the government might recoup its losses and prevent future problems.
The imperial government conceded reluctantly. Ceylon’s Paper Currency Ordinance (No. 32 of 1884), passed on December 10, 1884, and with that, a currency board was established. Three commissioners — the colony’s secretary, treasurer, and auditor — supervised the board.
Like all currency boards, the Ceylon board issued notes (of five to 1,000 rupees) convertible on demand into a foreign anchor currency (Indian silver rupees) at a fixed rate of exchange. It held anchor-currency reserves equal to 110 percent of its monetary liabilities. Most important, the board could not loan money to the fiscal authorities, imposing a hard budget on Ceylon’s fiscal system.
The net effect was economic stability — and while stability might not be everything, everything is nothing without stability. That’s why today, the reinstatement of Sri Lanka’s currency board is just what the doctor ordered.
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