Features
MMT, deficit financing and printing money
By sumanasiri liyanage
E-mail: sumane_l@yahoo.com
“We need a mechanism where money flows out to the economy directly and permanently.” -Kikuo Iwata
Two prominent economists in Sri Lanka, Dr W A Wijewardene, a former Deputy Governor of the Central Bank of Sri Lanka and Prof Sirimevan Colombage, Professor of Economics, Open University of Sri Lanka, published two articles in The Island and Daily FT last week criticizing the extant monetary policy paradigm of the Central Bank of Sri Lanka (CBSL) alleging that the CBSL while distancing itself from inflation-oriented policies has begun to follow closely the policy framework that derived from the main tenets of Modern Monetary Theory (MMT). MMT as new discourse on the monetary-fiscal policy mix gained credence among left leaning Democrats especially during the presidential campaign in the US. Why is the issue of MMT raised in the Sri Lankan discourse? According to Prof. Colombage, Central Bank Governor Prof. W.D. Lakshman’s recent statement at an economic forum that domestic currency debt in a country with sovereign powers of money printing is not a huge problem is in close affinity with MMT argument.
The two economists agree that the continuation of present policy paradigm of the CBSL will necessarily lead to disaster. Dr. Wijewardene in the form of a conversation between two popular tele- drama characters, Ashini and Sarath Mahattaya, gave a clear and lucid narrative on the MMT, tracing its historical roots. This is very useful to economic students. At the end of the conversation with his granddaughter, Sarath Mahattaya, Dr Wijewardene’s narrator had concluded: “So, the present Government’s reliance on MMT is like getting a demon to work for it. If it does not play the game within limits, the demon will turn back and swallow it. This should be properly understood by the present Government’s top policymakers who advocate printing of money to pay for Government spending”. Of course, Dr Wijewardene has admitted that the government may borrow moderately. “What I mean by moderately is that money printing should not cause unwarranted unaffordable inflation”.
Prof Colombage seems to be more reserved giving the impression that MMT may be okay for advanced countries like the USA and Japan with reserved currency, but not for a small country like Sri Lanka. I am sure he may be thinking of the proposal by the former deputy governor at the Bank of Japan Kikuo Iwata. Moreover, he seems to think that MMT like policies are unavoidable at present conjuncture. He writes: “The recent monetary expansion points to imminent dangers in adopting MMT-style monetary policy in a country like Sri Lanka, though such policy stance might be unavoidable amidst the unprecedented economic setback caused by the COVID-19 pandemic.”
This article intends neither to defend the extant monetary policy of the CBSL nor to posit that the main arguments of the MMT are correct. For myriad of reasons, it is hard to say that the CBSL policy per se is governed by MMT. Nonetheless, the interpretation of the MMT given by Dr. Wijewardene and Prof Colombage appears to have missed some of the complexities of the MMT argument as their contestation of the MMT seems to be based on the neo-classical and monetarist premise that money supply is exogeneous. On the contrary, post-Keynesians and MMT theorists posit that money supply is endogenous and linked with the effective demand. Hence, deficit financing does not necessarily lead to inflation.
Modern Monetary Theory
MMT proposes to bring the government to the fore. According to Randall Wray, the main weakness of macroeconomics texts and teaching today is that they start with unanswered question. Where does money come from? Modern macroeconomics skips this question leaving it to circular reasoning. As a result, in present day macroeconomics textbooks the government is brought in not in Chapter 1 as it should be, but in Chapter 8 or 10.
Secondly, the MMT may not be reduced to a notion that upholds deficit financing through printing money. It posits referring to historical evidence a nexus between printing money and redemption of tax. Hence, Dr. Wijewardene’s following statement is a result of simplistic reading of the MMT. Critiquing Stephanie Kelton, he writes: “One of the bold statements of Kelton is that taxes are charged for paying for government expenditure is mere fantasy. That is because there are many other ways of paying for such expenditure such as printing money. Governments can pay for expenditure by borrowing. When it comes to repaying, they can print money and repay the debt. So, there is no problem.”
Thirdly, MMT does not totally neglect as critics say the possibility of inflationary pressure as a result of deficit financing. It has its own explanation of the phenomena of inflationary pressure before achieving full employment and hyper-inflationary situations.
A simple MMT macro model is adequate enough to demonstrate the complexities of its basic postulates. Scott Fullwiler’s MMT macro model as summarized by Michael Roberts is presented below:
Basically, he starts off with a Keynes/Kalecki post-Keynesian macro model of aggregate demand. This model is simply an identity. There are two ways of looking at an economy, by total income or by total spending and they must equal each other.
Thus National Income (NI) = National Expenditure (NE).
Following the ‘Keynesian Marxist’ Michal Kalecki, we can break this down into:
(NI) Profits + Wages = (NE) Investment + Consumption.
Now there are two sorts of income and two sorts of spending. Since rent and interest are paid from Profit, those payments may be excluded.
If we assume that all Wages are spent then and all Profits are saved, we can delete Wages and Consumption from the identity. So
Profits = Investment
But Scott re-expands the parts on the right-hand side to look at flows, so that wages that are saved are added back with profits to get Private Saving (so assuming some household saving); and he also adds in Government saving (taxation less spending) and Foreign Saving (net imports or current account deficit).
Thus, Profits as a separate category disappears into Private Savings and we get:
Investment = Private Saving + (Taxation – Government Spending) + (Imports – Exports)
But then Scott also dispenses with the separate category Investment and converts it into Private Saving less Investment or the Private Sector Surplus. So now we have Private Sector Savings (Wages saved plus Profits less Investment). So Scott continues:
Private Sector Surplus = Government Deficit + Current Account Balance
Or
Private Sector Surplus – Current Account Balance = Government Deficit
This is the key MMT identity. It argues that if the Government deficit rises, then assuming the Current Account balance does not change, the Private Sector Surplus (Wages saved +Profits less Investment) rises. The MMT conclusion (assertion) is that increasing the Government deficit will increase the Private Sector Surplus . And if we exclude Wages saved (the MMT identity does not) and the Current Account balance, then we have:
Net Profits (ie Profits after Investment) = Government deficit
And we can conclude that Government deficits determine Net Profits ie Profits less Investment.
Suppose that the Current Account Balance remains unchanged, an increase in Government Deficit leads to increase in PSS that equals Wages Saved + (Profit – Investment). Assuming that all wages are consumed we may write the fundamental equation of MMT as follows:
Net Profit = (Profit – Investment) = Government Deficit
The above equation shows that Government Deficit increases net Profit.
MMT posits that an increase in government deficit leads to expand the economy that in turn leads to increase the tax base.
Deficit Finance and Inflation
Can deficit finance lead to inflation? MMT has two answers to this question. Agreeing with the post-Keynesians, MMT posits that a continuous increase in money printing through deficit finance after achieving full employment would generate an inflationary pressure. If the resources are not fully employed, deficit financing would not necessarily lead to inflation. Besides, this full employment inflation, Randall shows that inflationary pressure may occur if increased government expenditure focuses on elite projects and highly skilled employment. Such an expenditure may create more what David Graeber called “bullshit jobs”.
MMT has multiple weaknesses. However, those weaknesses have nothing to with the critique of MMT by mainstream economists. If a country like Sri Lanka adopts deficit financing and printing money in a crisis situation, it is imperative such policies should be accompanied by import restrictions, proper direction of government expenditure and increase of direct taxation. Nonetheless, the government decision to dispossess Eastern Container Terminal (ECT) shows that its directionality is fundamentally wrong.
In lieu of conclusion, it is imperative to note without giving room for a misunderstanding that MMT as well as all the varieties of Keynesianism suffer from basic flaw. They seem to inverse the nexus between human labour, value and money. Michael Roberts has highlighted this in the following words: “They ignore that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (ie for money over the costs of production), not need, then money represents the socially necessary labor time expended. We see only money, not value, but money is only the representation of value in its universal form, namely abstract labour as measured in socially necessary labour time. It is a fetish to think that money is something that is outside and separate from value.” Anyway, this would be a subject for another article.
(The writer is a retired university teacher in political economy.)
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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