Monday, March 14, 2016

India, IMF, team up to help keep Sri Lanka, South Asia economies stable

ECONOMYNEXT - The International Monetary Fund and India have teamed up to set up a training school to help boost knowledge and capacity of officials in charge of economies in the region to help them avoid de-stabilizing economies.

"The Fund has built up an immense stock of economic expertise," India's Prime Minister Narendra Modi told 'AdvancingAsia', an economic conference in Delhi hosted by the IMF and his government.

"All its members should take advantage of this. All of us need to pursue policies that provide a stable macro economy, enhance growth and further inclusion. 

"The Fund can be of great assistance in this. Apart from advice, the IMF can help in building capacity for policy making. 

"I am happy to announce a new partnership with Bangladesh, Bhutan, Maldives, Nepal, Sri Lanka, India and the IMF."

The South Asia Regional Training and Technical Assistance Center (SARTTAC) will build capacity among regional officials on macroeconomic and fiscal management, monetary operations, financial sector regulation and supervision, and macroeconomic statistics.

"This will be the first center that fully integrates training and technical assistance and is a model for our future capacity development work," IMF managing director Christine Lagarde said.

Sri Lanka's credit system has been de-stabilized over the past year with massive money printing or 'quantity easing' to accommodate a runaway budget deficit. Sri Lanka's rupee has collapsed from 131 to the US dollar to 145 over the past year.

Sri Lanka's a chronic customer of the IMF loans, is expected to go to the fund for a stabilization program shortly.

The difference between countries with so-called soft-pegs that get into balance of payments trouble and those that do not (true floating currencies and currency boards) is both knowledge and ideology where there is a false doctrine that interest rates and exchange rates can be simultaneously controlled.

Other than Nepal and Bhutan, which have quasi currency boards linked to India's rupee (near hard pegs), most other countries including Pakistan get into regular balance of payments trouble by monetizing debt to finance runway budget deficits while trying to maintain a dollar soft-peg.

India's rupee - originally a silver based currency - used to be the 'dollar of South Asia and Middle East' until shortly after independence from British rule and for more than two decades after the Reserve Bank of India was created.

But after the agency was nationalized and then Prime Minister Nehru's Soviet style five year plans were financed with RBI credit the Indian rupee started to collapse. 

Middle Eastern nations abandoned rupees, through which their economies were effectively 'dollarized' in today's terminology India's the rupee collapsed steadily generating poverty and capital destruction until economic reforms in 1991 ended fiscal pressure to print money.

Modi, soon after being elected scrapped India's Planning Commission, which was responsible for most of the planning, interventions, licensing, directed credit and other coercive controls and the suppression of economic freedoms of citizens that undermined economic progress.

When Nehru's first Soviet style interventionist plan was unveiled, only one classical-style economist B R Shenoy objected. He was shunned at home and went to work for the IMF.

Sri Lanka's rupee was also linked to the Indian rupee through a currency board (from the time of the silver standard in 1885) and ran into balance of payments trouble in less than two years of creating a soft-pegged central bank and joining the IMF.

The IMF was created by Harry Dexter White, an interventionist US Treasury officials who was later sacked amid controversial allegations of being a Soviet spy, to help countries that had to get into trouble by joining the now collapsed Bretton Woods system of failed soft-pegs.

While was a so-called 'New Dealer' who helped devalue the US dollar to 35 dollars an ounce of gold from 20 an ounce in 1993 and essentially followed so-called Keynesian interventionist policies.

Ironically at Bretton Woods negotiations the US overruled John Maynard Keynese, who wanted to create a uniformly inflating currency, the Bancor. Instead another synthetic currency, the SDR, special drawing rights was created, which is not used in the broader market.

Unlike the hard pegs (where interest rates float and the exchange rate is fixed), the Bretton Woods soft pegs allowed countries to print money (monetize debt), pushing them into balance of payments troubles and currency collapse. 

The system collapsed in 1971-73 generating a massive commodity bubble, similar to the 2008 'food crisis' and fully fiat inflating paper money was born and the link to specie (gold) was finally abandoned giving rise to today's independently floating exchange rates in advanced nations.

Countries that maintained soft-pegs remained poor or developing countries. Singapore and Hong Kong went back to currency boards. 

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