Does this sound Familar?

1.15 As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

1.16 That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

1.17 Yet there are telling examples of the path we have taken from key economies around the world. For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

1.18 A few months ago, the USA economy confronted a severe mortgage crisis, which threatened to spark an economy-wide recession.

1.19 The USA Central Bank again responded by injecting over US $160 billion between December, 2007 and March, 2008, to provide impetus to the American economy and prevent a worse crisis from happening....

1.22 Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander....

1.26 As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances. [link]

It shouldn't. Because unlike the Reserve Bank of Zimbabwe, whose governor made these observations (pdf link), the Sri Lankan Central Bank refuses to accept that inflation is a monetary phenomenon (they think it's a petroleum phenomenon) . At least the Zimbabweans are honest with the source of inflation, with inflation at 355,000 I guess he has no choice.

[link from Greg Mankiw]

Competing currencies: putting the Central Bank out of business.

The Inflation in Sri Lanka is now at about 20%, and the Central Bank expects the figures to remain at 16% to 20% at least for the first half of 2008. It’s getting so unprecedented now, that it’s receiving some attention from international monetary experts. Over in the U.S. too they have problems with their currencies, the Dollar is loosing value against other currencies at record levels.

So the question is when certain currencies under performs say the SL Rupee or the Zimbabwean Dollar, why wouldn’t the market choose other currency instead? (Economists call this dollarization – replacing a countries currency with currency from another country – e.g. US Dollars) While the Central Bank may have the monopoly authority to print money in Sri Lanka, what stops the market from choosing foreign currencies? Why wouldn’t for example, retailers in Colombo declare, they “now accept Euros, Dollars and Pounds for transactions" and consumers follow suit. After all, most retailers support multiple types of credit cards and modes of payment, why not different currencies? It’s a question I put to FussBudget of LBO, who’s possibly one of the few Sri Lankan economists who’s taking the issue of Inflation head on. Here’s his response:

Deane,
Good one ! It is legal tender laws that bar you from accepting for payment or keeping foreign currency with you. You are barred from even keeping dollars with you. These exchange control rules were a little relaxed last year. But still you have to deal in Sri Lanka currency and keeping large quantities of foreign currency is still illegal.

Foreign exchange is subject to exchange control as well as customs laws here, and the govt could not only confiscate them and land you in jail but also fine you 300 percent.

By allowing NRFC accounts Sri Lanka slightly relaxed the monopoly on savings in local currency some time ago.

When people keep dollar notes, keep travellers cheques without changing and NRFC accounts it chips away at the note issuing monopoly of a government. (Notes - reserve money - deposits - M2). The liking for foreign currency and the distrust of the local currency is due to the loose monetary policy of the central bank.

However with tighter monetary policy since 1995, when the Central Bank changed from a pure inflationary money printer to something that at least tried to keep inflation in check we have seen a slight change in the situation and confidence increasing in the local currency.

As you know at one time the US banned citizens from holding gold through legal tender laws.

Deane, your friend Ron Paul is asking for competitive currencies inside the US. In the US though gold is no longer illegal to hold, it is still taxed when traded. This makes it less easy to challenge the dollar monopoly.

At the moment we have a 100 percent reserve backed currency. That means if govt wants, they can dollarize Sri Lanka tomorrow and eliminate high inflation.

While the Euro is obviously the best currency to dollarize to keep inflation as low as possible, for purposes of exports it may be better to dollarize with US dollars to prevent a big shock to the industrial sector.

As you know a currency board is also the same as dollarizing in a practical sense - except that we will have notes of a different colour.

If you followed Yugoslavia, there was dollarization with the German mark, when hyperinflation struck. Then you had the situation of currency boards, Euro union etc.
Here the debate about monetary reform has been muted until now. With Steve Hanke also getting into the picture now the 60 years of deception practised by the central bank on the poor of this country is also getting chipped away. [Link to comment. The Links, emphasis in the quote are mine]

Well, whad’ya know, I’m a criminal. Hopefully none of the custom’s chaps read this blog. I have from recently actually kept some of my savings in foreign currencies instead of Rupees.

I knew there was probably a truck-load of regulation preventing a market-led dollarization from ever happening (in any country, really) but I didn't know the exact provisions in Sri Lanka.

FussBudget’s (who’s real identity I do not know) reference to Ron Paul is an exchange we had before and a few days ago Ron Paul – whom I backed for U.S. president – made a speech in the house floor asking congress to consider the concept of “competing currencies” . Here is a relevant excerpt:

At this country's founding, there was no government controlled national currency. While the Constitution established the Congressional power of minting coins, it was not until 1792 that the US Mint was formally established. In the meantime, Americans made do with foreign silver and gold coins. Even after the Mint's operations got underway, foreign coins continued to circulate within the United States, and did so for several decades.

On the desk in my office I have a sign that says: “Don't steal – the government hates competition.” Indeed, any power a government arrogates to itself, it is loathe to give back to the people. Just as we have gone from a constitutionally-instituted national defense consisting of a limited army and navy bolstered by militias and letters of marque and reprisal, we have moved from a system of competing currencies to a government-instituted banking cartel that monopolizes the issuance of currency. In order to introduce a system of competing currencies, there are three steps that must be taken to produce a legal climate favorable to competition. [link] (Emphasis mine)

None of this will probably happen for a very long time. But I’m glad the debate has started.